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Accounting

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The financial information system that provides insight into the financial occurences of an organization.

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Accounting

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Consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users.

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The 3 basic activities of accounting

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Identify, record and communicate the economic events of an organization

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Identify

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The starting point to the accounting process that observes the economic events relevant to a business.

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Economic Events

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Sale of goods, provision of services, payment of expenses and liabilities

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Recording

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Consists of keeping a systematic, chronological diary of events, measured in dollars and cents.

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Communication

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The economic activity that consists of presenting the collected information to interested users by means of accounting reports

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Financial Statements

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A form of reporting recorded financial data, in aggregate, in a standardized way to make reported financial information meaning or useful

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The Four Financial Statements

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Income Statement, Owner's Equity Statement, Balance Sheet, and Statement of Cash Flows

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Analysis

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Involves the use of ratios , percentages, graphs, and charts to highlight significant financial trends and relationships

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Interpretation

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Involves Explaining the uses, meaning, and limitations of reported data

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Bookkeeping

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Usually involves only the recording of economic events, therefore it is just one part of the accounting process

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Accounting

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Involves the entire process of identifying, recording, and communicating economic events

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Internal Users

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Internal users of accounting information who must answer many important questions relevant to the function of their business

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External Users

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Individuals and organizations outside a company who want financial information about the company

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External Users

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Investors and Creditors

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Investors

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Owners

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Investors

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Use accounting information to decide whether to buy, hold, or sell ownership shares of a company

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Creditors

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Suppliers, bankers, etc.

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Creditors

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Use accounting information to evaluate the risks of granting credit or lending money

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Financial accounting

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Provides economic and financial info for investors, creditors and other external users

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Taxing authorities

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Internal Service Revenue

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Taxing authorities

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Want to know whether the company complies with tax laws

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Regulatory agencies

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Securities and Exchange Commission

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Regulatory agencies

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Want to know whether the company is operating within prescribed rules

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Customers

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Interested in whether a company will continue to honor product warranties and support its product lines

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Labor Unions

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Want to know whether the owners have the ability to pay increased wages and benefits

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Ethics

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A sound, well-functioning economy depends on accurate and dependable financial reporting

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SOX

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It's intent is to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

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SOX

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Top management must now certify the accuracy of financial information

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SOX

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Penalties for fraudulent financial activity are much more severe

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SOX

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Increased the independence requirements of the outside auditors who review the accuracy of corporate financial statements

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SOX

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Increased the oversight role of boards of directors

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Ethics

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The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair

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GAAP

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Generally Accepted Accounting Principles

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SOX

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Sarbanes-Oxley Act

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GAAP

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Standards developed by the accounting profession, that are generally accepted and universally practiced

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GAAP

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These standards indicate how to report economic events

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FASB

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Financial Accounting Standards Board

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FASB

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The primary accounting standard-setting body in the United States

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SEC

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The Securities Exchange Commission

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SEC

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The agency of the U.S. Government that oversees U.S. Financial markets and accounting standard-setting bodies

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SEC

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Relies on the FASB to develop accounting standards, which public companies must follow

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IASB

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International Accounting Standards Board

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IASB

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The primary accounting standard-setting body that many countries outside of the U.S. Have adopted

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IFRS

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International Financial Reporting Standards

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IFRS

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Standards set by the IASB

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Convergence

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The efforts made, in recent years, by both standard-setting bodies (FASB and IASB) to reduce the differences between U.S. GAAP and IFRS

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Convergence

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Because of this, it is likely that someday there will be a single set of high-quality accounting standards that are used by companies around the world

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Relevence

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Means that financial info is capable of making a difference in a decision

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Faithful representation

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Means that the numbers and descriptions match what really existed or happened—they are factual

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Historical Cost Principle

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Dictates that companies record assets at their cost, true not only at the time it is purchased, but also over time the asset is held

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Fair Value Principle

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States that assets and liabilities should be reported at fair value

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Fair Value Principle

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Mostly used, only in situations where assets are likely actively traded, such as investment securities

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Fair Value

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The price received to sell an asset or settle a liability

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Assumptions

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Provide a foundation for the accounting process

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Monetary Unit Assumption

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Requires that companies include in the accounting records only transaction data that can be expressed in money terms, enabling accounting to quantify economic events

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Monetary Unit Assumption

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Prevents the inclusion of relevant information in accounting records such as owner's health, quality of service, and morale of employees.

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Economic entity

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Any organization or unit in society, such as a company, a government unit, a municipality, a school district, a church, etc.

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Economic Entity Assumption

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Requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities

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Proprietorship

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A business owned by one person, the owner is often the manager/operator of this business

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Proprietorship

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Small service-type businesses, and small retail stores are common forms of this economic entity

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Partnership

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A business owned by two or more persons associated as partners

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Partnership

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Like a proprietorship except that more than one owner is involved

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Corporation

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A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock

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Corporation

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Holders of shares enjoy limited liability

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Limited liability

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Holders of shares are not personally liable for the debts of the corporate entity

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Corporation

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Stock-holders may transfer all or part of their ownership shares to other investors at any time

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Corporation

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Ownership can be transferred without dissolving this entity, enjoying an unlimited life

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The two basic elements of business

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What a business owns and what it owes

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Assets

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The resources a business owns

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What a business owes

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Liabilities and owner's equity

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Liabilities

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Claims of creditors

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Creditors

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Those to whom a company owes assets

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Owner's Equity

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Claims of the owners

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The basic accounting equation

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Assets (A) = Liabilities (L) + Owner's Equity (OE)

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The basic accounting equation

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A L OE

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The basic accounting equation

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Assets must equal the sum of liabilities and owner's equity

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Liabilities

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Appear before owner'ss equity in the BAE because they are paid first if a business is liquidated

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The basic accounting equation

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Applies to all economic entities regardless of size, nature of business, or form of business organization

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The basic accounting equation

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Provides the underlying framework for recording and summarizing economic events

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Assets

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Used in carrying out activities of a business succh as production or sales

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Assets

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It's common feature is the capacity to provide future services or benefits

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Liabilities

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Claims against assets—that is, existing debts and obligations

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Accounts Payable

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Credit from suppliers

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Notes Payable

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Money borrowed from the bank

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Salaries and Wages payable

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Money owed to employees and personelle of a business

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Creditors

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May legally force the liquidation of a business that does not pay its debts

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Creditors

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The law requires that this group's claims be paid before ownership claims

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Owner's Equity

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The ownership claim on total assets

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Owner's Equity

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It si equal to total assets minus total liabilites

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Owner's Equity

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This category increases with owner investments and revenues

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Investment by owner

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The assets an owner puts into the business

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Investment by owner

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These investments increase owner's equity

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Investment by owner

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They are recorded in a category called owner's capital

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Revenues

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The gross increase in owner's equity resulting from business activities entered into for the purpose of earning income

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Revenues

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Usually, this results from selling merchandise, performing services, renting property, and lending money

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Revenues

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Usually result in an increase in an asset, they may arise from different sources and are called various names depending on the nature of the business

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Decreases in owner's equity

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Owner's drawings and expenses

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Owner's drawings

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A withdrawl or other assets for personal use, at the behest of an owner

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Owner's drawings

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Decreases owner's equity

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Expenses

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The cost of assets consumed or services used in the process of earning revenue

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Expenses

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They are decreases in owner's equity that result from operating a business

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The expanded accounting equation

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Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses

Accounting Principles 12th Ed. – Ch. 1 – Flashcards

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