Foundations of Accounting What is a business A business is an organization in which resources such as materials and labor are processed to provide outputs goods and services to customers Most businesses seek to earn a profit but some organizations such as hospitals and churches are notfor profit entities What are the basic forms of business organization In general a business can be organized as a sole proprietorship with only one owner a partnership in which two or more owners combine skills and resource a corporation a separate legal entity owned by stockholders What are some of the characteristics of the different forms of business organization Organizational form Legal status Tax status Characteristics Sole proprietorship one owner Legally business and owner are considered same entity Non taxable passthrough entity business profits taxed on owner s tax return Easy and inexpensive to organize 70 of US businesses organized as sole proprietorships Unlimited liability of owner owner is personally responsible for all debts of business Limited life Partnership Legally business and owners are considered same entity Non taxable passthrough entity partners pay tax on their share of business profits Combines skills and resources of more than one person Unlimited liability partners may be personally responsible for Taxable entity corporation files tax return and pays taxes any distributions to the owners may also be taxed on owners individual returns Complex may be costly to organize Organized under laws of a particular state 20 of US businesses generate 90 of US Revenues Can obtain resources by issuing stock More paperwork and regulation Limited liability is major advantage owners stockholders are not personally responsible for business debts Corporation Business and owners are separate entities debts of business Limited life Possibility of disagreement between partners Business Activities Businesses may also be organized according to their business activities what they do Service business provides a service does something Examples dry cleaner architect hair salon airline Business Activities Merchandising business purchases finished goods for re sale to customers Examples Target Amazon Aggieland Outfitters Business Activities Manufacturing business buys materials converts them into sale either to other manufacturing companies or to customers products for Example Goodyear Tire may sell tires to Ford and GM for use in their new car production or to tire store for resale to customers What is accounting Accounting is the process of analyzing organizing and recording financial information and then communicating that information to decision makers Bookkeeping is the recording part of the accounting process Accounting standard setting in the U S Several organizations influence the development of accounting standards Securities and Exchange Commission SEC an agency created by Congress to protect investors by ensuring that all investors have access to high quality financial information The SEC has the authority to regulate accounting and reporting practices however the SEC generally delegates much of this authority to FASB Financial Accounting Standards Board FASB an independent seven member organization created by the SEC a private sector organization responsible for developing accounting standards in the United States standards may change and evolve as business needs change FASB seeks input from professional organizations such as AICPA American Institute of CPAs and AAA American Accounting Organization to keep standards current Governmental Accounting standards Board organization responsible for the development of new governmental accounting concepts and standards International standard setting The International Accounting Standards Board IASB is responsible for standard setting outside of the United States These standards are called International Financial Reporting Standards Objectives of financial reporting FASB has developed a conceptual framework to help guide in developing accounting principles These principles are known as GAAP or generally accepted accounting principles According to the conceptual framework financial statements have the objectives of providing information that is useful in making investment lending and similar decisions helping assess a business entity s ability to generate future cash flows providing information about a company s resources and claims on those resources Underlying assumptions Entity assumption each business has an existence separate from its owners creditors employees customers other interested parties and other businesses A separate identifiable entity is the subject of the statements Money measurement activities are measured in monetary units U S dollars in the United States euros in Europe and only those events which can be expressed in these monetary units are included in the financial statements Continuity or going concern assumes that an entity will continue to operate indefinitely unless strong evidence exists that the entity will terminate Cost assets are generally recorded at their acquisition cost Time period or periodicity the operations of most businesses are continuous over many years This assumes that an entity s life can be subdivided into months or years and that activities can be recorded in these discrete time periods with financial statements reporting on a specific period or date Self test Using the information provided in this presentation answer the following questions Solutions are provided on the last slide Question 1 Ethelena is the owner of Ethelena s Hair Boutique and Salon Ethelena recently purchased a new car for her personal use and she took out a personal loan to pay for the car Ethelena s accountant indicated that the car could not be included as an asset on the company s balance sheet What accounting principle guided this decision a b c d cash basis assumption monetary unit principle personal fair value assumption economic entity assumption Question 2 Bubba owns and operates a small fishing tackle shop He needs to borrow money to expand the business and has prepared financial statements to show to the bank s loan officer Before preparing these statements Bubba obtained appraisals of all business assets so that his statements would show the most current values Which accounting principle or assumption has Bubba violated a b c d e reliability principle cost principle going concern assumption monetary unit principle No