Chapter 1 Accounting consists of 3 basic activities Identifies records and communicates the economic events of an organization to other users I What is accounting A 3 activities Identify business 2 Records 1 Company selects the economic events relevant to its in order to provide a history of its financial activities a Keeping a diary ledger journal b Tracking all income and expenses 3 Communicates analyze and interpret reported information a Use visual aids such as graphs formulas charts b Interpret by explaining the uses meaning and limitations of reported data of accounting information are those individuals inside a B Internal Users company who plan organize and run the business 1 Marketing Managers 2 Finance 3 Human Resources 4 Management C External Users want financial information about the company are individuals and organizations outside a company who Owners use info to decide whether to buy sell or hold 1 Investors positions in the company 2 Creditors use info to decide if company can pay back loans II Building Blocks of Accounting A Ethics in Accounting 1 Recognize an ethical situation and the issues involved 2 3 Identify and analyze the principal elements in the situation Identify the alternatives and weigh the impact of each alternatives on various stakeholders B Generally Accepted Accounting Principals GAAP 1 Agencies a Securities and Exchange Commission SEC b Public Company Oversight Board PCAOB determines auditing standards and reviews auditing firms c Financial Accounting Standards Boards FASB Primary d accounting setting body in the USA Internal Accounting Standards Board IASB International reporting standards 2 Measurement Principal a Cost Principal HISTORICAL COST companies record assets at their cost Ie buy land for 30K record it for 30K even as the land price goes up b Fair Value Principal recorded at fair market value assets and liabilities should be c Decide by relevance and faithfulness Most time FASB uses Cost Principal because Fair Value can not always be accurate unless actively traded a Monetary Unit Assumption provide a foundation for the accounting process 3 Assumptions accounting records only transaction data that can be expressed in money terms Quantify economic events entity company must be kept separate and distant from the activities of the owner b Economic Entity Assumption companies include in the activities of the 4 Types of Business Ownership business owned and operated by on person a Proprietorship b Partnership c Corporations business owned by 2 or more people a business that is a separate legal entityand has ownership divided into stock that can be bought and sold The owners have limited liability Liable only what they invest III Basic Accounting Equation Assets Liabilities Stockholders Equity are resources a business owns and uses assets for productions and A Assets sales They provide Future Service and Benefits B Liabilities 1 are claims against assets existing debts and obligations listed first in equations because liabilities are paid first if business is liquidated 2 Accounts payable buying on credit card 3 Notes payable borrowed 4 wage payables taxes payable 5 C Stockholders Equity Total Assets Total liabilities Stockholder Equity ownership claim on total assets 1 Common Stock total amount paid in by stockholders for the shares they purchase revenue expenses and retained earnings are the gross increases in stockholders equity resulting from D Revenue business activities entered into for the purpose of earning income 2 Retained Earnings 1 selling goods and Services fees 2 3 interest 4 dividends rents 5 royalties 6 costs of the assets consumed or services used in the process of E Expenses earning revenue 1 wages rent 2 F Dividends 3 4 taxes interest distributed to stock holders 1 Dividends reduce retained earnings 2 Dividends NOT an expenses IV Using the Accounting Equation A Income Statement SEE PAGES 16 20 V Financial Statements or net loss of a company for s specific time period 1 Revenue listed first followed by expenses 2 Net income Profit Revenue Expenses 3 Net Loss Revenue Expenses presents the revenue and expenses and resulting income summarizes the changes in retained earnings B Retained Earnings Statement for a specific period of time 1 dividends are recorded here C Balance Sheet company over a specific time reports the assets liabilities and stockholdes equity of a 1 Assets listed first followed by liabilities and shareholder equity D Statement of Cash Flow Summarizes information concerning the cash inflows receipts and outflows payments for a specific period of time 1 Where did the cash come from during the period 2 What was cash used for during the period 3 What was the change in the cash balance during the period
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