Chapter 1 Introducing Accounting in Business Importance of Accounting Accounting is an information and measurement system that identifies records and communicates relevant reliable and comparable information about an organizations business activities identify the business activity record it communicate it through statements analyze and interpret the statements Recordkeeping bookkeeping recording of transactions or events either manually or electronically just one part of accounting o Technology reduces the time effort and cost of recordkeeping and improves accuracy External users are not directly involved in running the organization lenders shareholders governments consumer groups external auditors customers o Financial accounting is the area of accounting aimed at serving external users by providing them with general purpose financial statements Internal users are those directly involved in managing and operating an organization use the information to help improve the efficiency and effectiveness of an organization officers managers internal auditors sales staff budget officers controllers o Managerial accounting is the area of accounting that serves the decision making needs of internal users o Internal controls are procedures set up to protect company property and equipment ensure reliable accounting reports promote efficiency and encourage adherence to company policies Opportunities in accounting financial managerial taxation accounting related Most opportunities are in private accounting employees working for businesses then public accounting services such as auditing and tax advice to businesses then government nonprofit and education Fundamentals of Accounting Ethics are beliefs that distinguish right from wrong accepted standards of good and bad behavior Social responsibility refers to the concern for the impact of actions on society Fraud triangle asserts that opportunity pressure and rationalization must exist for a person to commit fraud Generally accepted accounting principles GAAP financial accounting practices are governed by concepts and rules Securities and Exchange Commission SEC has the legal authority to set GAAP oversees proper use of GAAP by companies that raise money from the public through stock and debt o Financial Accounting Standards Board FASB a private sector group that sets both broad and specific principles International Accounting Standards Board IASB an independent group consisting of individuals from many countries that issues international financial reporting standards IFRS that identify preferred accounting practices We are attempting to converge the FASB and IASB o Conceptual framework Objectives to provide information useful to investors creditors and others Qualitative characteristics to require information that is relevant reliable and comparable Elements to define items that financial statements can contain Recognition and measurement to set criteria that an item must meet for it to be recognized as an element and how to measure that element General accounting principles basic assumptions concepts and guidelines for preparing financial statements o At least 4 basic principles Measurement cost principle accounting information is based on actual cost with a potential for subsequent adjustments to market emphasizes reliability and verifiability objective supported by facts unbias Revenue recognition principle provides guidance on when a company must recognize record revenue Revenue is recognized when earned proceeds from selling products and services need not be in cash revenue is measured by the cash received plus the cash value of any other items received Expense recognition principle matching principle prescribes that a company record the expenses it incurred to generate the revenue reported Full disclosure principle prescribes that a company report the details behind financial statements that would impact users decisions Going concern assumption accounting info reflects a presumption that the business will continue operating instead of being closed or sold Monetary unit assumption we can express transactions and events in monetary units Time period assumption presumes that the life of a company can be divided into time periods o 4 assumptions Business entity assumption means that a business is accounted for separately from other business entities such as its owner 3 forms of business entities 1 Sole proprietorship proprietorship a business owned by 1 person in which that person and the company are viewed as 1 entity for tax and liability purposes unlimited liability 2 Partnership a business owned by 2 or more people which are jointly liable for tax and other obligations o Limited partnership a general partner with unlimited liability and a limited partners with liability restricted to amount invested o Limited liability partnership restricts partners liabilities to their own acts and the acts of those under their control o Limited liability company limited liability of a corporation and tax treatment of a partnership 3 Corporation a business legally separate from its owner o Shareholders owners not liable for corporate acts limited liability o Double taxation o S corporation does not owe corporate income o Common stock when a corporation issues only tax one class of stock o 2 constraints Materiality constraint prescribes that only information that would influence the decisions of a reasonable person needs to be disclosed Cost benefit constraint prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed Specific principles detailed rules used in reporting business transactions and events Sarbanes Oxley Act created to help stop financial abuses at companies that issue their stock to the public Auditors must verify the effectiveness of internal controls an audit examines whether financial statements are prepared using GAAP does not attest to absolute accuracy of the statements Dodd Frank Wall Street Reform and Consumer Protection Act created to promote US financial stability by improving accountability and transparency in the financial system put an end to the notion of too big to fail protect the taxpayer by ending bailouts and protect consumers from abusive financial services practices o Volcker Rule aims to limit speculative investments by large financial firms and to prohibit most banking entities from engaging in proprietary trading or sponsoring or investing in a hedge or
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