UMD BMGT 220 - Chapter 1: Introducing Accounting in Business

Unformatted text preview:

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, customerso 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 educationFundamentals 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 debto 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 IASBo 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 statementso 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 acompany 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 o 4 assumptions 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 companycan be divided into time periods 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 investedo Limited liability partnership: restricts partners liabilities to their own acts and the acts of those under their controlo Limited liability company: limited liability of a corporation and tax treatment of a partnership - 3) Corporation: a business legally separate from its ownero Shareholders: owners; not liable for corporate acts (limited liability) o Double taxationo S-corporation: does not owe corporate income taxo Common stock: when a corporation issues only 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 andevents - 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 topromote 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


View Full Document

UMD BMGT 220 - Chapter 1: Introducing Accounting in Business

Documents in this Course
Chapter 1

Chapter 1

18 pages

Chapter 1

Chapter 1

20 pages

Midterm 2

Midterm 2

10 pages

Load more
Download Chapter 1: Introducing Accounting in Business
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 1: Introducing Accounting in Business and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 1: Introducing Accounting in Business 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?