Rutgers ACCOUNTING 272 - Chapter Three: Adjusting the Accounts

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Chapter One: What Is Accounting?Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users. Identifies economic events relevant to its business sale of snack chips by PepsiCoRecords a systematic, chronological diary of events  measured in dollars and centsCommunicates accounting reports (financial statements)  analyze/interpret for users• By presenting recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful. The major users and uses of accounting are as follows: (a) Management uses accounting information in planning, controlling, and evaluating business operations. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners.Bookkeeping usually involves only the recording of economic events. There are two broad groups of users of financial information: internal users and external users. • Internal users of accounting information are those individuals inside a company who plan, organize, and run the business.o Marketing managers, production supervisors, finance directors, company officers How do they get the information? Managerial accounting provides internal reports to help users make decisions about their companies. • External users are individuals and organizations outside a company who want financial information about the company. o Investors & creditors o Financial accounting provides economic and financial information for investors, creditors, and other external users. Taxing authorities, regulatory agencies, customers, labor unionsEthics in Financial Reporting Concerns that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting  Sarbanes-Oxley Act of 2002: law passed to reduce unethical corporate behavior. • The standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or unfair, are ethics. Generally Accepted Accounting Principles (GAAP): indicate how to report economic eventsSecurities and Exchange Commission (SEC)• A governmental agency that requires companies to file financial reports in accordance with generally accounting principles.• Rules apply to publicPublic Company Accounting Oversight Board (PCAOB)• It determines auditing standards and reviews auditing firms.Financial Accounting Standards Board (FASB)• A private organization that establishes generally accepted accounting principles.• Rules apply to public/privateInternational Accounting Standards Board (IASB)• An accounting standard-setting body that issues standards adopted by many countries outside of the U.S. • Understand distinction between IASB & U.S.Measurement Principles (relate to relevance [financial information is capable of making a difference in a decision] and faithful representation [numbers and descriptions match what really existed or happened—factual])• Cost principle: an accounting principle that states that companies should record assets at their cost.o Cost  what people pay to get something, not the value of the bought product Objectively verifiable  Problem – only useful at the time it is on market• Fair value principle: an accounting principle that states that companies should record assets at their fair value.Measured in dollars $Assumptions • Monetary unit assumption: an assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money.• Economic entity assumption: an assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.* Adelphia – case in which money was guaranteed to the founding familyo Proprietorship: a business owned by one person.o Partnership: a business owned by two or more persons associated as partners.o Corporation: a business organized as a separate legal entity under state corporation law, having ownership divided into transferrable shares of stock.The Basic Accounting Equation ASSETS (owns) = LIABILITES (owes) + STOCKHOLDERS’ EQUITY (claims of owners)• The capacity to provide future services or benefits (ex: delivery truck, computers, money)• Accounts payable (ex: money for flour)• Note payable (ex: money borrowed from bank for truck)• Wages payable (ex: money to employees)• Sales and real estate payable (ex: money to government)* Goes to creditors * Residual equity: money “left over” after creditors’ claims are satisfied• Common stock: total amount paid in by stockholders for the shares they purchase. (^)• Retained earnings: section of the balance sheet determined byo Revenues: gross increases in stockholders’ equity resulting from business activities entered into for the purpose of earning income. (v) Problem: efforto Expenses: cost of assets consumed or services used in the process of earning revenue. (v)o Dividends: distribution of cash or other assets to stockholders. (^)Net income/net loss = revenue - expensesTransactions are a business’s economic events recorded by accountants and affect the accounting equation. 1. Investment by stockholders: cash added to A and SE2. Purchase of equipment for cash: cash taken from A, equipment added to A3. Purchase of supplies on credit: supplies added to A, accounts payable added to L4. Services provided for cash: cash added to A, revenue added to SE5. Purchase of advertising on credit: accounts payable added to L, expenses taken from SE6. Services rendered for cash and credit: cash/accounts receivable added to A, revenue added to SE7. Payment of expenses: cash added to assets, expenses taken from SE8. Payment of accounts payable: cash taken from A and L9. Receipt of cash on account: cash added to A, accounts receivable taken from A10. Dividends: cash taken from A, dividends taken from SERights are always assets.Payables are always liabilities.Financial Statements1. An income statement presents the revenues and expenses and resulting net income or net loss

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Rutgers ACCOUNTING 272 - Chapter Three: Adjusting the Accounts

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