Fundamental Accounting PrinciplesMcGraw-Hill/Irw*in
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Learning objectives
Conceptual:
C1: Explain the purpose and importance of accounting in the information age.
C2: Identify users and uses of accounting.
C3: Identify opportunities in accounting and related fields.
C4: Explain why ethics are crucial to accounting.
C5: Explain the meaning of GAAP, and define and apply several key principles of accounting.
Analytical:
Define and interpret the accounting equation and each of its components.
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Learning objective
C1: Explain the purpose and importance of accounting in the information age.
We live in an information age.
Information affects how we live, whom we associate with, and the opportunities we have.
For example, where to go traveling during this summer vacation? You will search on the websites to find something new, something interesting. Then decide to go. Also whether to take ACCT 102? Is it easy? Is it interesting? Is it useful?...
Every daily life question you need some information to answer it to make a decision. Therefore, information help us make decisions. An information system involves the collecting, processing, and reporting of information to decision makers.
Accounting is also information.
An important aim of accounting is providing information about what businesses own, what they owe, and how they perform.
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is a
system that
Identifying business activities requires selecting transactions and events relevant to an organization.
Ex. The sale of cosmetics, such as perfume, lipsticks.. by SaSa
Recording business activities requires keeping a chronological log of transactions and events measured in dollars and classified and summarized in a useful format.
Communicating business activities requires preparing accounting reports such as financial statements. It also requires analyzing and interpreting such reports.
The difference between bookkeeping and accounting: bookkeeping is the recording of transactions and events. This is only one part of accounting. Accounting also identifies and communicates information on transactions and events.
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Bookkeeping is the recording of financial transactions and events, either manually or electronically.
Accounting is much more. It includes identifying, measuring, recording, reporting, and analyzing business events and transactions, and helps information users to make economic decisions.
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Learning objective
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External Users
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Shareholders: whether to buy, hold, or sell stocks?
Governments: whether the firm pay all due tax?
Customers: whether the firm can exist to provide post-sale services?
External Auditors: whether the financial statements are prepared according to GAAP?
Etc.
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Production managers: monitor cost and ensure quality.
Purchasing managers: what, when and where to purchase materials.
Human resource managers: employees’ performance and compensation.
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Learning objective
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Learning objective
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Accepted standards of good and bad behavior
Ethics—A Key Concept
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Consider all good and bad consequences.
Choose best option after weighing all consequences.
Guidelines for Ethical Decision Making
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Learning objective
C5: Explain the meaning of GAAP, and define and apply several key principles of accounting.
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Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Generally Accepted Accounting Principles
Reliable Information
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The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.
Setting Accounting Principles
Financial Accounting Standards Board is the private group that sets both broad and specific principles.
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International Accounting Standard Board (IASB)
International Financial Reporting Standards (IFRS)
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Usually stem from long-used accounting practice.
Specific principles: detailed rules used in reporting business transactions and events.
Usually created by a pronouncement from an authoritative body.
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Source documents.
Objectivity Principle
Accounting information is supported by independent, unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and verifible information.
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Cost Principle
Cost is measured on a cash or equal-to cash basis
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Principles of Accounting
The assets are reported at cost but not reported at liquidation value that assume closure.
Now
Future
Going-Concern Principle
Reflects assumption that the business will continue operating instead of being closed or sold.
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Recognize revenue when it is earned.
Proceeds need not be in cash (Credit sales).
Measure revenue by cash received plus cash value of items received.
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Principles of Accounting
Business Entity Principle
A business is accounted for separately from other business entities, including its owner.
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*
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
Characteristics of Businesses
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Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it common stock (or capital stock).
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Learning objective
Define and interpret the accounting equation and each of its components.
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Accounting Equation
Assets are resources with future benefits that are owned or controlled by a company.
Liabilities are what a company owes its creditors in future products or services.
Equity refers to the claims of its owner(s).
Forms of funds=Sources of funds ()
What resources does the firm have? (Assets) = Where do those resources come from? (Liabilities and Equity)
A firm acquires assets by funds. Liabilities and equity are the sources of funds to acquire those assets.
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Assets
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Taxes Payable
Wages Payable
Notes Payable
Accounts Payable
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Owner’s
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Expanded Accounting Equation
Revenues: gross increase in equity from a company’s earnings activities.
Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.
Owner investments: the assets an owner puts into the company.
Owner withdrawals: the assets take away from the company for personal use.
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Private
accounting
60%
Public
accounting
25%
Government,
not-for-profit,
& education
15%
CharacteristicsProprietorshipPartnershipCorporation