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HFT 2401
Chapter 1
Introduction to Accounting
AccountingA Means to an End
Provides answers to questions How much cash do we have What was our payroll cost When did we buy a piece of equipment & at what
cost What is our food cost What is our revenue What are our expenses What did we keep (net income)
American Accounting Association defines accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of that information”
The Accounting Process
1) Observe events in order to identify the events that are of a financial nature – monetary terms
2) Requires the recording, classifying, and summarizing these events.
3) Produces various financial statements for internal & external users.
4) Communication
Bookkeeping vs. Accounting
Bookkeeping – records & classifies transactions
Accounting – summarizes and interprets
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Branches of Accounting
Financial Accounting – Revenues, expenses, assets & liabilities
Cost Accounting – Record, classify, allocate & report current & prospective costs. Used mainly in manufacturing
Managerial Accounting – Analyzes & provides information to management to enhance controls
Branches of Accounting
Tax Accounting – Prepare & file tax returns
Auditing – Reviews and evaluates documents, records and control systems
Accounting Systems – Information systems
Organizations that Influence Accounting
AICPA
FASB
SEC
IRS
HFTP
Forms of Business Organizations
Sole Proprietorship
Partnerships
Limited Partnerships
Limited Liability Companies (LLC)
Corporations
Sole Proprietorship
Easiest to organize / dissolve
Legally not a separate business – liability issues
It is separate for accounting purposes, however
Owner not paid a salary or wage - withdrawals
Partnerships
Two or more people joined together in a non-corporate manner for conducting business. Can use a written or oral agreement
Partnerships
Advantages Greater financial
strength Does not pay taxes Shares liability Greater
management strength
Disadvantages Partners are taxed on
profits regardless of cash distribution
Limits decision making process
Unlimited legal liability
Limited Partnerships
Offers liability protection to limited partners General Partner(s) – responsible for debts of the
partnership Limited Partner(s) – may not actively participate
in the day to day operations of the business Agreement must be written Limited partners liability is limited to the amount of
their investment
Corporations
A legal entity created by a state or other political authority
Characteristics An exclusive name Continued existence independent of
stockholders Paid in capital represented by shares of stock Overall control vested in its directors
Corporations
Advantages Shareholders liability limited
to amount of investment Owners are taxed on
distributed profits (dividends) Employee equity participation
(ESOP) Lower tax rates Corporation continues on in
perpetuity
Disadvantages Double taxation Ownership control
Other Forms Of Business Organization
S-Corp Eliminates
double taxation Limited to 75
shareholders Only one class
of stock Shareholders
pay taxes
Limited Liability Company (LLC) May have unlimited
number of owners May have a single
owner Not restricted to one
class of stock
Principles of Accounting
Cost Business Entity Continuity of the Business Unit Unit of Measurement Objective Evidence Full Disclosure Consistency Matching Conservatism Materiality
States that when a transaction is recorded, the transaction price (cost) establishes the accounting value.
Cost Principle
Statements are based on the concept that each business maintains its own accounts, & that these accounts are separate from other interests of the owners.
Business Entity
The assumption that the business will continue indefinitely
Continuity of the Business Unit
Unit of Measurement
All transactions are expressed in monetary terms
Accounting records are based on objective evidence ( invoices, checks, cash register receipts)
Objective Evidence
Financial statements must provide all information pertinent to interpretation of the financial statements.
Full Disclosure
The same accounting method from time period to time period.
Consistency
Match revenues with expensesCash versus accrual.
Matching
Recognize expenses as soon as possible, but delay recognition of revenues until they are sure.
Also, Value Inventory, Investments, PPE at the lower of Original Cost or Current Market Value.
Conservatism
Events or information must be accounted for if they make a difference to the readers of the financial statements.
Materiality
Overview of Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Fundamentals of Accounting
Balance Sheet Assets (Things Owned)
= Liabilities ( Obligations )+ Equity ( Residual Claims on Assets )
Fundamentals of Accounting
Income StatementRevenues
- Expenses= Net Income (Loss)
Temporary Accounts are Netted and Closed to Equity (retained earnings)
Fundamental Equation
Assets = Liabilities + Owners Equity
Assets = Liabilities + Permanent OE + Temporary OE
Assets = Liabilities + Permanent OE
+ Revenue - Expenses
Cash vs Accrual
Cash Basis Accounting Recognize revenue or expense when cash
received or disbursed
Accrual Basis Accounting Recognize revenue when earned Recognize expense when incurred
Assets
Resources owned by a business Common characteristic – the capacity to
provide future benefit or service
Use for the purpose production, consumption and exchange of goods or services
Future economic benefits results in cash inflows
Liabilities
Claims against assets Creditors Existing debts and obligations
Accounts payable Notes payable Wages payable Sales, Real Estate and Income Taxes payable
Equity
Claims of the owners on the assets Corporations
Paid in capital Retained earnings Revenues Expenses Dividends
Revenues > Expenses = Net IncomeRevenues < Expenses = (Net Loss)
Transactions
Transactions defined: economic events of the enterprise recorded
Each transaction may be internal or external Each transaction must identify the specific items
affected and the net change on each item Each transaction has a dual effect on the
accounting equation The two sides of the accounting equation must
always equal
Effects of Transactions on the Accounting Equation
Increase in an asset Decrease in another asset Increase in a liability Increase in owners equity
Increase in a liability Increase in an asset Decrease in another liability Decrease in owners equity
Increase in owners equity Increase in an asset Decrease in liability
Homework Assignment
Problem 1 Problem 4 Problem 5 Problem 9 Problem 12