Beginning AssumptionsAccounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions. Put more simply, accounting is the language of business.To accomplish the process of accounting, accountants use four assumptions:Financial StatementsA financial Statement is a formal record of the financial activities of a business. Financial Statement comprises of:The Income StatementThe Balance SheetThe Statement of Retained EarningsThe ash Flo! StatementReporting Proftability:The Income Statement?"ne of the first #uestions an$ business !ants to %no! is !hether the$ are ma%ing mone$ or are profitable.These ans!ers can be found in the Income Statement.The Income Statement and TermsAn income statement reports a companys revenues and expenses.Reenue ! An increase in resources resulting from the sale of goods or sericesTermsReenue Recognition Principle ! A reenue should be recorded "hen a resource has been earned#$pense ! A decrease in resources resulting from the sale of goods or serices %atching Principle ! #$penses should be recorded in the period resources are used to generate reenuesIncome Statement #$ampleBasic Structure of the Income StatementReenues ! #$penses & 'et Income or 'et (ossReported oer a specifc period, li)e for the year ended *ecember +,, -.,. Reporting /inancial Position: The Balance Sheet and Related Terms#thics and *ecision %a)ingIn todays business enironment, companies hae to be a"are not only of the economic impact of their decisions, but also of their ethical impact0Information being used for1To falsify records??To ignore product safety??To exceed government limits??The 2lassifed Balance Sheetgroups together accounts of similar nature and reports them in a fe" ma3or classifcations0 2urrent assets (ong4term inestments /i$ed assets Intangible assets 5ther assets 2urrent 6 (ong4term Retained #arnings 2ontributed 2apital #7uityBalance Sheet Classifications&&Items are grouped b$ categor$ in the balance sheet.Current Assets'onvert to ash in & $ear or less(Noncurrent Assets'All other assets(Current iabilities ')aid !ith ash in & $ear or less(Noncurrent iabilities 'All other liabilities(ASS!TS IABIITI!S*sers of Accounts*sers of AccountsInvestors+endersreditors,ebtors-overnment BodiesEmplo$eeAnal$st)ublicInvestors+endersreditors,ebtors-overnment BodiesEmplo$eeAnal$st)ublicThe 2onceptual /rame"or)The conceptual frame"or) of accounting is the collection of concepts that guide the manner in which accounting is practiced.The grammar or terms, e$plaining fnancial accountinglanguage in this chapter, are more formally )no"n as components of the conceptual frame"or) of accounting0Terms 8sed to Identify and *escribe #conomic Information Term "efinition #eported on theAsset A resource of a business Balance sheetiability An obligation of a business Balance sheet!$uity The difference bet%een assets and liabilitiesBalance sheetContributed Capital !$uity resulting from contributions from o%nersBalance sheet#etained !arnings !$uity resulting from profitable operationsBalance sheet and statement of retained earnings#evenue An increase in assets resulting from selling a good or providing a serviceIncome Statement!xpense A decrease in assets resulting from selling a good or providing a serviceIncome Statement"ividend A distribution of profits to o%nersStatement of retained earningsPrinciples 8sed to %easure #conomic Information&rinciple "efinition #amification#evenue #ecognitionRevenues are recorded !hen the$ are earned.The receipt of cash is not re#uired to record a revenue.'atching E.penses are recorded in the time period !hen the$ are incurred to generate revenues.For man$ assets/ the cost of the asset must be spread over the periods that it is used. Cost Assets are recorded and maintained at their historical costs.E.cept in a fe! cases/ mar%et values are not used for reporting asset values.Assumptions %ade 9hen 2ommunicating #conomic InformationAssumption "efinition #amification!conomic entityThe financial activities of a business can be accounted for separatel$ from the business0s o!ners.1e do not have to !orr$ that the financial information of the o!ner is mi.ed !ith the financial information of the business.'onetary unitThe rupee/ unad2usted for inflation/ is the best means of communicating accounting information in the India.All transactions in foreign currencies are converted to rupees.Time periodAccounting information can be communicated effectivel$ over short periods of time.3ost businesses prepare #uarterl$ and annual financial statements.(oing concernThe compan$ for !hich !e are accounting !ill continue its operations indefinitel$.If an entit$ is not selling its assets/ then the cost principle is appropriate.:ualitatie 2haracteristics of Accounting InformationTerm*efnition Ramifcation8nderstandabilityAccounting information should be comprehensible by those "illing to spend a reasonable amount of time studying it08sers must spend a reasonable amount of time studying accounting information for it to beunderstandable0ReleanceThe capacity of accounting information to ma)e a di;erence in decisions0Information should hae predictie or feedbac) alue and should be timely0:ualitatie 2haracteristics of Accounting Information @4 'etIncome@(oss 4 *iidends & #ndingRetained #arnings#nding retained earnings goes to the balance sheet0Statement of cash ?o"sSho"s a companys in?o"s and out?o"s of cash oer a specifcperiod of time05perating 2ash /lo"s >@4 Inesting2ash /lo"s >@4 /inancing 2ash /lo"s & 'et change in cashThe ending cash balance on thestatement of cash ?o"s should agree"ith the balance in cash on the balance sheet0Business /ormsBusinesses hae three basic options "hen deciding "hich form a ne" business "ill ta)e0These include: sole proprietorship, partnership, and corporation0 A Public 2ompany2orporations can ta)e seeral forms, one of "hich is a public corporation0 A public corporation is one in "hich o"nership is aailable to the public at large0 Such corporations are said to be publicly traded. #$amples of publicly traded corporations are Tata, Infosys, and *abur0The stoc) of a public corporation is usually bought and sold on an open e$change such as the BombayStoc) #$changeAenerally Accepted Accounting PrinciplesAenerally acceptedaccounting principles