Scribd
Upload
2K views

Accounting Principles Chapter 1 Notes

Accounting identifies, records, and communicates the economic events of an organization. It involves three activities: identifying relevant events, recording them to provide a financial history, and communicating collected information through reports. The building blocks of accounting include generally accepted accounting principles, measurement principles like historical cost and fair value, and assumptions like the monetary unit and economic entity assumptions. The basic accounting equation is assets = liabilities + owner's equity, showing the relationship between what a business owns, what it owes, and what belongs to the owners.

Uploaded by

HansAxel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
2K views

Accounting Principles Chapter 1 Notes

Accounting identifies, records, and communicates the economic events of an organization. It involves three activities: identifying relevant events, recording them to provide a financial history, and communicating collected information through reports. The building blocks of accounting include generally accepted accounting principles, measurement principles like historical cost and fair value, and assumptions like the monetary unit and economic entity assumptions. The basic accounting equation is assets = liabilities + owner's equity, showing the relationship between what a business owns, what it owes, and what belongs to the owners.

Uploaded by

HansAxel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

I. What Is Accounting?

- accounting identifies, records, and communicates the economic events of an organization to interested
users
A. Three Activities
- identify events relevant to its business
- records event to provide history of financial activities
- bookkeeping only involves recording of economic events
- communicates collected info to interested users, by means of accounting reports
- most common reports = financial statements
- analyze and interpret, through explaining uses, meaning, and limitations of reported data
B. Who Uses Accounting Data
1. Internal Users

- managers, supervisors, finance directors, company officers, etc.


- questions asked: finance, marketing, human resources, management
2. External Users

- investors decide whether to buy/hold/sell ownership shares of company


- creditors evaluate risk of granting credit or lending money
- taxing authorities see if company complies with tax laws
- regulatory agencies see if company is operating within rules
- customers see if companies honor product warranties and support its product lines
- labor unions see if owners have ability to pay increased wages and benefits
II. The Building Blocks of Accounting

- sound functional economy depends on accurate and dependable financial reporting


A. Ethics in Financial Reporting

- sarbanes-oxley act (SOX)


B. Generally Accepted Accounting Principles

- GAAP is common set of standards


- FASB (financial accounting standards board) is accounting standard-setting body in USA
- SEC (securities and exchange commission) is agency that oversees financial markets and
accounting-standard setting body
- IASB (international accounting standards board)
- IFRS (international financial reporting standards)
- convergence = increase comparability between GAAP and IFRS
C. Measurement Principles

- tradeoff between relevance and faithful representation


- relevance = financial info can make difference in decision
- faithful representation = numbers match what really existed or happened (they are factual)

- companies weigh factual nature of cost figures (cost principle) vs. relevance of fair value
1. Historical Cost Principle (or Cost Principle)

- record assets at their cost


- even if the asset has changed in price over time
2. Fair Value Principle
- report at fair value, the price received to sell an asset or settle a liability
- example: investment securities (market price info is readily info)
D. Assumptions
1. Monetary Unit Assumption

- include in accounting records only transactions that can be expressed in money terms
- accounting can be quantified/measured; vital to cost principle
- prevents qualitative info such as health of owner, quality of service, morale of employees, etc.
2. Economic Entity Assumption

- any organization or unit in society


- activities of entity is separate and distinct from owner and other entities
- proprietorship = one owner, liable for all profits/losses
- partnership = two or more owners
- corporation = separate legal entity under corporation law, ownership divided into transferable
shares of stock; stockholders have limited liability
III. The Basic Accounting Equation

assets = liabilities + owner's equity


A. Assets
- resources a business owns
- capacity to provide future services or benefits
- used to make money
B. Liabilities
- claims against assets, e.g. debts and obligations to creditors
- accounts payable, notes payable, salaries and wages payable, taxes payable
- liabilities must be paid before ownership claims
C. Owner's Equity
- ownership claim on assets
- since creditors must be paid before ownership claims, owner's equity often called residual equity
1. Increases in Owner's Equity

- investments by owner / owner's capital


- revenues = sales, fees, services, commissions, interests, dividends, royalties, rent
2. Decreases in Owner's Equity

- drawings by owner
- expenses = cost of supplies, salaries and wages, utilities, rent, interest, tax
IV. Using the Accounting Equation
- the full order is:
- transaction analysis
- journal
- ledger
- unadjusted trial balance
- trial balance
- close
- balance sheet

- external and internal transactions; some activities are not business transactions, e.g.
answering the phone
V. Financial Statements
A. Income Statement

- revenues and expenses = net income/loss


B. Owner's Equity Statement

- investments, drawings, net income


C. Balance Sheet

- assets, liabilities, owner's equity


D. Statement of Cash Flows
- cash inflow (receipts) and cash outflows (payments)
- cash effects of operations
- investing activities
- financing activities
- net increase or decrease in cash
- cash amount at the end of period
answers:
- where did cash come from?
- what was cash used for?
- what was change in cash balance?

You might also like