Accounting involves identifying, recording, and communicating economic events of an organization to users. There are internal users, such as managers, and external users, like investors and creditors, who utilize accounting data for decision-making. The document also discusses accounting standards, measurement principles, and the basic accounting equation, emphasizing the importance of accurate financial reporting.
Accounting involves identifying, recording, and communicating economic events of an organization to users. There are internal users, such as managers, and external users, like investors and creditors, who utilize accounting data for decision-making. The document also discusses accounting standards, measurement principles, and the basic accounting equation, emphasizing the importance of accurate financial reporting.
Accounting involves identifying, recording, and communicating economic events of an organization to users. There are internal users, such as managers, and external users, like investors and creditors, who utilize accounting data for decision-making. The document also discusses accounting standards, measurement principles, and the basic accounting equation, emphasizing the importance of accurate financial reporting.
Accounting involves identifying, recording, and communicating economic events of an organization to users. There are internal users, such as managers, and external users, like investors and creditors, who utilize accounting data for decision-making. The document also discusses accounting standards, measurement principles, and the basic accounting equation, emphasizing the importance of accurate financial reporting.
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What is accounting?
Accounting consists of three basic activities:
identifies, records,
Communicates, the economic events of an organization to interested users.
o As a starting point to the accounting process, a company identifies the economic events relevant to its business. Examples of economic events are the 1 sale of goods, the providing 2 of telephone services. o Once a company identifies economic events, it records those events in order to provide a history of its financial activities. o Recording consists of keeping a systematic, chronological diary of events, measured in1 monetary units. o In recording, the company also classifies and summarizes economic events. o Finally, the company communicates the collected information to interested users by means of accounting reports. The host common of these reports are called FSE
Who Uses Accounting Data?
o There are two broad groups of users of financial information: internal users and external users.
A. INTERNAL USERS
o Internal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors, finance directors, and company officers. o Managerial Accounting provides internal reports to help users make decisions about their companies. o Examples are financial comparisons of operating alternatives, projections of income from new sales campaigns, & forecasts for the next year. B. EXTERNAL USERS
o External users are individuals and organizations outside a company who want financial information about the company. o The two most common types of external users are investors and creditors. o Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. o Creditors (such as suppliers & bankers) use accounting information to evaluate the risks of granting credit or lending money. o Financial Accounting provides economic and financial information for investors, creditors, and others.
o In order to ensure high-quality financial reporting, accountants present FS's in conformity
with accounting standards that are issued by standard setting bodies. o Presently, there are two primary accounting standard-setting bodies—the IASB and FASB. o More than 140 countries follow standards referred to as IFRS. o IFRS's are determined by the IASB. The IASB is headquartered in London, with its 15 board members down from around the world. o Most companies in the US follow standards issued by the FASB, referred to as GAAP. o As markets become more global, it is often desirable to compare the results of companies from different countries that report using different accounting standards. o In order to increase comparability, in recent years the two standard-setting bodies have made efforts to reduce the differences between IFRS and U.S. GAAP. o This process is referred to as convergence. o As a result of these convergence efforts, it is likely that someday there will be a single set of high-quality accounting standards that are used by companies around the world. International Accounting Standards Board (IASB) http://www.iasb.org/ o IFRS International Financial Reporting Standards
o IFRS generally uses one of two measurement principles, the historical cost principle or the fair value principle. o The selection of which principle to follow generally relates to trade-offs between relevance & faithful representation. o Relevance means that financial information is capable of making a difference in a decision. o Faithful representation means that the numbers and descriptions match what really existed or happened they are factual.
1. HISTORICAL COST PRINCIPLE (or Cost Principle)
o It dictates that companies record assets at their cost.
o This is true not only at the time the asset is purchased, but also over the time the asset is held.
2. FAIR VALUE PRINCIPLE
o It states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). o Fair value information may be more useful than HC for certain types of assets and liabilities. o For example, certain investment securities are reported at FV because market value information is usually readily available for these types of assets. o In determining which measurement principle to use, companies weigh the factual nature of cost figures versus the relevance of fair value. o In general, even though IFRS allows companies to revalue 2 PPE and other long-lived assets to FV, most companies choose to use cost. Only in situations where assets are actively traded, such as investment securities, do companies 3 generally use the FV principle extensively. Assumptions
o Assumptions provide a foundation for the accounting process.
o Two main assumptions are the monetary unit assumption and the economic entity assumption. 1. MONETARY UNIT ASSUMPTION o The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in money terms. o This assumption enables accounting to quantify (measure) economic events. o The monetary unit assumption is vital to applying the historical cost principle. o This assumption prevents the inclusion of some relevant information in the accounting records. o For example, the health of a company's owner, the quality of service, and the morale of employees are not included. o The reason: Companies cannot quantify this information in money terms. 2. ECONOMIC ENTITY ASSUMPTION o It requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship Partnership Forms of Business Ownership Corporation
Proprietorship
Owned by one person
Owner is often manager/operator Owner receives any profits, suffers any losses, and is personally liable for all debts.
Partnership
Owned by two or more persons
Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares
Separate legal entity organized under corporation law Limited liability
The Basic Accounting Equation
Basic Accounting Equation
Provides the underlying framework for recording and summarizing economic events. Assets must equal the sum of liabilities and equity.
Assets = Liabilities + Equity
Assets
Resources a business owns.
Provide future services or benefits. Cash, Inventory, Equipment, etc. o To be an Asset, Provide future services or benefits, it comes from past transaction and we should to have full of control for that asset.
Liabilities
Claims against assets (debts and obligations).
Creditors (party to whom money is owed). Accounts Payable, Notes Payable, Salaries and Wages Payable, etc
o To be a liability, in the future there must be outflow of resource from our
business, it comes from past transaction and it must be past transaction. Equity
Ownership claim on total assets.
Referred to as residual equity. Share Capital—Ordinary and Retained Earnings.
Increases and Decreases in Equity
INCREASES
a) Investments by shareholders represent the total amount paid in by shareholders for the ordinary shares they purchase. b) Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
DECREASES
a) Dividends are the distribution of cash or other assets to shareholders.
Dividends reduce retained earnings. However, dividends are not expenses.
b) Expense is resource that has been consumed in order to generate revenue.
Using the Accounting Equation
Transactions are a business's economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions. Each transaction has a dual effect on the accounting equation.
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
