Accounting Chapter 1

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Accounting is a system that identifies, records and communicates information that is relevant reliable and comparable to help users make better decisions. Identify economic events o Economic events are relevant to the business meaning they affect the money ex. Transactions Record economic events o They are done in a systematic chronological diary of events o Also known as bookkeeping. Communicate collected info o Done so through accounting reports

Ex. Financial Statements o Economic events reported in the aggregate under certain categories o Important accountants can analyze and interpret the reported information. Includes explaining the uses, meaning, and limitations of reported data. Accounting Information Users Internal Users o Those inside a business who plan organize and run the business Ex. Finance Marketing, human resources, management o Managerial Accounting: provides internal reports to help users External Users o Those outside a company who want financial information. Investors use infor to make decisions to buy hold or sell ownership shares Creditors (ex. Suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. Taxing Authorities (IRS) use it to test for tax law compliance Regulatory agencies (SEC, FTC) whether company operates in prescribe rules Customers, warranty and support issues Labor Unions to identify whether owners can pay increased wages and benefits.

o Financial Accounting provides reports that aid external users Building Blocks of Accounting

Generally accepted accounting principles (GAAP) o Determined by SEC, oversees U.S financial markets and accounting standard setting bodies Public Company Accounting Oversight Board (PCAOB), determines auditing standards and reviews auditing firms Financial Accounting Standards Board (FASB) primary accounting standard setting body in the US International Accounting Standards Board (IASB), issues international financial reporting standards (IFRS) that have been adopted by many countries outside of the US Measurement principles o Chosen between Relevance, financial info is capable of making a difference Faithful Representation, it is factual o Cost Principle Record assets at cost o Fair Value Principle, assets and liabilities are reported at fair value Price received to sell an asset or settle a liability Assumptions o Monetary Unit Assumption Companies include in the accounting records only transaction data that can be expressed in money terms o Economic Unit Entity Activities of the entity be separate and distinct from the activities of its owner and all other economic entities. Proprietorship Owned by one person, liable for all debts

Partnership Two or more people can be fully liable or limited liability Corporation Stockholders have limited liability Ease of transfer of ownership Enjoys unlimited life. Basic Accounting Equation Assets = Liabilities + Stockholders Equity

o Assets Resources a business own, Have capacity to provide future services or benefits o Liabilities Claims against these assets Ex. Accounts payable, note payable, wages payable, sales and real estate taxes payable. People you owe money to are creditors Pay them first when you go bankrupt o Stockholders equity or Residual Equity Common Stock Total amount stockholders pay for the shares they have Retained Earnings, determined by 3 items. Revenues Gross increases resulting from business activities entered into for the purpose of earning income. Expenses Cost of assets consumed or services used in the process of earning revenue. Distribution of cash or other assets to stockholders.

Dividends

Use of Accounting Equation For ever transaction there is a dual response. Review Book Examples Financial Statements Income statement o Revenues and expenses and resulting net income Retained Earnings o Retained earnings + net income - Dividends Balance sheet o Reports assets liabilities and stockholders equity of a company at a specific date Statement of cash flows o Receipts (cash inflows) outflows (payments)

Chapter 2
Account or T- Account

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Record of increases and decreases in a specific asset, liability or owners equity item. Debit indicates left o Debit balance when debit > Credit o Normal Balance Debit Assets Dividend Expense Credit indicates right

o Credit balance when Credit > Debit o Normal Balance Credit Liabilities Increase in common stock Revenue Normal Balance of an account is on the side where an increase in the account is recorded. Steps in Recording Process Analyze Each Transaction Enter Transaction Information in a Journal Transfer Journal Information to appropriate accounts in ledger Journal Book of original entry. Recorded in chronological order o Date, account title, reference number, debit, credit columns Entering transaction data in is journalizing. o Simple entries include only two accounts o Compound entries have more than two Ledgers are account specific. *Look at book illustrations

Chapter 3

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Timing Issues Time period assumption o Accountants divide economic life of a business into artificial time periods Interim periods o When accounting period is a quarter or year Fiscal Year o When it is an entire year Accrual Vs. Cash Basis Accrual basis accounting o Record transactions in the period in which the event occurs o In accordance with GAAP o Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned. o Expense Recognition (Matching Principle) Expenses follow revenues. Cash basis accounting. o Record when the cash moves

Basics of Adjusting Entries Ensure that revenue recognition and expense recognition are followed. Must make every time a financial statement is prepared. Deferrals o Companies make adjustments to record portion that represents expense incurred or revenue earned. o Prepaid expenses or prepayments Asset account is debited at first. Adjusting entry credits the asset account while it debits the expense account. o Unearned Revenues Adjusting entry debits liability and credits revenue. Unearned revenue is a liability Accruals o Accrued Revenues Adjusting entry is debit Asset and credit Revenue.

o Accrued Expenses. Adjusting entry, debit expense and credit liability. o Accrued Interest Face value * annual interest rate * time in terms of one year