 Accounting is an information system that identifies, records, communicates,

analyze, and interpret the economic events of any business entity to

interested users for decision making.
 Identifying economic events involves selecting the economic activities
relevant to a particular organization. Example: The sale of soft drink by
Pepsi Co, the paying of wages by Ford Motor company to its workers etc.
 Once identified, economic events are recorded to provide a history of the
organization’s financial activities. Recording consists of keeping a systematic
chronological diary of events, measured in monetary terms.
 The identifying and recording activities are of little use unless the
information is communicated to interested users. Financial information is
communicated through accounting reports, commonly known as financial
statements.
 A vital element in communicating economic events is the ability to analyze
the reported information. Analysis involves the use of ratios, percentages,
graphs, and charts to highlight significant financial trends and relationships.
 Interpretation involves explaining the uses, meaning, and limitations of
reported data.
 Distinguishing between Bookkeeping and Accounting: Bookkeeping usually
involves only the recording of economic events. However, accounting process
involves the bookkeeping function and much more. In total, accounting
involves the entire process of identifying, recording, communicating,
analyzing and interpreting of economic events.

 Ethics In Financial Reporting

 Standards of conduct by which one’s actions are judged as right or wrong,
honest or dishonest, fair or not fair, are Ethics.
 Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG,
and others.
 Congress passedSarbanes-Oxley Act of 2002.
 Effective financial reporting depends on sound ethical behavior.
 Cost Principle (Historical) – dictates that companies record assets at their
cost.
 Issues:
 Reported at cost when purchased and also over the time the asset is held.
 Cost easily verified, whereas market value is often subjective.
 Fair value information may be more useful.
 Monetary Unit Assumption – include in the accounting records only
transaction data that can be expressed in terms of money.
 Economic Entity Assumption – requires that activities of the entity be kept
separate and distinct from the activities of its owner and all other economic
entities.
 Proprietorship.
 Partnership.
 Corporation.
 Proprietorship: A business owned by one person is generally a
proprietorship. The owner is often the manager/operator of the business.
There is no legal distinction between the business as an economic unit and
the owner, but the accounting records of the business activities are kept
separate from the personal records and activities of the owner. Example:
Small service-type businesses ( clothing store, plumbing store, beauty salon,
auto repair shop), farms etc. Characteristics of Proprietorship:
 Relatively small amount of capital required.
 The owner receives any profits, suffers any losses, and is personally liable for
all debts of the business.
 Limited life.
 Unlimited liability.
 Ownership is not easily transferable.

 Partnership: A business owned by two or more persons associated as

partners is a partnership. In most respects partnership is like a
proprietorship except that more than one owner is involved. Typically a
partner ship agreement (written or oral) sets forth such terms as initial
investment, duties of each partner, division of net income (or net loss), and
settlement to be made upon death or withdrawal of a partner or partners.
Like a proprietorship, for accounting purposes the partnership affairs must
be kept separate from the personal activities of the partners. Example:
Partnerships are often used to organize retail and service-type businesses,
including professional practices (lawyers, doctors, architects, certified public
accountants) etc. Characteristics of Partnership:
 Relatively small amount of capital required.
 The partners receive any profits, suffer any losses, and is personally liable for
all debts of the business.
 Limited life.
 Unlimited liability.
 Ownership is not easily transferable.
 Corporation: A business organized as a separate legal entity under state
corporation law and having ownership divided into transferable shares of
stock is corporation. For example: ExxonMobil, General Motors, Wal-mart
etc. Characteristics of corporation:
 Large amount of capital required
 The holders of the shares (stockholders) enjoy limited liability.
 Stockholders may transfer all or part of their shares to others at any time.
 •The most essential building blocks of accounting are the categories into
which economic events are classified. The two basic elements of a business
are what it owns and what it owes. Assets are the resources owned by a
business. Liabilities and owner’s equity are the rights or claims against these
resources. Claims of creditors are called liabilities and claims of owners are
called owner’s equity.•This relationship of assets, liabilities, and owner’s
equity can be expressed as an equation as shown above.This relationship is
 referred to as the basic accounting equation. Assets must equal the sum of
liabilities and owner’s equity. Because creditors claims must be paid before
of ownership claims if a business is liquidated, liabilities are shown before
owner’s equity in the basic accounting equation
 This accounting equation applies to all business entities regardless of size,
nature of business, or form of business organization. The equation provides
the underlying framework for recording and summarizing the economic
events of a business enterprise.

 Assets: are resources owned by a business. They are used in carrying out
such activities as production, consumption, and exchange. The common
characteristics possessed by all assets is the capacity to provide future
services or benefits. In a business enterprise, that service potential or future
economic benefit eventually results in cash inflows. Assets are the first
component of the balance sheet. For example, the XYZ Pizza store owns a
delivery truck that provides economic benefits from its use in delivering
pizzas. Other assets of XYZ Pizza store are tables, chairs, oven, cash register
and of course cash. Assets are further classified into two main categories:
1) Current assets: are cash, cash equivalents and other assets that can be
converted into cash with in an operating cycle. Current assets are first major
components of balance sheet. Example: cash, short term deposits, account
receivables, prepaid and other current assets etc.
2) Long term assets: Assets that are not intended to be turned into cash
or be consumed within one year of the balance sheet. Long term assets
include land, property, plant, building, equipment, intangible assets (copy
rights, goodwill, patents) etc.
 Liabilities: Obligations of a company or organization. Amounts owed to
lenders, suppliers, vendors, governments, employees etc. Liabilities often
have the word "payable" in the account title. Liabilities also include amounts
received in advance for a future sale or for a future service to be performed.
Liabilities are the second major component of the balance sheet. For
example, the XYZ Pizza store also has a notes payable to ABC bank for the
money borrowed to purchase the delivery truck. XYZ Pizza store may also
have wages payable to its employees. Liabilities are divided into two main
categories:
1) Current liabilities: In general, if liabilities or obligations must be paid
with in a year, it is considered current. These include bills, money you owe to
your vendors and suppliers, employee payroll, short-term loans etc.
2) Long term liabilities: Obligations of the enterprise that are not
payable within one year of the balance sheet date. Examples are bonds
payable, long term notes payable, mortgage payable etc.
 Owner’s (stockholders’) equity: The ownership claim on total assets is
known as owner’s equity. It is equal to total assets minus total liabilities.
Here is why: The assets of a business are supplied or claimed by either
creditors or owners. In publicly traded companies, outstanding preferred
and common stocks represent the stockholders’ equity.
 Investments by owner are the assets the owner puts into the business. These
investments increase owner’s equity.
 Revenues are the gross increase in owner’s equity resulting from business
activities entered into for the purpose of earning income. Revenue increases
owner’s equity.
 a

 Drawings An owner may withdraw cash or other assets for personal use. We
use a separate classification called drawings to determine the total
withdrawals for each accounting period. Drawings decrease owner’s equity.
 Expenses are the cost of assets consumed or services used in the process of
earning revenue. Expenses decreases owner’s equity that result from
operating the business.
 Common expenses are: salaries expense, rent expense, utilities expense, tax
expense, etc.
 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.
 Four financial statements are prepared from the summarized accounting
data:

 Income Statement
revenues and expenses and resulting net income or net loss for a
specific period of time.

 Owner’s Equity Statement

summarizes the changes in owner’s equity for a specific period of
time.

 Balance Sheet
reports the assets, liabilities, and owner’s equity at a specific date.

 Statement of Cash Flows

summarizes about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
 Public Accounting
 Careers in auditing and taxation serving the general public.
 Private Accounting
 Careers in industry working in cost accounting, budgeting,
 accounting information systems, and taxation.
 Opportunities in Government
 Careers with the IRS, the FBI, the SEC, and in public
 colleges and universities.
 Forensic Accounting
 Careers with insurance companies and law offices to conduct
 investigations into theft and fraud.