Accounting: a process of identifying, recording, summarizing, and reporting economic

info to decision makers in the form of financial statement.

Steps to accounting:
1. Recording data
2. Classifying and Summarizing results
3. Interpret and take decision
Flow of accounting:
1. Business transactions occur
2. Business prepare reports to show the results of their operations
3. People make decision
Users of accounting:

Individuals
Business
Investors and creditors
Government agencies
Taxing authorities
Nonprofit organizations

External users of accounting:

Investors
Creditors
Regulators
Customers
Competitors

Internal users of accounting:

Owners
Managers
Employees

External users make decision about the entity, internal users make decision for the
entity.
Financial accounting: focuses on reporting to external parties, and measures and records
business transactions, and provides financial statements based on generally accepted
accounting principles.
Management accounting: measures and reports financial and nonfinancial info that help
managers make decisions to fulfill the goals of an organization.
Cost accounting: it provides info for both management accounting and financial
accounting, and measures and reports financial and nonfinancial data.
Inventory: goods held by a firm for a resale to customers
Accounts payable: a liability that results from a purchase of goods or services on account

Compound entry: a transaction that affects more than 2 accounts

Creditor: one to whom money is owed
Debtor: one who owes money
Balance sheet: a financial statement, consists of assets and liabilities and the
shareholders equity.
Accounting equation = assets = liabilities + equity
Uses of fund = sources of fund
Assets: something a firm owns which have an economical value
Assets to be included in the balance sheet:
Be owned or controlled by the firm
Must possess expected future benefits
Liabilities = maturity
Equity consists of:
Contributed capital, cashed raised from the issuance of shares
Earned capital: retained earnings
Accrual accounting: recognition of revenue when earned and the matching of expenses
when incurred.
Statement of cash flow: reports when inflows or outflows
Cash flow reported based on 3 business activities:
1. Operating activities
2. Investing activities
3. Finance activities
Revenue: they are amounts received or to be received from customers for sales of
products or services
Expenses: amounts that have been paid or will be paid later for costs that have been
incurred to earn revenue
Owners equity: is whats left of the assets after liabilities have been deducted
Role of accounting:

Budgeting
Information system design
Cost accounting
Internal auditing

GAAP: generally accepted accounting principles

The entity concept: an accounting entity is an organization that stands apart from other
firms and individuals as a separate economic unit

Materiality convention: a financial item is material if its omission or misstatement would

tend to mislead the reader of the financial statements under consideration.
Revenue principles:
When to record revenue
The amount of revenue to record
How the recognize the revenue:
Earned: goods are delivered or a service is performed
Realized: cash or a claim to cash is received in exchange for goods and services
The matching principle: it is the basis for recording expenses and includes two steps,
identify all the expenses incurred during the accounting period, measures the expenses
and match expenses against revenue earned.
Double entry system: two sides are affected every transaction happens.