Accounting Fundamental: Chapter 1

We live in an information age in which accounting information impacts us all

Accounting is an information and measurement system that identifies, records, and communicates information about an organization’s business activities.

Because all organizations set up an accounting information system to communicate data to help people make better decisions.

the recording of transactions and events

• 1. External Users
• 2. Internal Users

• -not directly involved in running the organization
• -Ex. shareholders, investors, lenders, customers, lawyers

the area of accounting aimed at serving external users by providing them with general-purpose financial statements

area of accounting that serves the decision making needs of internal users

Internal users

internal users

• 1. Financial
• 2. Managerial
• 3. Taxation
• 4. Accounting-related

trusted

beliefs that separate right from wrong

• -procedures to protect assets, uphold company policies
• -to prevent fraud companies set these up

prevention

• 1. Opportunity: Low-risk of getting caught
• 2. Pressure: or incentive to commit fraud
• 3. Rationalization: justifies fraud or does not see its criminal nature

• -requires that public companies apply both accounting oversight and stringent internal controls. (more transparency, accountability and truthfulness in reporting transactions) 
• -Congress passed the act to help curb financial abuses at companies that issue their stock to the public
• -Companies in the past have inflated their revenues and income and hid debt

• Designed to:
• 1. Promote accountability and transparency in the financial system
• 2. put an end to the notion of "too big to fail"
• 3. protect taxpayer by ending bailouts
• 4. protect consumers from abusive financial services

• -Generally Accepted Accounting Principles 
• -Aims to make information relevant, reliable, and comparable

• -the basic assumptions, concepts, and guidelines for preparing financial statements.
• -stem from long-used accounting practices.
• 1.Measurement
• 2.Revenue recognition
• 3.Full disclosure
• 4.Expense recognition

• -accounting information is based on actual cost
• -actual cost is considered objective
• -Ex. a company pays $500 for equipment. it must be recorded at $500 even if the owner thinks the equipment is worth $700

• -a company must record the expenses incurred to generate the revenue reported
• -Ex. Rent costs of office space

• -revenue is recognized when
• 1. goods and services are provided to customers
• 2.at the amount expected to be received by the customer
• -when earned

to record

• -detailed rules used in reporting business transactions and events.
• -arise more often from the rulings of authoritative groups.

- a company is required to report the details behind financial statements that would impact user's decisions

• -Assumption that the business will continue operating instead of being closed or sold
• -a company does not the intention of liquidating its assets and closing down

• -transactions and events are expressed in monetary or money unit
• -Ex. US dollar

-all business entities should be accounted for separately, including its owner

-presumes that the life of a company can be divided into time periods, such as months and years

• -the ability of information to influence decisions
• -Only information that would influence the decisions of a reasonable person need to be disclosed

• -information disclosed by an entity must have benefits to the user that are greater than the costs
• -The benefits of the information disclosed must be greater than the costs of providing the information.

• 1. Measurement principle
• 2. Revenue recognition principle
• 3. Expense recognition principle 
• 4. Full disclosure principle

• 1. Going concern assumption
• 2. Monetary unit assumption
• 3. Time period assumption
• 4. Business entity assumption

• 1. Materiality 
• 2. cost-benefit

• -resources a company owns or controls
• -expected to yield benefits
• -Ex. musical instruments for a rock band or land for a vegetable grower
• -cash, supplies, equipment, land and accounts receivable

an asset that promises a future inflow of resources

• -creditors claim on assets
• -obligations to provide assets, products, or services to others

• -liability that promises a future out-flow of resources.
• -Ex. wages payable to workers, accounts payable to suppliers, loans payable to banks

-the owner's claim on assets 

=  assets - liabilities

• Assets = Liabilities + Equity
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decreases it

descreases it

• 1. Owner, Capital (increases)
• -Owner contributions, investments
• 2. Owner, Withdrawals (decreases) 
• -personal use outflows of cash
• 3. Revenue (increases) 
• -sales of products, services, facilities rented to others, consulting services
• 4. Expenses (decreases
• -cost of providing products and services, Ex. costs of employee time, use of supplies, advertising, utilities, insurance fees

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• 1. Income statement
• 2. Statement of owner's equity 
• 3. Balance sheet
• 4. Statement of cash flows

describes a company's revenues and expenses and computes net income or loss over a period of time.

•  Revenue
• -Expenses
•  Net Income

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• *Owner's investments and withdrawals are not part of income.

explains changes in owner's equity from owner investments, net income (or loss), and any withdrawals over a period of time.

•  Beg. capital
• +Owner investments
• +Net income
•  -Withdrawals
• End. capital

describes a company's financial position(types and amounts of assets, liabilities, and equity) at a point in time.

• Assets = Liabilities + Equity
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identifies cash inflows (receipts) and cash outflows (payments) over a period of time

• +/- Operating C.F
• +/- Investing C.F
• +/- Financing C.F
•       Change in cash

occurs when revenue exceeds expenses

occurs when expenses exceed revenue