Accounting 1 - Chapter 1

Assets

Assets may be viewed as resources owned or controlled by an entity. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies. Also called net equity.

Business events that are measurable include:

Decreases in the value of securities (assets). Bankruptcy of a customer owing money. Technological advances rendering patents (or other assets) worthless. An "act of God" (casualty) that destroys assets.

Ojectivity Principle

The objectivity principle states that accounting information must be unbiased and based upon independent evidence.

Bookkeeping

The part of accounting that involves recording economic transactions and events, either electronically or manually, is called bookkeeping (also known as recordkeeping), not accounting.

Revenue recognition principle

The revenue recognition principle states that revenue is to be recorded in the accounts of the company when it is earned. We need not wait until cash is received before we recognize revenue. It may be difficult to follow this principle in the beginning of the course because you are probably a cash basis individual. You usually wait until cash is paid or received before recognizing a transaction.

Tax Accounting

Preparation, Planning, Regulatory, Investigations, Consulting, Enforcement, Legal Services, Estate Plans

Return on Assets (ROA)

A ratio that helps us measure operating efficiency of a company is the return on assets. Return on assets is calculated by dividing net income by average total assets. In most cases the simple average is used. Add the beginning and ending balance of total assets and divide by two to get a simple average. Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 $350 million/$2,000 million = 17.5%

Financial Accounting

Area of accounting mainly aimed at serving external users. Preparation, Analysis, Auditing (external), Regulatory, Consulting, Planning, Criminal Investigation

Managerial Accounting

Area of accounting mainly aimed at serving the decision-making needs of internal users; also called management accounting. General Accounting, Cost Accounting, Budgeting, Internal Auditing (internal), Consulting, Controller, Treasurer, Strategy

Sarbanes-Oxley Act

Congress passed the Sarbanes-Oxley Act, also called SOX, to help curb financial abuses at publicly traded companies. SOX has revolutionized the way audits are performed in the accounting field. Public companies must apply both accounting oversight and stringent internal controls to comply with the requirements of SOX. Corporate executives and the companies can be fined millions of dollars, as well as face up to ten years in prison for knowingly violating this act.

Double-entry bookkeeping system

Double-entry bookkeeping is an accounting method to balance a business' books. For every journal entry credit (recorded under the company's equity side), there is an equal journal entry debit (recorded under the company's assets side.)

Equity

Equity for a non-corporate entity commonly called owner's equity increases and decreases as follows: Owner investments and revenues increase equity, whereas owner withdrawals and expenses decrease equity. Owner investments are assets an owner puts into the company, and are included under the generic account Owner, Capital.

GAAP:

Generally Accepted Accounting Principles Importance: GAAP are the rules that specify acceptable accounting practices.

Order of Accounting Activities

Identifying - Recording - Communicating The proper order for these activities is identifying transactions, recording transactions, and summarizing transactions.

FASB:

Importance: FASB is an independent group of full-time members who are responsible for setting accounting rules in the United States.

IASB:

International Accounting Standards Board. Importance: Its purpose is to issue standards that identify preferred practices in the desire of harmonizing accounting practices across different countries. The vast majority of countries and financial exchanges support its activities and objectives.

Accounting Related Jobs

Lenders, Consultants, Analysts, Traders, Directors, Underwriters, Planners, Apprasisers, FBI Investigators, Market Researchers, Systems Designers, Merger Services, Business Valuation, Human Services, Litigation Support, Entrepreneurs

External Users

Lenders, Shareholders, Governments, Consumer Groups, External Auditors, Customers

Liabilities

Liabilities represent the claims of creditors on the entity's assets. Liabilities include accounts payable (amounts we owe to creditors for assets purchased on account), notes payable, taxes payable, and wages payable (amounts we owe to our employees at the end of the accounting period).

Internal Users

Managers, Officers and Directors, Internal Auditors, Sales Staff, Budget Officers, Controllers

There are three main areas in which trained accountants may find jobs. The textbook identifies these three areas as (1) private accounting, (2) public accounting, and (3) government, and not-for-profit accounting, and accounting education. Which one of these areas has the most accounting jobs at the present time and what percentage of the job market is represented by this area?

Private accounting has the most jobs at the present time and this area represents 60% of the present job market

SEC:

Securities and Exchange Commission Importance: The SEC is charged by Congress to set reporting rules for organizations that sell ownership shares to the public. The SEC delegates part of this responsibility to the FASB.

Business transactions that are measurable include:

Selling products and services, Collecting funds from dues, taxes, contributions, or investments, Borrowing money, Purchasing products and services.

Accounting Equation

The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because in a general way it states that assets must be equal to the claims against those assets. If you have an asset we can have two broad categories of claims against that asset. First, we may have claims by creditors, liabilities. Finally, after all creditor claims are satisfied, the residual owners, and stockholders, have a claim on those assets. Assets = Liabilities + Equity or Assets minus Liabilities equal Equity

Business Entity Principle

The business entity principle tells us that we must separate out the transaction of individual owners of a business from those of the business.

Cost Principle

The cost principle tell us that accounting information is based upon actual cost incurred. We refer to this cost as historical cost.

Net Income

The difference between revenues and expenses.

Growing-Concern Principle

The going-concern principle states that, in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future.

Monetary Unit Principle

The monetary unit principle tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States.

Four fundamental financial statements

There are four fundamental financial statements used in accounting. 1. The income statement shows our revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. The statement of owner's equity shows the change in the owners' equity during the current period. We will cover the statement of cash flows in detail in a later chapter. Notice that the statement is divided into three major sections: (1) cash flows from operating activities; (2) cash flows from investing activities; and (3) cash flows from financing activities. 3. The balance sheet is a listing of all asset, liability, and equity account balances. The balance sheet is an inventory of assets, liabilities and equity at the end of the month. The balance sheet is a static statement showing the balances of assets, liabilities, and equity at the end of a period.) 4. The statement of cash flows shows where the company got its cash and how it spent its cash. The first financial statement that we prepare is the income statement. Let's get started.