Accounting Unit 1

Economic Entity Concept

A business is separate from its owners.

Cost Principle

Assets are recorded at cost and remain.

IFRS Vs GAAP

Consolidation, Inventory and Development Costs.

Dividends

Earnings distributed by the company.

Four Basic Principles

1) Historical Cost Principle: Requires companies to account and Report based on acquisition costs rather than fair market value for most assets and liabilities. 2) Revenue Recognition Principle: requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received. 3) Matching Principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with Revenue can be established, cost may be charged as expenses to the current period. 4) Full Disclosure Principle: Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information cost more to Preparing use. Information disclose should be enough to make a judgement while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information.

Five Basic Constraints

1) Objectivity Principle: The company financial statements provided by the accountant should be based on objective evidence. 2) Materiality Principle: The significance of an item should be considered when it is reported. 3) Consistency Principle: The company uses the same accounting principles and methods from year to year. 4) Conservatism Principle: When choosing between two solutions, the one that will be less likely to overstate assets and income should be picked. 5) Cost-Benefit Relationship: The company considers the costs necessary to prepare the information and what benefit users will be getting from it.

Accrual

A charge incurred in one accounting period that has not been paid by the end of it.

Income Statement

A report of revenue, expenses and net income or net loss for an accounting period. Revenues - Expenses = Net Income/Loss

Four Basic Assumptions

Accounting Entity, Going Concern, Monetary Unit Principle, and Time Period Principle are the four basic assumptions.

Current Liabilities

Accounts payable, income taxes payable, accrued expenses.

Full Disclosure Principle

Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information cost more to Preparing use. Information disclose should be enough to make a judgement while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information.

Form-10K

An annual report rewuired by the SEC that givrs a comprehensive dummary of a company's performance.

Accounting Entity Assumption

Assumes that the business is separate from its owners or other businesses. Revenue and expense should be kept separate from personal expenses.

Going Concern Assumption

Assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, on foreseeable future.

Current Assets

Cash, short-term Investments, accounts receivable, inventory, prepaid expenses.

Three Basic Accounting Models - IFRSA

Current Cost Accounting, financial maintenance in nominal monetary units and financial maintenance in units of constant purchasing power.

Matching Principle

Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with Revenue can be established, cost may be charged as expenses to the current period.

Monetary Unit Principle

Finacial transactions must be recorded and reported in a stable and accepted unit of measure.

Three Underlying Assumptions - IFRSA

Going Concern, Stable Measuring Unit Assumption, and Units Of Constant Purchasing Power.

Time Period Principle Assumption

Implies that the economic activities of an Enterprise can be divided into artificial time periods.

FASB Goals

Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance, reliability, comparability, and consistency. Keep standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting. Promote international convergence of accounting standards concurrent with improving the quality of financial reporting. Improve common understanding of the nature and purposes of information in financial reports.

Long Term Assets

Land, buildings, equipment, intangibles, long-term Investments.

Materiality

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The assessment of what is material is a matter of professional judgment.

Monetary Unit Principle Assumption

Monetary Unit Principle: Assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of the US dollar as the monetary unit of record on adjusted for inflation. This is also known as the stable dollar principle.

Classified Balance Sheet

Places assets and liabilities in two sets: Current and Long Term. Current being less than a year. Long term being more than a year.

Historical Cost Principle

Requires companies to account and Report based on acquisition costs rather than fair market value for most assets and liabilities.

Revenue Recognition Principle

Requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received.

Statement of Retained Earnings

Shows how retained earnings changed from the beginning of period to the end of the period. Beginning of Retained Earnings + Net Income - Dividends = Ending Retained Earnings

The Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest.

International Financial Reporting Standards (IFRS)

The IFRS is a common global financial language for business affairs that is understandable and comparable across international boundaries.

SEC Goals

The Securities Act of 1933 The Securities Exchange Act of 1934The Trust Indenture Act of 1939 The Investment Company Act of 1940 The Investment Advisers Act of 1940 The Sarbanes-Oxley Act of 2002 The Credit Rating Agency Reform Act of 2006.

Securities and Exchange Commission

The US SEC is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States.

Convergence

The act of moving toward union or uniformity.

Cost-Benefit Relationship Constraint

The company considers the costs necessary to prepare the information and what benefit users will be getting from it.

Objectivity Constraint

The company financial statements provided by the accountant should be based on objective evidence.

Consistency Constraint

The company uses the same accounting principles and methods from year to year.

Materiality Constraint

The significance of an item should be considered when it is reported.

Assets

Things that a company owns that has value. Can include physical property, such as plants, trucks, equipment and inventory. Investments and cash are aslco included.

U.S. GAAP

United States Generally Accepted Accounting Principles. It is a set of rules, standards, and conventions accounts follow in recording and summarizing and in the preparation of financial statements.

Conservatism Constraint

When choosing between two solutions, the one that will be less likely to overstate assets and income should be picked.

Net Loss

When expenses exceed revenue.

Net Income

When revenue exceeds expenses.