Chapter 1

Accounting Process

Identification --> Recording --> Communication

Four Financial Statements

Income Statement Owner's Equity Statement Balance Sheet Statement of Cash Flows

Subdivisions of Owner's Equity

Investments by Owner Revenues Drawings Expenses

Accounting

an information system that identifies, records, and communicates the economic events of an organization to interested users.

Fair Value Pinciple

states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Statement of Cash Flow

summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time

Owner's Equity Statement

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

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Net Loss

Revenues < Expenses

Net Income

Revenues > Expenses

Generally Accepted Accounting Principles (GAAP)

a common set of guidelines (standards) used by accountants

Investments by Owner

are the assets put in the business by the owner

Expenses

are the cost of assets consumed or services used in the process of earning revenue

Transactions

are the economic events of the business recorded by accountants

Revenues

are the gross increase in owner's equity resulting from business activities entered into for the purpose of earning income

Drawings

are withdrawals of cash or other assets by the owner for personal use

Liabilities

claims against assets

Owner's Equity

claims of owners

Identification

first part of the accounting process; involves selecting those events that are considered evidence of economic activity relevant to a particular business organization

External Users

include investors, creditors, taxing authorities, regulatory agencies, labor unions, and customers

Taxation

includes providing tax advice and planning, preparing tax returns, and representing clients before governmental agencies

Auditing

involves examining financial statements of companies and expressing an opinion as to the fairness of their presentation

Management Consulting

involves providing advice for managers on such matters as financial planning and control and the development of computer systems

Private Accounting

involves the government of accountants within individual companies. Performs a wide variety of duties such as general accounting, cost accounting, budgeting, accounting information systems, tax accounting, and internal auditing.

Corporation

is a business organized as a separate legal entity under state corporation law with ownership divided into transferable shares of stock

Proprietorship

is a business owned by one person

Partnership

is a business owned by two or more persons associated as partners

Internal Users

managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers.

Income Statement

presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time

Public Accounting

provides the services of auditing, taxation, and management consulting

Balance Sheet

reports the assets, liabilities, and owner's equity at a specific date

Historical Cost Principle

requires that companies record assets at their cost

Monetary Unit Assumption

requires that only transaction data that can be expressed in money terms be included in the accounting records

Economic Entity Assumption

requires that the activities of the entity be kept separate and distinct from (1) the activities of its owner and (2) all other economic entities

Assets

resources owned

Recoding

second part of the accounting process; is the keeping of a chronological diary of events, measured in dollars and cents

Securities and Exchange Commission (SEC)

the agency of the United States government that oversees U.S. financial markets and accounting standard-setting bodies

Financial Accounting Standards Board (FASB)

the primary accounting standard-setting body in the United States. Many countries outside of the U.S. have adopted the accounting standards issued by the International Accounting Standards Board (IASB).

Ethics

the standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair

Communication

third part of the accounting process; occurs through the preparation and distribution of accounting reports