Accounting Principles 12th Ed. - Ch. 1
Liabilities
Claims against assets—that is, existing debts and obligations
Corporation
Holders of shares enjoy limited liability
The Four Financial Statements
Income Statement, Owner's Equity Statement, Balance Sheet, and Statement of Cash Flows
SOX
Increased the oversight role of boards of directors
Assumptions
Provide a foundation for the accounting process
SEC
Relies on the FASB to develop accounting standards, which public companies must follow
Monetary Unit Assumption
Requires that companies include in the accounting records only transaction data that can be expressed in money terms, enabling accounting to quantify economic events
Investment by owner
These investments increase owner's equity
Creditors
Those to whom a company owes assets
Labor Unions
Want to know whether the owners have the ability to pay increased wages and benefits
The two basic elements of business
What a business owns and what it owes
The basic accounting equation
A L OE
Corporation
A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock
Proprietorship
A business owned by one person, the owner is often the manager/operator of this business
Partnership
A business owned by two or more persons associated as partners
Financial Statements
A form of reporting recorded financial data, in aggregate, in a standardized way to make reported financial information meaning or useful
Economic entity
Any organization or unit in society, such as a company, a government unit, a municipality, a school district, a church, etc.
Liabilities
Appear before owner'ss equity in the BAE because they are paid first if a business is liquidated
The basic accounting equation
Applies to all economic entities regardless of size, nature of business, or form of business organization
The basic accounting equation
Assets (A) = Liabilities (L) + Owner's Equity (OE)
The expanded accounting equation
Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses
The basic accounting equation
Assets must equal the sum of liabilities and owner's equity
Convergence
Because of this, it is likely that someday there will be a single set of high-quality accounting standards that are used by companies around the world
Liabilities
Claims of creditors
Owner's Equity
Claims of the owners
Recording
Consists of keeping a systematic, chronological diary of events, measured in dollars and cents.
Accounting
Consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users.
Accounts Payable
Credit from suppliers
GAAP
Generally Accepted Accounting Principles
Limited liability
Holders of shares are not personally liable for the debts of the corporate entity
The 3 basic activities of accounting
Identify, record and communicate the economic events of an organization
Creditors
May legally force the liquidation of a business that does not pay its debts
Relevence
Means that financial info is capable of making a difference in a decision
Faithful representation
Means that the numbers and descriptions match what really existed or happened—they are factual
Notes Payable
Money borrowed from the bank
Salaries and Wages payable
Money owed to employees and personelle of a business
Fair Value Principle
Mostly used, only in situations where assets are likely actively traded, such as investment securities
Decreases in owner's equity
Owner's drawings and expenses
Investors
Owners
Corporation
Ownership can be transferred without dissolving this entity, enjoying an unlimited life
SOX
Penalties for fraudulent financial activity are much more severe
Monetary Unit Assumption
Prevents the inclusion of relevant information in accounting records such as owner's health, quality of service, and morale of employees.
Financial accounting
Provides economic and financial info for investors, creditors and other external users
The basic accounting equation
Provides the underlying framework for recording and summarizing economic events
Economic Entity Assumption
Requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities
Economic Events
Sale of goods, provision of services, payment of expenses and liabilities
SOX
Sarbanes-Oxley Act
Regulatory agencies
Securities and Exchange Commission
Proprietorship
Small service-type businesses, and small retail stores are common forms of this economic entity
GAAP
Standards developed by the accounting profession, that are generally accepted and universally practiced
IFRS
Standards set by the IASB
Fair Value Principle
States that assets and liabilities should be reported at fair value
Corporation
Stock-holders may transfer all or part of their ownership shares to other investors at any time
Creditors
Suppliers, bankers, etc.
SEC
The Securities Exchange Commission
SEC
The agency of the U.S. Government that oversees U.S. Financial markets and accounting standard-setting bodies
Investment by owner
The assets an owner puts into the business
Expenses
The cost of assets consumed or services used in the process of earning revenue
Communication
The economic activity that consists of presenting the collected information to interested users by means of accounting reports
Convergence
The efforts made, in recent years, by both standard-setting bodies (FASB and IASB) to reduce the differences between U.S. GAAP and IFRS
Accounting
The financial information system that provides insight into the financial occurences of an organization.
Revenues
The gross increase in owner's equity resulting from business activities entered into for the purpose of earning income
Creditors
The law requires that this group's claims be paid before ownership claims
Owner's Equity
The ownership claim on total assets
Fair Value
The price received to sell an asset or settle a liability
FASB
The primary accounting standard-setting body in the United States
IASB
The primary accounting standard-setting body that many countries outside of the U.S. Have adopted
Assets
The resources a business owns
Ethics
The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair
Identify
The starting point to the accounting process that observes the economic events relevant to a business.
GAAP
These standards indicate how to report economic events
Expenses
They are decreases in owner's equity that result from operating a business
Investment by owner
They are recorded in a category called owner's capital
Owner's Equity
This category increases with owner investments and revenues
SOX
Top management must now certify the accuracy of financial information
Investors
Use accounting information to decide whether to buy, hold, or sell ownership shares of a company
Creditors
Use accounting information to evaluate the risks of granting credit or lending money
Assets
Used in carrying out activities of a business succh as production or sales
Bookkeeping
Usually involves only the recording of economic events, therefore it is just one part of the accounting process
Revenues
Usually result in an increase in an asset, they may arise from different sources and are called various names depending on the nature of the business
Revenues
Usually, this results from selling merchandise, performing services, renting property, and lending money
Taxing authorities
Want to know whether the company complies with tax laws
Regulatory agencies
Want to know whether the company is operating within prescribed rules
Ethics
A sound, well-functioning economy depends on accurate and dependable financial reporting
Owner's drawings
A withdrawl or other assets for personal use, at the behest of an owner
FASB
Financial Accounting Standards Board
What a business owes
Liabilities and owner's equity
Partnership
Like a proprietorship except that more than one owner is involved
Owner's drawings
Decreases owner's equity
Historical Cost Principle
Dictates that companies record assets at their cost, true not only at the time it is purchased, but also over time the asset is held
SOX
Increased the independence requirements of the outside auditors who review the accuracy of corporate financial statements
External Users
Individuals and organizations outside a company who want financial information about the company
Customers
Interested in whether a company will continue to honor product warranties and support its product lines
Taxing authorities
Internal Service Revenue
Internal Users
Internal users of accounting information who must answer many important questions relevant to the function of their business
IASB
International Accounting Standards Board
IFRS
International Financial Reporting Standards
External Users
Investors and Creditors
Interpretation
Involves Explaining the uses, meaning, and limitations of reported data
Accounting
Involves the entire process of identifying, recording, and communicating economic events
Analysis
Involves the use of ratios , percentages, graphs, and charts to highlight significant financial trends and relationships
Owner's Equity
It si equal to total assets minus total liabilites
Assets
It's common feature is the capacity to provide future services or benefits
SOX
It's intent is to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals