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