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