CHAPTER ONE: ACCOUNTING IN BUSINESS
I. Importance of Accounting—we live in the information age, where information, and its reliability, impacts the financial well-being of us all. A. Accounting Activities Accounting is an information and measurement system that identifies, records and communicates relevant, reliable, and comparable information about an organizations business activities. B. Users of Accounting Information 1. External Information Users—those not directly involved with running the company. Examples: shareholders (investors), lenders, customers, suppliers, regulators, lawyers, brokers, the press etc. a. Financial Accounting—area of accounting aimed at ...view middle of the document...
A. Ethics—a key concept. Ethics are beliefs that distinguish right from wrong. B. Generally Accepted Accounting Principles (GAAP)—concepts and rules that govern financial accounting. Purpose of GAAP is to make information in accounting statements relevant, reliable and comparable. 1. Setting Accounting Principles a. In U.S. major rule-setting bodies are the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). b. The International Accounting Standards Board (IASB) issues standards that identifies preferred accounting practices in the global economy and hopes to create harmony among accounting practices in different countries. 2. Principles and Assumptions of Accounting—two types are general (basic assumptions, concepts and guidelines for preparing financial statements; stem from long used accounting practices) and specific (detailed rules used in reporting transactions; from rulings of authoritative bodies). The four principles discussed in this chapter are: a. Cost principle—financial statements are based on actual costs incurred in business transactions. Cost is measured on a cash or equal-to-cash basis. This principle emphasizes reliability and verifiability, and information based on cost considered objective. Objectivity means information is supported by unbiased evidence: more than someone's opinion. b. Revenue recognition principle—revenue is recognized (recorded) when earned. Proceeds need not be in cash. Revenue is measured by cash received plus the cash value of other items received. c. Matching principle—a company must record expenses incurred to generate revenues it reported. d. Full disclosure principle—requires reporting the details behind the financial statements that would impacts users’ decisions. The four assumptions discussed in this chapter are: a. Going-concern assumption—accounting information reflects the assumption that the business will continue operating instead of being closed or sold. b. Monetary unit assumption—transactions and events are expressed in monetary, or money, units. Generally this is the currency of the country in which it operates but today some companies express
3 reports in more than one monetary unit. c. Time period assumption—the life of the company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.
d. Business entity assumption—a business is accounted for separate from other business entities and separate from its owner. 3. Business Entity Forms a. Sole proprietorship is a business owned by one person that has unlimited liability. The business is not subject to an income tax but the owner is responsible for personal income tax on the net income of entity. b. Partnership is a business owned by two or more people, called partners, who are subject to unlimited liability. The business is not subject to an income tax, but the owners are responsible for personal income tax on their...