Accounting Principles-Lecture 1-kieso PDF

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10/13/2016

Accounting Principles Lecture 1

What is Accounting? • Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. • Identifies: Selecting those events that represent economic activities of the organization (selling goods, providing services, collecting from customers, and payment of wages are examples of economic events). 2

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Question • Are the following events recorded in the accounting records? • Explain your answer in each case. (a) The owner of the company dies. (b) Supplies are purchased on account. (c) An employee is fired. (d) The owner of the business withdraws cash from the business for personal use. 3

Answer • Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic equation. • (a) No, the death of the president of the company is not a business transaction as it does not affect the basic equation. • (b) Yes, supplies purchased on account is a business transaction as it affects the basic equation. • (c) No, an employee being fired is not a business transaction as it does not affect the basic equation. • (d) Yes 4

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What is Accounting? • Records: Keeping a chronological diary of events measured in dollars in an orderly and systematic manner. In recording, economic events are classified and summarized. • Communicates the economic events of an organization to interested users through the preparation and distribution of accounting reports. When communicating economic events to users, the accountant must be able to analyze and interpret the reported information. 5

Exercise • 1. Which of the following is not a step in the accounting process? • a. Identification. c. Recording. • b. Verification. d. Communication.

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Exercise E1-1 • Jenks Company performs the following accounting tasks during the year. • ______Analyzing and interpreting information. • ______Classifying economic events. • ______Explaining uses, meaning, and limitations of data. • ______Keeping a systematic chronological diary of events. • ______Measuring events in dollars and cents. • ______Preparing accounting reports. • ______Reporting information in a standard format. • ______Selecting economic activities relevant to the company. • ______Summarizing economic events. Accounting is “an information system that identifies, records, and communicates the economic events of an organization to interested users.” • Instructions • Categorize the accounting tasks performed by Jenks as relating to either the identification (I), recording (R), or communication (C) aspects of accounting.

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Solution • Jenks Company performs the following accounting tasks during the year. • ___C___Analyzing and interpreting information. • ___R___Classifying economic events. • ___C___Explaining uses, meaning, and limitations of data. • ___R___Keeping a systematic chronological diary of events. • ___R___Measuring events in dollars and cents. • ___C___Preparing accounting reports. • ___C___Reporting information in a standard format. • ___I___Selecting economic activities relevant to the company. • ___C___Summarizing economic events. Accounting is “an information system that identifies, records, and communicates the economic events of an organization to interested users.” • Instructions • Categorize the accounting tasks performed by Jenks as relating to either the identification (I), recording (R), or communication (C) aspects of accounting.

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Who Uses Accounting Data? • Users of financial information can be divided into two groups: • 1. Internal users: are users from inside the organization, mainly managers who plan, organize, and run the business. These include marketing managers, production supervisors, finance directors, and company officers. This group needs detailed information on a timely basis. 9

Who Uses Accounting Data? • 2. External Users: Are users from outside the organization such as: – Investors who need information to decide on whether to buy, hold, or sell stock. – Creditors such as suppliers and banks who need information to decide on whether to grant credit or lend money to the organization. – Taxing authorities. – Regulatory agencies (the SEC for example). – Labor unions. – Economic planners. – Customers. – External users need summarized information about the organization. 10

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Exercise 1-2 • The following are users of financial statements. ______Customers ______Securities and Exchange Commission ______Internal Revenue Service ______Store manager ______Labor unions ______Suppliers ______Marketing manager ______Vice president of finance ______Production supervisor • Instructions • Identify the users as being either external users or internal users.

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Answer • The following are users of financial statements. __E____Customers __E____Securities and Exchange Commission __E____Internal Revenue Service __I____Store manager __E____Labor unions __E____Suppliers __I____Marketing manager __I____Vice president of finance __I____Production supervisor 12

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Distinguishing Between Bookkeeping and accounting • Bookkeeping involves only the recording of economic events and is often performed by individuals with limited skills in accounting. • Accounting involves the entire process of identification, recording and communication. It is performed by skilled individuals (accountants).

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Financial Accounting and Managerial Accounting • Accounting is also divided into financial versus managerial accounting. • Financial accounting is the field of accounting that provides economic and financial information for investors, creditors, and other external users. • Managerial accounting provides economic and financial information for managers and other internal users. 14

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Generally Accepted Accounting Principles • Generally accepted accounting principles are a common set of guidelines (standards) used by accountants in reporting economic events. • The Securities and Exchange Commission (SEC) is the agency of the U.S government that oversees U.S financial markets and accounting standard-setting bodies. The primary accounting standard-setting body in the U.S is The Financial Accounting Standards Board (FASB). • Countries outside the U.S have adopted the accounting standards issued by the International Accounting Standards Board (IASB). These standards are called International Financial Reporting Standards (IFRS). • One important principle is the cost principle, which states that assets should be recorded at their acquisition cost—the amount paid to acquire the asset. 15

Accounting Basic Assumptions • In developing GAAP, certain basic assumptions are made. There are two main assumptions: • The Monetary Unit Assumption: This assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records.

• The Economic Entity Assumption: This assumption requires that the activities of the entity be kept separate and distinct from: – the activities of its owners, and – activities of all other economic entities. 16

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Types of Business Enterprises • There are three types of business enterprises: • * Proprietorship: 1. Has a single owner, the proprietor, 2. Examples include small retail stores, 3. From an accounting viewpoint, the proprietorship is distinct from the proprietor, 4. From a legal perspective, the proprietor (owner) has personal liability for the debts of the business. • * Partnerships: 1. Has two or more owners (partners), 2. Examples include professional organizations (attorneys), 3. Accounting treats the partnership as a separate organization, distinct from the personal affairs of each partner, 4. From a legal perspective, partners are personally liable for the debts of the business. • * Corporations: 1. A business owned by many investors who are called stockholders or shareholders (people who own shares of ownership in the business) 2. Unlike proprietorships or partnerships, corporations has an indefinite life, 3. Stockholders may transfer (sell) their stock to other investors at any time 4. Stockholders have limited liability for corporate debts. 17

Exercise • The three types of business entities are: a. proprietorships, small businesses, and partnerships. b. proprietorships, partnerships, and corporations. c. proprietorships, partnerships, and large businesses. d. financial, manufacturing, and service companies.

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Basic Accounting Equation • The two basic elements of any business are what it owns and what it owes. • Assets are the resources owned by a business. Equities are the sources of those assets. Equities represent the claims against those assets (who provided those assets or who has rights to those assets). • Since each and every asset owned by a business must have a source (someone must have a right to that asset), this relationship can be expressed in an equation called the basic accounting equation as follows:

Assets = Equities

Basic Accounting Equation • Equities (claims against assets) can be divided into two components: – Claims of creditors which are called liabilities. – Claims of owners which are called owners’ equity.

• Based on the above classification of equities, the basic accounting equation can be expressed as follows:

Assets = Liabilities + Owners’ Equity

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End of Lecture 1

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