Lesson 1 overview of principles of accounting
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This document provides an overview of accounting principles. It defines accounting as identifying, recording, and communicating financial data of an organization. Accounting has internal and external users and is used for decision making. Generally Accepted Accounting Principles (GAAP) provide standards for accounting. The accounting equation, assets = liabilities + owner's equity, and the four main financial statements (balance sheet, income statement, statement of cash flows, owner's equity statement) are also introduced. The financial statements are interrelated and provide information about a company's performance and financial position.
Lesson 1 overview of principles of accounting
- 1. Chapter 1-1 Lesson 1Lesson 1 Overview of Principles of Accounting
- 2. Chapter 1-2 1. Explain what accounting is. 2. Identify the users and uses of accounting. 3. Explain generally accepted accounting principles 4. State the accounting equation, and define its components. 5. Analyze the effects of business transactions on the accounting equation. 6. Understand the four financial statements and how they are prepared. Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
- 3. Chapter 1-3 What is Accounting?What is Accounting?What is Accounting?What is Accounting? SO 1 Explain what accounting is.SO 1 Explain what accounting is. Accounting is the process of identifying, recording and communicating the financial data of an organisation to interested users.
- 4. Chapter 1-4 Three Activities What is Accounting?What is Accounting?What is Accounting?What is Accounting? SO 1 Explain what accounting is.SO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function.
- 5. Chapter 1-5 Management There are two broad groups of users of financial information: internal users and external users. Human Resources Tax Labor Unions SEC Marketing Finance Investors Creditors Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data? SO 2 Identify the users and uses of accounting.SO 2 Identify the users and uses of accounting. Shareholde rs Internal Users External Users
- 6. Chapter 1-6 Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data? SO 2 Identify the users and uses of accounting.SO 2 Identify the users and uses of accounting. 6. Will the company be able to pay its short-term debts? Investors Management Finance Marketing Creditors
- 7. Chapter 1-7 Discussion Question SO 3 Understand why ethics is a fundamental business conceptSO 3 Understand why ethics is a fundamental business concept. Q1-1: “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain. See notes page for discussion Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
- 8. Chapter 1-8 Common set of standards or principles which are broadly used in identifying, recording and communication financial data. The standards or principles are called operating guidelines for Accounting activities. The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles (GAAP)(GAAP) Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles (GAAP)(GAAP) SO 4 Explain generally accepted accounting principlesSO 4 Explain generally accepted accounting principles
- 9. Chapter 1-9 What are the GAAPWhat are the GAAP Assumptions 1)Monetary unit 2)Economic entity 3)Time period Going concern Principles 1) Revenue recognition 2)Matching 3)Full disclosure Cost Constraints 1)Materiality 2)Conservatism Operating guidelines are classified as assumptions, principles, and constraints.
- 10. Chapter 1-10 GAAP (cont.)GAAP (cont.) AssumptionsAssumptions provide a foundation forprovide a foundation for the accounting process.the accounting process. PrinciplesPrinciples indicate how transactionsindicate how transactions and other economic events should beand other economic events should be recorded.recorded. ConstraintsConstraints on the accounting processon the accounting process allow for a relaxation of the principlesallow for a relaxation of the principles under certain circumstances.under certain circumstances.
- 11. Chapter 1-11 Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) SO 4 Explain generally accepted accounting principles and the cost principle.SO 4 Explain generally accepted accounting principles and the cost principle. Standard setting for AccountingStandard setting for AccountingStandard setting for AccountingStandard setting for Accounting http://www.fasb.org/ http://www.sec.gov/ http://www.iasb.org/
- 12. Chapter 1-12 Proprietorship Partnership Corporation Owned by two orOwned by two or more persons.more persons. Often retail andOften retail and service-typeservice-type businessesbusinesses GenerallyGenerally unlimitedunlimited personal liabilitypersonal liability PartnershipPartnership agreementagreement OwnershipOwnership divided intodivided into shares of stockshares of stock Separate legalSeparate legal entity organizedentity organized under stateunder state corporation lawcorporation law Limited liabilityLimited liability Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership Generally ownedGenerally owned by one person.by one person. Often smallOften small service-typeservice-type businessesbusinesses Owner receivesOwner receives any profits,any profits, suffers anysuffers any losses, and islosses, and is personally liablepersonally liable for all debts.for all debts. SO 5 Explain the monetary unit assumptionSO 5 Explain the monetary unit assumption and the economic entity assumption.and the economic entity assumption.
- 13. Chapter 1-13 AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities Owner’sOwner’s EquityEquity Owner’sOwner’s EquityEquity = + Accounting equation is a statement that shows total assets of an organization is equal to its total liabilities and owner’s equity. The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation SO 6SO 6 State the accounting equation, and defineState the accounting equation, and define its components.its components.
- 14. Chapter 1-14 Companies prepare four financial statements from the summarized accounting data: Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared.
- 15. Chapter 1-15 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Illustration 1-9 Financial statements and their interrelationships
- 16. Chapter 1-16 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements Net income is needed to determine the ending balance in owner’s equity. Illustration 1-9 Financial statements and their interrelationships
- 17. Chapter 1-17 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Statement indicates the reasons why owner’s equity has increased or decreased during the period. Owner’s Equity Statement Illustration 1-9 Financial statements and their interrelationships
- 18. Chapter 1-18 FinancialFinancial StatementsStatements FinancialFinancial StatementsStatements The ending balance in owner’s equity is needed in preparing the balance sheet Illustration 1-9 Financial statements and their interrelationships
- 19. Chapter 1-19 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Balance Sheet Illustration 1-9 Financial statements and their interrelationships
- 20. Chapter 1-20 FinancialFinancial StatementsStatements FinancialFinancial StatementsStatements Illustration 1-9 Financial statements and their interrelationships
- 21. Chapter 1-21 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Information for a specific period of time. Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? Statement of Cash Flows
- 22. Chapter 1-22 Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows Illustration 1-9 Financial statements and their interrelationships
- 23. Chapter 1-23 Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared. Review QuestionReview Question
- 24. Chapter 1-24 Discussion QuestionDiscussion Question Q1-19: “A company’s net income appears directly on the income statement and the owner’s equity statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain. See notes page for discussion Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements SO 8 Understand the four financial statements and how they are prepared.SO 8 Understand the four financial statements and how they are prepared.
Editor's Notes
- #3: 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
- #8: Question 1 (textbook) Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.
- #13: Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
- #25: Question 19 (textbook) Y e s . Net income does appear on the income statement — it is the result of subtracting expenses from revenues. In addition, net income appears in the statement of owner’s equity—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet.