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16 views35 pages

Chapter 1 - Lecture Slides

Uploaded by

Asif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Welcome to the World of Accounting

70-122
Lavender Yang
July 5, 2022
Accounting and the
Business
Environment

Chapter 1
What Is Accounting?
Accounting is the
information system that Financial
measures business Accounting
activities, processes the
information into
reports, and
communicates the Managerial
results to decision Accounting
makers.
Who needs to know?
• External decision makers (Financial)
– Investors
– Creditors
– Suppliers
– Regulators
• Internal Revenue Service (tax)
• Internal decision makers (Managerial)
– Management: CEO, CFO
– Employees: Supervisors
Types of Accounting
• Different decision makers have different needs
• Financial Accounting
– External
– Certified Public Accountants (AICPA)
• Managerial Accounting
– Internal
– Certified Managerial Accountants (IMA)
• Tax Accounting
– IRS
The Organizations That Govern
Accounting
FASB SEC
• Financial Accounting • Securities and Exchange
Standards Board Commission
• Privately funded • Oversees the US
• Creates the rules and financial markets
standards that govern
financial accounting
Generally Accepted Accounting
Principles (GAAP)
• Issued by the FASB.
• Establishes the rules for Relevant = The info
recording transactions and allows users to make a
preparing financial decision.
statements.
• Published online as part of Faithfully
the Accounting Standards Representative = The
Codification. info is complete,
• Requires that information be neutral, and free from
useful. material error.
International Financial Reporting
Standards (IFRS)
• Created by International Accounting Standards
Board
– Generally less specific than GAAP, more room for
discretion
– More than 120 countries have adopted IFRS
– e.g. Canada used to have ‘Canadian GAAP’,
starting in 2011, they use IFRS
• IASB and FASB have been negotiating for a
long time to harmonize standards
Accounting Assumptions

Economic
Entity Cost
Assumption Principle

Monetary Unit Going Concern


Assumption Assumption
Economic Entity Assumption
• Business stands apart as a separate economic
unit from its owners
– Why is this important?
• Types of economic entities
– Sole proprietorship
• Owner fully liable, pay tax as individual
– Partnership
• Owners fully liable, pay tax as individuals
– Corporation
• Limited liability, pay corporate and personal tax
– Limited-Liability Company
• Limited Liability, is not taxed, members pay tax as individuals
Cost Principle
• Acquired assets should be recorded at their
actual/historical cost
• Assets will continue to be reported at their
historical cost over their useful life.
• Historical cost is meant to be reliable and
conservative
• An important alternative is fair (or market)
value – used much more often under IFRS
Monetary Unit Assumption
• Items measured in financial statements are
measured in terms of a monetary unit
– Same across statements
– Constant over time
• In the US we record all transactions in dollars
• Potential issues with inflation and exchange
rate fluctuations
Going Concern Assumption
• Assumes that the entity will remain in
operation for the foreseeable future
• Is it always convenient to assume a business is
a going concern?
• Which red flags may indicate a business in not
a going concern?
The Accounting Equation
The Accounting Equation

Assets = Liabilities + Equity

Rule: The Balance Sheet Equation


must ALWAYS be in balance.
The Accounting Equation

Assets = Liabilities + Equity

Assets are economic


resources that are
expected to benefit
the business in the
future.
The Accounting Equation

Assets = Liabilities + Equity

Liabilities are
debts that are
owed to
creditors.
The Accounting Equation

Assets = Liabilities + Equity

Equity is the
owner’s residual
claim against the
assets of the
company.
The Accounting Equation

Assets = Liabilities + Equity

The owner’s claim on


the resources increase Owner’s Capital
and decrease as the – Owner’s Withdrawals
company engages in + Revenues
earnings activities. - Expenses
The Accounting Equation

Assets = Liabilities + Equity

Revenues are
economic resources
that have been earned Owner’s Capital
by delivering products – Owner’s Withdrawals
or services to + Revenues
customers. - Expenses
The Accounting Equation

Assets = Liabilities + Equity

Expenses are the


costs associated Owner’s Capital
with selling goods or – Owner’s Withdrawals
services. + Revenues
- Expenses
Analyzing transactions
using the accounting
equation
How Do You Analyze A Transaction?

Think of a transaction as
a very special kind of
historical event.
1. It involves the exchange
of economic resources.
2. We must be able to
measure the economic
impact in monetary units.
How Do You Analyze A Transaction?
Sheena Bright starts a new business named Smart
Touch. She puts $30,000 cash into the business. How
does this impact the Accounting Equation?
How Do You Analyze A Transaction?
Next, Smart Touch purchases land for $20,000 cash.

In this transaction, all the change occurred on the left side of the
equation. One asset was converted into a different asset.
How Do You Analyze A Transaction?
In Transaction #3, Smart Touch buys $500 of office
supplies, offering to pay in 30 days.

Remember, in business it is quite common for a business to


purchase something now, and pay for it later.
How Do You Analyze A Transaction?
In Transaction #4, Smart Touch provides training
services to customers for $5,500 cash.
How Do You Analyze A Transaction?
In Transaction #5, Smart Touch performs $3,000 of
services for a customer who will pay in one month.
How Do You Analyze A Transaction?
In Transaction #6, Smart Touch pays $3,200 in cash
expenses; $2,000 for office rent and $1,200 for
employee salaries.
How Do You Analyze A Transaction?
In Transaction #7, Smart Touch pays $300 to the store
from which it purchased office supplies in Transaction
#3.
How Do You Analyze A Transaction?
In Transaction #8, Smart Touch collects $2,000 from
the client for which Smart Touch performed services
in Transaction #5.
LO4: How Do You Analyze A
Transaction?
33
34
Chapter 1 Review
• What is accounting? Who needs it?
– External decision makers (financial) and internal
decision makers (managerial)
• Accounting standards (Generally Accepted
Accounting Principles) and important
assumptions
• The accounting equation: Assets = Liabilities +
Equity
• Analyzing transactions
• Preparing financial statement
– Compute ROA

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