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CH 1 - 01 Accounting Basics

The document outlines the fundamental concepts of accounting, including its three main activities: identifying, recording, and communicating economic events. It discusses the users of accounting data, distinguishing between internal and external users, and introduces key principles and assumptions such as the historical cost principle and economic entity assumption. Additionally, it covers different forms of business ownership and emphasizes the importance of separating personal and business finances.

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7 views13 pages

CH 1 - 01 Accounting Basics

The document outlines the fundamental concepts of accounting, including its three main activities: identifying, recording, and communicating economic events. It discusses the users of accounting data, distinguishing between internal and external users, and introduces key principles and assumptions such as the historical cost principle and economic entity assumption. Additionally, it covers different forms of business ownership and emphasizes the importance of separating personal and business finances.

Uploaded by

The online Guy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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A

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C A
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U I T
N N I
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G
1-1
1 Accounting in Action

Learning Objectives

1 Identify the activities and users associated with accounting.

Explain the building blocks of accounting: ethics, principles, and


2 assumptions.

3 State the accounting equation, and define its components.

Analyze the effects of business transactions on the accounting


4 equation.

Describe the four financial statements and how they are


5 prepared.
1-2
LEARNING Identify the activities and users
OBJECTIVE
1
associated with accounting.

Accounting consists of three basic activities—it

 identifies,

 records, and

 communicates

the economic events of an organization to interested users.

1-3 LO 1
Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes


the bookkeeping function.

1-4 LO 1
Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

1-5 LO 1
Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
1-6 LO 1
DO IT! 1 Basic Concepts

Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,


recording, and communication.

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

4. The two most common types of external users are investors and
company officers.

5. Managerial accounting activities focus on reports for internal users.

Solution: 1. True 2. False 3. False 4. False 5. True

1-7 LO 1
Measurement Principles

HISTORICAL COST PRINCIPLE (or cost principle) dictates


that companies record assets at their cost.

FAIR VALUE PRINCIPLE states that assets and liabilities


should be reported at fair value (the price received to sell an asset
or settle a liability).

Selection of which principle to follow


generally relates to trade-offs
between relevance and faithful
representation.

1-8 LO 2
Assumptions

MONETARY UNIT ASSUMPTION requires that companies


include in the accounting records only transaction data that can be
expressed in terms of money.

ECONOMIC ENTITY ASSUMPTION requires that activities of


the entity be kept separate and distinct from the activities of its
owner and all other economic entities.

 Proprietorship
Forms of Business
 Partnership
Ownership
 Corporation

1-9 LO 2
Forms of Business Ownership

Proprietorship Partnership Corporation

 Owned by one  Owned by two or  Ownership


person more persons divided into
 Owner is often shares of stock
 Often retail and
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, suffers under state
 Generally
any losses, and is corporation law
unlimited
personally liable personal liability  Limited liability
for all debts
 Partnership
agreement

1-10 LO 2
Assumptions

Question
Combining the activities of Kellogg and General Mills
would violate the

a. cost principle.

b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

1-11 LO 2
Assumptions

Question
A business organized as a separate legal entity under state
law having ownership divided into shares of stock is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.

1-12 LO 2
DO IT! 2 Building Blocks of Accounting

Indicate whether each of the following statements presented


below is true or false.

1. The historical cost principle dictates that companies


record assets at their cost. In later periods, however,
False
the fair value of the asset must be used if fair value
is higher than its cost.

2. Relevance means that financial information matches False


what really happened; the information is factual.

3. A business owner’s personal expenses must be


separated from expenses of the business to comply True
with accounting’s economic entity assumption.

1-13 LO 2

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