Chapter 1 Accounting and the Business Environment:
1) Accounting
a. Accounting is the information system that measures business activities,
processes information into reports, and communicates the results to
decision makers.
b. Helps make decisions
2) Decision Makers
a. Business Owners
b. People who consider lending money to the business
c. People who want to invest in the business
d. Government
e. Employees
f. business owners
g. Investors
h. Creditors: any person or business to whom a business owes money • Taxing
authorities (Internal Revenue Service): income tax
i. Financial accounting: provides information for external decision makers
i. Outside investors, lenders, and governments
j. Managerial accounting: focuses on information for internal decision makers
i. Company’s managers and employee
3) Organizations and Rules
a. Financial Accounting Standards Board (FASB)
i. Privately funded organization
ii. Oversees the creation and governance of accounting standards
b. Generally Accepted Accounting Principles (GAAP)
i. The main U.S. accounting rule book •
ii. Accounting guidelines that govern how accountants measure,
process, and communicate financial information
iii. Formulated by FASB
4) Cash vs. Accrual Basis Accounting
a. Cash Basis (Not GAAP)
i. Revenues are recognized when cash is received
ii. Expenses recognized when cash is paid
b. Accrual Basis
i. Revenues recognized when earned
ii. Expenses recognized when incurred
, c. Example: A E-Learning Service business paid $1,200 for insurance for the
next six months ($200 per month). This prepayment represents insurance
coverage for May through October.
5) The Revenue Recognition Principle
a. It requires business to record revenue when it has been earned and
determines the amount of revenue to record.
b. The business will recognize revenue when it satisfies each performance
obligation by transferring a good or service to a customer. (also called
revenue earned)
c. The amount of revenue recognized is the amount allocated to the satisfied
performance obligation.
6) The Matching Principle
a. The matching principle guides accounting for expenses and ensures the
following:
i. All expenses are recorded when they are incurred during the period.
ii. Expenses are matched against the revenues of the period.
7) The Time Period Concept
a. Assume that a business’s activities can be sliced into small time segments
and that financial statements can be prepared for specific periods, such as a
month, quarter, or year.
b. Basic accounting period: one year; annual financial statements
i. Calendar year
ii. Fiscal year
c. The year-end date is usually the low point in business activity for the year
i. Wal-Mart Stores, Inc. and J.C. Penny: fiscal year ends around January
31
8) The Economic Entity Assumption
a. An economic (business) entity is an organization that stands apart as a
separate economic unit.
i. Sole Proprietorship (87%)
ii. Partnership (7%)
iii. Corporation (5%)
iv. Limited-liability Company (LLC) (1%
v. All above are JOINT VENTURES
9) Cost Principle
a. The cost principle states that acquire assets and services should be
recorded at their actual cost (historical cost).
10) Monetary Unit Assumption
1) Accounting
a. Accounting is the information system that measures business activities,
processes information into reports, and communicates the results to
decision makers.
b. Helps make decisions
2) Decision Makers
a. Business Owners
b. People who consider lending money to the business
c. People who want to invest in the business
d. Government
e. Employees
f. business owners
g. Investors
h. Creditors: any person or business to whom a business owes money • Taxing
authorities (Internal Revenue Service): income tax
i. Financial accounting: provides information for external decision makers
i. Outside investors, lenders, and governments
j. Managerial accounting: focuses on information for internal decision makers
i. Company’s managers and employee
3) Organizations and Rules
a. Financial Accounting Standards Board (FASB)
i. Privately funded organization
ii. Oversees the creation and governance of accounting standards
b. Generally Accepted Accounting Principles (GAAP)
i. The main U.S. accounting rule book •
ii. Accounting guidelines that govern how accountants measure,
process, and communicate financial information
iii. Formulated by FASB
4) Cash vs. Accrual Basis Accounting
a. Cash Basis (Not GAAP)
i. Revenues are recognized when cash is received
ii. Expenses recognized when cash is paid
b. Accrual Basis
i. Revenues recognized when earned
ii. Expenses recognized when incurred
, c. Example: A E-Learning Service business paid $1,200 for insurance for the
next six months ($200 per month). This prepayment represents insurance
coverage for May through October.
5) The Revenue Recognition Principle
a. It requires business to record revenue when it has been earned and
determines the amount of revenue to record.
b. The business will recognize revenue when it satisfies each performance
obligation by transferring a good or service to a customer. (also called
revenue earned)
c. The amount of revenue recognized is the amount allocated to the satisfied
performance obligation.
6) The Matching Principle
a. The matching principle guides accounting for expenses and ensures the
following:
i. All expenses are recorded when they are incurred during the period.
ii. Expenses are matched against the revenues of the period.
7) The Time Period Concept
a. Assume that a business’s activities can be sliced into small time segments
and that financial statements can be prepared for specific periods, such as a
month, quarter, or year.
b. Basic accounting period: one year; annual financial statements
i. Calendar year
ii. Fiscal year
c. The year-end date is usually the low point in business activity for the year
i. Wal-Mart Stores, Inc. and J.C. Penny: fiscal year ends around January
31
8) The Economic Entity Assumption
a. An economic (business) entity is an organization that stands apart as a
separate economic unit.
i. Sole Proprietorship (87%)
ii. Partnership (7%)
iii. Corporation (5%)
iv. Limited-liability Company (LLC) (1%
v. All above are JOINT VENTURES
9) Cost Principle
a. The cost principle states that acquire assets and services should be
recorded at their actual cost (historical cost).
10) Monetary Unit Assumption
