lOMoAR cPSD| 63316909
D074 – PRINCIPLES OF ACCOUNTING
UNIT 2 – FINANCIAL ACCOUNTING
MODULE 01 – ACCOUNTING INFORMATION
“Everyone uses accounting information”
LESSON 01 – THE ROLE AND PURPOSE OF ACCOUNTING
Accounting Systems – Used to manage income, expenses, and other financial activities of a
business.
Functions of Fccounting Systems
Analysis – Immediate analysis of event/transactions as they occur.
Bookkeeping – Record in organized fashion what happened. Is a preservation of a
systematic, quantitative record of an activity. Very primitive but business is not
possible without it.
Evaluation – Structure the data for decision making.
What is Accounting?
System that provides quantitative information, primarily financial in nature, about economic
entities, intended to be useful in making economic decisions.
• Quantitative – Relates to numbers
• Financial – Money
• Useful – Theoretical conceptual framework but focus on practical usefulness
• Decisions – Past information impacts decision about the future
Decision-Making Process (Rational)
1. Identify the issue
2. Gather information (Accounting falls in this step)
3. Identify alternatives
4. Select the option that will most likely result in the desired objective.
Economic entity – May be an individual, a business enterprise, or a nonprofit organization.
Business – Organization operated with the objective of making profit from the sale of
goods or services.
Nonprofit Organization – entity without a profit objective, oriented towards providing
services efficiently and effectively, such as Universities or city government
Relationship of accounting to business
Accounting in a business is used to record and report the financial effects of business activities
Capital & Financing – Money used by the business to buy the resources it needs.
, lOMoAR cPSD| 63316909
Activities common to business organization
Sources of Capital
Investors (owners) Creditors (lenders)
Business itself in the form of earning that have
been retained
Accountant Role
• Measure and report – measure and communicate the result of business activities. They
follow the accounting cycle procedure.
• Advise – Advise managers how to structure activities to achieve the goals of the
business, like generating profit, minimizing costs, providing efficient service, etc.
LESSON 02 – WHO USES ACCOUNTING INFORMATION AND WHY?
“EVERYONE DOES, OR AT LEAST EVERYONE SHOULD”
Types of Accounting
• Managerial Accounting – Is gathering and analysis of information
for the purpose of internal decision making.
Areas of Managerial Accounting
Product costs
Breakeven analysis
Budgeting
Performance evaluation
Outsource production
, lOMoAR cPSD| 63316909
• Financial Accounting – Is the gathering, reporting, and analysis of
information primarily for the benefit of external users such as
investors and creditors.
Areas of Financial Accounting
Credit analysis
Regulatory uses (such as financial health of bank and insurance
companies)
Estimate the value of a company
Primary financial statements of Financial Accounting are:
Balance Sheet – List of a point in time (such as today) of resources
(assets), obligations (liabilities), owners’ equity (revenue).
Income Statement – For a period of time (such as a year) How much profit
did we make? (Net income).
Statement of Cash Flows – For a period of time (such as a year) Where did
our cash come from? Where did it go? In the following types of activities:
operating, investing, and financing.
External Stakeholders
Lenders – Would like to know if the loan will be repaid with interest, reason
why they will ask for a list of
• Assets and liabilities
• Payroll stubs, tax returns, other income
• Monthly payments obligations (car, rent, credit cards, etc.)
• Bank statements to document flow of cash in and out of your
account.
Investors – Would like to know if the business is profitable now, and what
is the potential for the future. To make a decision besides the financial
statements they will need:
• Business plan
• Market forecasts
• Character of management
Competitors – Would like to know the profitability of their competitors in
order to identify strategic opportunities for marketing efforts where
potential profits are high or where the competitor is weak.
Federal, State, and Local Government Agencies – They use financial
accounting information to make sure investor make informed decisions.
• Securities and Exchange Commission (SEC) – Monitors financial
accounting disclosure of companies (both U.S and foreign)
• International Trade Commission – Monitors fair trade practices.
• Internal Revenue Service (IRS) – Collects taxes, and audits tax
filings for mistakes or fraud.
, lOMoAR cPSD| 63316909
• Justice Department – Uses financial statements to evaluate
whether companies are earning excessive monopolistic profits.
Internal Stakeholders
Management – Use both managerial and financial information for
planning, daily monitoring, and evaluation.
Suppliers and Customers – To asses long-run prospect of a company.
Employees – financial information is useful because is used in
determining employee bonuses, it can be used to evaluate if an employee
will fulfill long-term promises, such as pensions and retiree health care
benefits, and in contract negotiations between labor unions and
management.
LESSON 03 – IMPORTANT INFLUENCES ON ACCOUNTING
What kind of Environment does Accounting operate?
• Organizations
• Ethics (standards accountant are required to abide by)
• Technology (how it impacts accounting)
The Need for Accounting Rules
It is an issue of comparability. It will be difficult and costly for outsiders to find out if every
company formulated its own set of accounting rules.
Who makes Accounting Rules?
Financial Accounting Standards Boards (FASB)
Sets the financial accounting rules in the U.S.
Private group (not a government agency)
No legal authority but are authorized by SEC to establish rules Proposed
standards are vetted in a public process.
Accounting rules that are approved are known GAAP (Generally Accepted
Accounting Principles).
Governmental Accounting Standards Board (GASB)
Sets the accounting and financial reporting standards for state and local
governments following GAAP.
Private group (not a government agency)
Security and Exchange Commission (SEC)
Legal authority to regulate financial markets and accounting
Is a Federal Government Agency
Defers to the FASB on accounting matters
American Institute of Certified Public Accountants (AICPA)
Professional association of Certified Public Accountants (CPA)
D074 – PRINCIPLES OF ACCOUNTING
UNIT 2 – FINANCIAL ACCOUNTING
MODULE 01 – ACCOUNTING INFORMATION
“Everyone uses accounting information”
LESSON 01 – THE ROLE AND PURPOSE OF ACCOUNTING
Accounting Systems – Used to manage income, expenses, and other financial activities of a
business.
Functions of Fccounting Systems
Analysis – Immediate analysis of event/transactions as they occur.
Bookkeeping – Record in organized fashion what happened. Is a preservation of a
systematic, quantitative record of an activity. Very primitive but business is not
possible without it.
Evaluation – Structure the data for decision making.
What is Accounting?
System that provides quantitative information, primarily financial in nature, about economic
entities, intended to be useful in making economic decisions.
• Quantitative – Relates to numbers
• Financial – Money
• Useful – Theoretical conceptual framework but focus on practical usefulness
• Decisions – Past information impacts decision about the future
Decision-Making Process (Rational)
1. Identify the issue
2. Gather information (Accounting falls in this step)
3. Identify alternatives
4. Select the option that will most likely result in the desired objective.
Economic entity – May be an individual, a business enterprise, or a nonprofit organization.
Business – Organization operated with the objective of making profit from the sale of
goods or services.
Nonprofit Organization – entity without a profit objective, oriented towards providing
services efficiently and effectively, such as Universities or city government
Relationship of accounting to business
Accounting in a business is used to record and report the financial effects of business activities
Capital & Financing – Money used by the business to buy the resources it needs.
, lOMoAR cPSD| 63316909
Activities common to business organization
Sources of Capital
Investors (owners) Creditors (lenders)
Business itself in the form of earning that have
been retained
Accountant Role
• Measure and report – measure and communicate the result of business activities. They
follow the accounting cycle procedure.
• Advise – Advise managers how to structure activities to achieve the goals of the
business, like generating profit, minimizing costs, providing efficient service, etc.
LESSON 02 – WHO USES ACCOUNTING INFORMATION AND WHY?
“EVERYONE DOES, OR AT LEAST EVERYONE SHOULD”
Types of Accounting
• Managerial Accounting – Is gathering and analysis of information
for the purpose of internal decision making.
Areas of Managerial Accounting
Product costs
Breakeven analysis
Budgeting
Performance evaluation
Outsource production
, lOMoAR cPSD| 63316909
• Financial Accounting – Is the gathering, reporting, and analysis of
information primarily for the benefit of external users such as
investors and creditors.
Areas of Financial Accounting
Credit analysis
Regulatory uses (such as financial health of bank and insurance
companies)
Estimate the value of a company
Primary financial statements of Financial Accounting are:
Balance Sheet – List of a point in time (such as today) of resources
(assets), obligations (liabilities), owners’ equity (revenue).
Income Statement – For a period of time (such as a year) How much profit
did we make? (Net income).
Statement of Cash Flows – For a period of time (such as a year) Where did
our cash come from? Where did it go? In the following types of activities:
operating, investing, and financing.
External Stakeholders
Lenders – Would like to know if the loan will be repaid with interest, reason
why they will ask for a list of
• Assets and liabilities
• Payroll stubs, tax returns, other income
• Monthly payments obligations (car, rent, credit cards, etc.)
• Bank statements to document flow of cash in and out of your
account.
Investors – Would like to know if the business is profitable now, and what
is the potential for the future. To make a decision besides the financial
statements they will need:
• Business plan
• Market forecasts
• Character of management
Competitors – Would like to know the profitability of their competitors in
order to identify strategic opportunities for marketing efforts where
potential profits are high or where the competitor is weak.
Federal, State, and Local Government Agencies – They use financial
accounting information to make sure investor make informed decisions.
• Securities and Exchange Commission (SEC) – Monitors financial
accounting disclosure of companies (both U.S and foreign)
• International Trade Commission – Monitors fair trade practices.
• Internal Revenue Service (IRS) – Collects taxes, and audits tax
filings for mistakes or fraud.
, lOMoAR cPSD| 63316909
• Justice Department – Uses financial statements to evaluate
whether companies are earning excessive monopolistic profits.
Internal Stakeholders
Management – Use both managerial and financial information for
planning, daily monitoring, and evaluation.
Suppliers and Customers – To asses long-run prospect of a company.
Employees – financial information is useful because is used in
determining employee bonuses, it can be used to evaluate if an employee
will fulfill long-term promises, such as pensions and retiree health care
benefits, and in contract negotiations between labor unions and
management.
LESSON 03 – IMPORTANT INFLUENCES ON ACCOUNTING
What kind of Environment does Accounting operate?
• Organizations
• Ethics (standards accountant are required to abide by)
• Technology (how it impacts accounting)
The Need for Accounting Rules
It is an issue of comparability. It will be difficult and costly for outsiders to find out if every
company formulated its own set of accounting rules.
Who makes Accounting Rules?
Financial Accounting Standards Boards (FASB)
Sets the financial accounting rules in the U.S.
Private group (not a government agency)
No legal authority but are authorized by SEC to establish rules Proposed
standards are vetted in a public process.
Accounting rules that are approved are known GAAP (Generally Accepted
Accounting Principles).
Governmental Accounting Standards Board (GASB)
Sets the accounting and financial reporting standards for state and local
governments following GAAP.
Private group (not a government agency)
Security and Exchange Commission (SEC)
Legal authority to regulate financial markets and accounting
Is a Federal Government Agency
Defers to the FASB on accounting matters
American Institute of Certified Public Accountants (AICPA)
Professional association of Certified Public Accountants (CPA)
