Accounting Chapter 1
1.1
Accounting is an information system that measures, processes, and
communicates financial information about a business.
An economic entity is a unit that exists independently, such as a business,
hospital, or a governmental body.
External decision makers use financial accounting to evaluate how well the
business has achieved its goals. These reports, called financial statements, are
a central feature of accounting.
Bookkeeping is the process of recording financial transactions and keeping
financial records.
Management information systems (MIS) consists of the interconnected
subsystems, including accounting, that provide the information needed to run a
business.
Internal decision makers use information provided by managerial accounting
about operating, investing and financial activities.
Business transactions are economic events that affect a business’s financial
position.
All business transactions are recorded in terms of money. This concept is called
money measure.
For accounting purposes, a business organization is a separate entity, distinct
not only from its creditors and customers but also from its owners.
These are the 3 basic forms of business organizations recognized as separate
entities:
Sole proprietorship; this is a business owned by 1 person.
Partnership; it is like a sole proprietorship in most ways, but it has 2 or
more owners.
Corporation; a business unit chartered by the state and legally separate
from its owners (stockholders).
1.2
Financial position refers to a company’s economic resources, such as cash,
inventory, and buildings, and the claim against those resources at a particular
time. Another term for claims is equities.
Economic resources = Creditors’ Equities + Owner’s Equity
=
Assets = Liabilities + Owner’s Equity
=
Accounting Equation
1.3
The order of financial statements:
, 1. Income statement: it summarizes the revenues earned and expenses
incurred by a business over an accounting period. (Contains: Revenues,
Expenses, Net Income)
2. Statement of owner’s equity: it shows the changes in owner’s equity
over an accounting period. (Contains: Begin capital, investments, net
income – withdrawals, end capital)
3. Balance sheet: it shows the financial position of a business on a certain
date.
Whereas the income statement focusses on a company’s profitability, the
statement of cash flows focuses on liquidity, which is the balancing of inflows
and outflows of cash to enable it to operate and pay its bills when they are due.
The statement of cash flows is organized in 3 business activities:
1. Cash flows from operating activities (net income, accounts receivable,
accounts payable, supplies)
2. Cash flows from investing activities (purchase of land, purchase of
building)
3. Cash flows from financing activities (investments by owner,
withdrawals).
1.4
To ensure that financial statements are understandable to their users, a set of
generally accepted accounting principles (GAAP) has been developed to
provide guidelines for financial accounting.
Many companies have their financial statement audited by an independent
certified public accountant (CPA), which means that the CPA is not an
employee for the company.
1.5
Profitability= the ability to earn enough income to attract and hold investment
capital.
Liquidity= the ability to have enough cash to pay debts when they are due.
Financial analysis is the use of financial statements to determine that a
business is well managed and is achieving its goals.
To be relevant, performance measures must be well aligned with the 2 major
goals of business: profitability and liquidity.
Financial ratios show how the elements of financial statements relate to each
other.
1.6
Ethics is a code of conduct that applies to everyday life. It addresses to whether
actions are right or wrong.
2.1
Recognition refers to the decision as to when to record a business transaction.
1.1
Accounting is an information system that measures, processes, and
communicates financial information about a business.
An economic entity is a unit that exists independently, such as a business,
hospital, or a governmental body.
External decision makers use financial accounting to evaluate how well the
business has achieved its goals. These reports, called financial statements, are
a central feature of accounting.
Bookkeeping is the process of recording financial transactions and keeping
financial records.
Management information systems (MIS) consists of the interconnected
subsystems, including accounting, that provide the information needed to run a
business.
Internal decision makers use information provided by managerial accounting
about operating, investing and financial activities.
Business transactions are economic events that affect a business’s financial
position.
All business transactions are recorded in terms of money. This concept is called
money measure.
For accounting purposes, a business organization is a separate entity, distinct
not only from its creditors and customers but also from its owners.
These are the 3 basic forms of business organizations recognized as separate
entities:
Sole proprietorship; this is a business owned by 1 person.
Partnership; it is like a sole proprietorship in most ways, but it has 2 or
more owners.
Corporation; a business unit chartered by the state and legally separate
from its owners (stockholders).
1.2
Financial position refers to a company’s economic resources, such as cash,
inventory, and buildings, and the claim against those resources at a particular
time. Another term for claims is equities.
Economic resources = Creditors’ Equities + Owner’s Equity
=
Assets = Liabilities + Owner’s Equity
=
Accounting Equation
1.3
The order of financial statements:
, 1. Income statement: it summarizes the revenues earned and expenses
incurred by a business over an accounting period. (Contains: Revenues,
Expenses, Net Income)
2. Statement of owner’s equity: it shows the changes in owner’s equity
over an accounting period. (Contains: Begin capital, investments, net
income – withdrawals, end capital)
3. Balance sheet: it shows the financial position of a business on a certain
date.
Whereas the income statement focusses on a company’s profitability, the
statement of cash flows focuses on liquidity, which is the balancing of inflows
and outflows of cash to enable it to operate and pay its bills when they are due.
The statement of cash flows is organized in 3 business activities:
1. Cash flows from operating activities (net income, accounts receivable,
accounts payable, supplies)
2. Cash flows from investing activities (purchase of land, purchase of
building)
3. Cash flows from financing activities (investments by owner,
withdrawals).
1.4
To ensure that financial statements are understandable to their users, a set of
generally accepted accounting principles (GAAP) has been developed to
provide guidelines for financial accounting.
Many companies have their financial statement audited by an independent
certified public accountant (CPA), which means that the CPA is not an
employee for the company.
1.5
Profitability= the ability to earn enough income to attract and hold investment
capital.
Liquidity= the ability to have enough cash to pay debts when they are due.
Financial analysis is the use of financial statements to determine that a
business is well managed and is achieving its goals.
To be relevant, performance measures must be well aligned with the 2 major
goals of business: profitability and liquidity.
Financial ratios show how the elements of financial statements relate to each
other.
1.6
Ethics is a code of conduct that applies to everyday life. It addresses to whether
actions are right or wrong.
2.1
Recognition refers to the decision as to when to record a business transaction.
