Summary of accounting
Chapter 1
Accounting and the Business Environment
Why is accounting important?
-Accounting: The information system that measures business activities, processes the
information into reports and communicates the results to decision makers.
Decision Makers: The users of Accounting Information
-We can divide accounting into two major fields—financial accounting and managerial
accounting.
-Financial Accounting: The field of accounting that focuses on providing information for
external decision makers such as outside investors, lenders, customers, and the federal
government.
-Managerial accounting focuses on information for internal decision makers, such as the
company’s managers and employees.
-Creditor: Any person or business to whom a business owes money.
-Certified public Accountants (CpAs) Licensed professional accountants who serve the
general public.
-Certified Management Accountants (CMAs) Certified professionals who specialize in
accounting and financial management knowledge. They typically work for a single company.
What are the organizations and rules that govern accounting?
Governing organizations
-Financial Accounting standards Board (FAsB) The private organization that oversees the
creation and governance of accounting standards in the United States.
-securities and Exchange Commission (sEC) U.S. governmental agency that oversees the U.S.
financial markets
Generally Accepted Accounting principles
-The guidelines for accounting information are called Generally Accepted Accounting
Principles (GAAP).
-GAAP rests on a conceptual framework that identifies the objectives, characteristics,
elements, and implementation of financial statements and creates the acceptable accounting
practices.
-The primary objective of financial reporting is to provide information useful for making
investment and lending decisions.
-Relevant information allows users of the information to make a decision. Information that is
faithfully representative is complete, neutral, and free from error.
,The Economic Entity Assumption
-Economic Entity Assumption An organization that stands apart as a separate economic unit.
-Assume Sheena Bright started the business by contributing capital of $30,000. Following the
economic entity assumption, Smart Touch Learning recorded the $30,000 separately from
Sheena’s personal assets, such as her clothing and car. To mix the $30,000 of business cash
with her personal assets would make it difficult to measure the success or failure of Smart
Touch Learning. The economic entity assumption requires that each organization be separate
from other businesses and from the owner.
The Cost principle
-Cost principle: A principle that states that acquired assets and services should be recorded at
their actual cost.
-Sole Proprietorship: A business with a single owner.
Partnership: A business with two or more owners and not organized as a corporation.
Corporation: A business organized under state law that is a separate legal entity.
Limited-Liability Company (llC): A company in which each member is only liable for his or
her own actions.
-The cost principle means we record a transaction at the amount shown on the receipt—the
actual amount paid.
-For example, assume our fictitious company Smart Touch Learning purchased land for
$20,000. The owner, Sheena Bright, might believe the land is instead worth $25,000. The cost
principle requires that Smart Touch Learning record the land at $20,000, not $25,000.
-The cost principle also holds that the accounting records should continue reporting the
historical cost of an asset over its useful life. Why? Suppose Smart Touch Learning holds the
land for six months. During that time land prices rise, and the land could be sold for $30,000.
Should its accounting value—the figure on the books—be the actual cost of $20,000 or the
current market value of $30,000? By the cost principle, the accounting value of the land
would remain at the actual cost of $20,000.
-Going Concern Assumption Assumes that the entity will remain in operation for the
foreseeable future.
-Monetary unit Assumption: The assumption that requires the items on the financial
statements to be measured in terms of a monetary unit. (Inflation is not included)
International Financial reporting standards
-International Financial reporting Standards (IFrs): A set of global accounting guidelines,
formulated by the International Accounting Standards Board (IASB).
-International Accounting standards Board (IAsB): The private organization that oversees the
creation and governance of International Financial Reporting Standards (IFRS).
,Ethics in Accounting and Business
-conflicts of interest and information asymmetry (hide information from investors)
-Audit An examination of a company’s financial statements and records.
-Sarbanes Oxley Act (sox): Requires companies to review internal control and take
responsibility for the accuracy and completeness of their financial reports.
What is the accounting equation?
-Accounting Equation: The basic tool of accounting, measuring the resources of the business
(what the business owns or has control of) and the claims to those resources (what the
business owes to creditors and to the owner). Assets = Liabilities + equity
-Example: If a business has assets of $230,000 and liabilities of $120,000, its equity must be
$110,000 ($230,000 − $120,000).
Assets
-Assets: economic resources that are expected to benefit the business in the future. Something
the business owns or has control of.
Liabilities
-liabilities: debts that are owed to creditors. Many liabilities have the word payable in their
titles. Examples include accounts payable, notes payable, and salaries payable.
Equity
-Equity: The owner’s claim to the assets of the business.
-Equity represents the amount of assets that are left over after the company has paid its
liabilities. It is the company’s net worth.
-owner's Capital: owner contributions to a business.
-An owner can contribute cash or other assets (such as equipment) to the business and receive
capital. Equity is also increased by revenues.
-Revenues: are earnings that result from delivering goods or services to customers. Examples
of revenues are sales revenue, service revenue, and rent revenue.
-Equity decreases with expenses and owner withdrawals. Expenses: are the cost of selling
goods or services. Expenses are the opposite of revenues and, therefore, decrease equity.
Examples of expenses are rent expense, salaries expense, advertising expense, and utilities
expense.
-Owner’s Withdrawals: Payments of equity to the owner. Owner withdrawals are the opposite
of owner contributions and, therefore, decrease equity.
-SUMMARY: Owner’s Capital: +; Owner’s Withdrawals: -; Revenues: +; Expenses: -
- Net Income: The result of operations that occurs when total revenues are greater than total
expenses.
- Net loss: The result of operations that occurs when total expenses are greater than total
revenues.
, How do you analyze transactions?
- Transaction: An event that affects the financial position of the business and can be measured
reliably in dollar amounts. Transactions affect what the company has or owes or its net worth.
-Accountants do not consider economic boom or recession
- What are some of your personal transactions? You may have bought a car. Your purchase
was a transaction. If you are making payments on an auto loan, your payments are also
transactions.
Transaction Analysis for smart Touch learning
Transaction 1—owner Contribution
- Sheena Bright starts the new business as a sole proprietorship named Smart Touch Learning.
The e-learning business receives $30,000 cash from the owner, Sheena Bright, and the
business gave capital to her. The effect of this transaction on the accounting equation of the
business is as follows: the $30,000 cash can be seen at assets side and on equity side
-Step 1: Identify the accounts and the account type. Each transaction must have at least two
accounts but could have more. The two accounts involved are Cash (Asset) and Bright,
Capital (Equity).
Step 2: Decide if each account increases or decreases. Remember to always view this from the
business’s perspective, and not from the owner’s or customer’s perspective. Cash increases.
The business has more cash than it had before. Bright, Capital increases. The business
received a $30,000 contribution.
Step 3: Determine if the accounting equation is in balance. For each transaction, the amount
on the left side of the equation must equal the amount on the right side. $30,000 = $30,000
Chapter 1
Accounting and the Business Environment
Why is accounting important?
-Accounting: The information system that measures business activities, processes the
information into reports and communicates the results to decision makers.
Decision Makers: The users of Accounting Information
-We can divide accounting into two major fields—financial accounting and managerial
accounting.
-Financial Accounting: The field of accounting that focuses on providing information for
external decision makers such as outside investors, lenders, customers, and the federal
government.
-Managerial accounting focuses on information for internal decision makers, such as the
company’s managers and employees.
-Creditor: Any person or business to whom a business owes money.
-Certified public Accountants (CpAs) Licensed professional accountants who serve the
general public.
-Certified Management Accountants (CMAs) Certified professionals who specialize in
accounting and financial management knowledge. They typically work for a single company.
What are the organizations and rules that govern accounting?
Governing organizations
-Financial Accounting standards Board (FAsB) The private organization that oversees the
creation and governance of accounting standards in the United States.
-securities and Exchange Commission (sEC) U.S. governmental agency that oversees the U.S.
financial markets
Generally Accepted Accounting principles
-The guidelines for accounting information are called Generally Accepted Accounting
Principles (GAAP).
-GAAP rests on a conceptual framework that identifies the objectives, characteristics,
elements, and implementation of financial statements and creates the acceptable accounting
practices.
-The primary objective of financial reporting is to provide information useful for making
investment and lending decisions.
-Relevant information allows users of the information to make a decision. Information that is
faithfully representative is complete, neutral, and free from error.
,The Economic Entity Assumption
-Economic Entity Assumption An organization that stands apart as a separate economic unit.
-Assume Sheena Bright started the business by contributing capital of $30,000. Following the
economic entity assumption, Smart Touch Learning recorded the $30,000 separately from
Sheena’s personal assets, such as her clothing and car. To mix the $30,000 of business cash
with her personal assets would make it difficult to measure the success or failure of Smart
Touch Learning. The economic entity assumption requires that each organization be separate
from other businesses and from the owner.
The Cost principle
-Cost principle: A principle that states that acquired assets and services should be recorded at
their actual cost.
-Sole Proprietorship: A business with a single owner.
Partnership: A business with two or more owners and not organized as a corporation.
Corporation: A business organized under state law that is a separate legal entity.
Limited-Liability Company (llC): A company in which each member is only liable for his or
her own actions.
-The cost principle means we record a transaction at the amount shown on the receipt—the
actual amount paid.
-For example, assume our fictitious company Smart Touch Learning purchased land for
$20,000. The owner, Sheena Bright, might believe the land is instead worth $25,000. The cost
principle requires that Smart Touch Learning record the land at $20,000, not $25,000.
-The cost principle also holds that the accounting records should continue reporting the
historical cost of an asset over its useful life. Why? Suppose Smart Touch Learning holds the
land for six months. During that time land prices rise, and the land could be sold for $30,000.
Should its accounting value—the figure on the books—be the actual cost of $20,000 or the
current market value of $30,000? By the cost principle, the accounting value of the land
would remain at the actual cost of $20,000.
-Going Concern Assumption Assumes that the entity will remain in operation for the
foreseeable future.
-Monetary unit Assumption: The assumption that requires the items on the financial
statements to be measured in terms of a monetary unit. (Inflation is not included)
International Financial reporting standards
-International Financial reporting Standards (IFrs): A set of global accounting guidelines,
formulated by the International Accounting Standards Board (IASB).
-International Accounting standards Board (IAsB): The private organization that oversees the
creation and governance of International Financial Reporting Standards (IFRS).
,Ethics in Accounting and Business
-conflicts of interest and information asymmetry (hide information from investors)
-Audit An examination of a company’s financial statements and records.
-Sarbanes Oxley Act (sox): Requires companies to review internal control and take
responsibility for the accuracy and completeness of their financial reports.
What is the accounting equation?
-Accounting Equation: The basic tool of accounting, measuring the resources of the business
(what the business owns or has control of) and the claims to those resources (what the
business owes to creditors and to the owner). Assets = Liabilities + equity
-Example: If a business has assets of $230,000 and liabilities of $120,000, its equity must be
$110,000 ($230,000 − $120,000).
Assets
-Assets: economic resources that are expected to benefit the business in the future. Something
the business owns or has control of.
Liabilities
-liabilities: debts that are owed to creditors. Many liabilities have the word payable in their
titles. Examples include accounts payable, notes payable, and salaries payable.
Equity
-Equity: The owner’s claim to the assets of the business.
-Equity represents the amount of assets that are left over after the company has paid its
liabilities. It is the company’s net worth.
-owner's Capital: owner contributions to a business.
-An owner can contribute cash or other assets (such as equipment) to the business and receive
capital. Equity is also increased by revenues.
-Revenues: are earnings that result from delivering goods or services to customers. Examples
of revenues are sales revenue, service revenue, and rent revenue.
-Equity decreases with expenses and owner withdrawals. Expenses: are the cost of selling
goods or services. Expenses are the opposite of revenues and, therefore, decrease equity.
Examples of expenses are rent expense, salaries expense, advertising expense, and utilities
expense.
-Owner’s Withdrawals: Payments of equity to the owner. Owner withdrawals are the opposite
of owner contributions and, therefore, decrease equity.
-SUMMARY: Owner’s Capital: +; Owner’s Withdrawals: -; Revenues: +; Expenses: -
- Net Income: The result of operations that occurs when total revenues are greater than total
expenses.
- Net loss: The result of operations that occurs when total expenses are greater than total
revenues.
, How do you analyze transactions?
- Transaction: An event that affects the financial position of the business and can be measured
reliably in dollar amounts. Transactions affect what the company has or owes or its net worth.
-Accountants do not consider economic boom or recession
- What are some of your personal transactions? You may have bought a car. Your purchase
was a transaction. If you are making payments on an auto loan, your payments are also
transactions.
Transaction Analysis for smart Touch learning
Transaction 1—owner Contribution
- Sheena Bright starts the new business as a sole proprietorship named Smart Touch Learning.
The e-learning business receives $30,000 cash from the owner, Sheena Bright, and the
business gave capital to her. The effect of this transaction on the accounting equation of the
business is as follows: the $30,000 cash can be seen at assets side and on equity side
-Step 1: Identify the accounts and the account type. Each transaction must have at least two
accounts but could have more. The two accounts involved are Cash (Asset) and Bright,
Capital (Equity).
Step 2: Decide if each account increases or decreases. Remember to always view this from the
business’s perspective, and not from the owner’s or customer’s perspective. Cash increases.
The business has more cash than it had before. Bright, Capital increases. The business
received a $30,000 contribution.
Step 3: Determine if the accounting equation is in balance. For each transaction, the amount
on the left side of the equation must equal the amount on the right side. $30,000 = $30,000
