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Summary Chapter 1 - Introduction to Accounting and Business
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Chapter 1 - Introduction to Accounting and BusinessLearning Objectives
Objective 1:
Describe the nature of business and the role of accounting and ethics in business.
Answer:
A business is an organization in which inputs (basic resources) such as materials and labor
are assembled and processed to provide outputs (goods or services) to customers. There
are many different businesses, such as big corporations such as starbucks to small local
coffee shops. The objective of most businesses is to earn a profit. Many concepts and
principles also apply for non-profit-earning organizations, such as hospitals, churches and
gov agencies. The role of accounting is to provide information for managers to use in
operating the business. Accounting also provides information in assessing the economic
performance and condition of the business. Accounting can be defined as an information
system that provides reports to users about the economic activities and conditions of a
business. Accounting is know as “Language of business.”
Objective 2:
Describe generally accepted accounting principles, including the underlying assumptions
and principles.
Answer:
The generally accepted accounting principles (GAAP) is a collection of accounting standards
and assumptions that define how financial information will be reported. Accounting
Standards are the rules that determine the accounting for individual business transactions.
Accounting Principles and Assumptions provide the framework upon which accounting
standards are constructed. The Assumptions include Monetary Unit, Time Period, Business
Entity, and Going Concern. The Monetary Unit assumption requires that financial reports be
expressed in a single money unit (currency). This provides a common measurement of the
effects of economic events and transactions on an entity. The monetary unit is determined
by the country in which the company operates. The Time Period assumption allows a
company to report its economic activities on a regular basis for a specific time period. In
doing so financial conditions and changes are reported periodically on a consistent basis.
The Business Entity assumption limits the economic data in financial reports to that directly
related to the activities of the business. Meaning the business is viewed as an entity
separate from its owners, creditors or other businesses. For example, the accountant for a
business with one owner would record only the activities of the business and not the
personal activities of the owner. The Going Concern assumption requires that financial
reports be prepared assuming that the entity will continue operating in the future. This
assumption justifies reporting items such as equipment, building and land at their initial or
historical cost rather than liquidation or forced sale values. The Principles are also an
integral part of financial accounting, they include: Measurement, Historical Cost, Revenue
Recognition, and Expense Recognition. The Measurement principle determines the amount
that will be recorded and reported. The measurement principles requires the amounts to be
objective and verifiable. Objective measurements are based upon independent, unbiased
evidence. An amount is verifiable if it can be confirmed by a third party. The Historical Cost
principle is recorded an items initial transaction price. Amounts do not normally change until
another transaction. The Revenue Recognition principle determines when revenue is
recorded in the accounting records. Normally, revenue is recorded when the services have
been performed or goods are delivered to the customer. The Expense Recognition principle,
, requires expenses to be recorded in the same period as the related revenue, doing so allows
the reporting of a profit or loss for the period. This is sometimes also known as the matching
principle.
Objective 3:
State the accounting equation and define each element of the equation.
Answer:
The Accounting Equation is:
Assets = Liabilities + Equity
Assets are the resources owned by a business, assets include; cash, land, building, and
equipment. The rights or claims to the assets are divided into 2 types. The first being the
rights of creditors, these are the debts of the business and are called liabilities. The second
claim to assets are rights of owners which are considered as Equity. Since stockholders own
a corporation equity is called stockholders’ equity. For a proprietorship, partnership, or
limited liability company, equity is called owners’ equity.
Objective 4:
Describe and illustrate how business transactions can be recorded in terms of the resulting
change in the elements of the accounting equation.
Answer:
Business transactions are economic events/conditions that directly change an entity’s
financial condition or its results of operations. Purchasing land for 50,000 euros would be a
business transaction, but a change in the business's credit ranking does not classify as a
business transaction because it does not directly affect cash or any other asset, liability, or
stockholders’ equity amount. Business transactions can be recorded through a Balance
Sheet:
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