Lecture 1-Balancing/Accounting in Action Flashcards
What is the accounting?
Accounting is the financial information system that provides insights into understanding organizations and numbers
What does accounting consist of?
three basic activities which are to identify, to record and communicate
What are the building blocks of accounting?
Ethical in Financial Reporting, Accounting Standards and Measurement Principles.
Accounting Information System
the system of collecting and processing transactions data and communicating financial information to decision-makers
who uses accounting data
External and Internal users
Internal users of accounting information are:
managers who plan, organize and run the business. These include marketing managers, production supervisors, finance directors and company officers- Managerial accounting activities focus on reports for internal users
External users of accounting data are:
individuals and organizations outside of a company who want financial information about the company. Two most common types are investors and creditors (company officers)
What are investors or what do they do?
use accounting information to decide whether to buy, hold or sell ownership shares of a company
What are creditors and what do they do?
are suppliers and bankers and they use accounting information to evaluate the risks of granting credit or lending money
What are ethics?
the standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair.
Why is ethics a fundamental business concept?
To carry on a business or invest money you should be able to rely on the financial statements being honestly prepared otherwise information would have no credibility. There is no doubt a sound, well-functioning economy depends on accurate and dependable financial reporting.
Ethics in Financial Reporting
I . Recognize an ethical situation and the ethical
issues involved. Use your personal ethics to identify ethical situations and issues. Some businesses and professional organizations provide written codes of ethics for guidance in some business situations.
- Identify and analyze the principal elements
in the situation. Identify the stakeholders persons or groups who may be harmed or benefited. Ask the question: What are the responsibilities and obligations of the parties involved? - Identify the alternatives, and weigh the impact of each alternative on various stakeholders. Select the most ethical alternative, considering all the consequences. Sometimes there will be one right answer. Other situations involve more than
one right solution; these situations require an evaluation of each and a selection of the
best alternative.
Measurement principles
IFRS generally uses one of two measurement principles, the historical cost principle or the fair value principle.
Historical cost principle (or cost principle): dictates that companies record assets at their cost. This is true not only at the time the
asset is purchased, but also over the time the asset is held. (original cost of the car and over the time you hold it)
Fair value principle: states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a
liability).
Accounting Standards
Ensure high-quality financial reporting.
Primary accounting standard-setting bodies:
International Accounting Standards Board (IASB)
* Determines International Financial Reporting Standards (IFRS)
* Used in 130 countries
Financial Accounting Standards Board (FASB)
* Determines generally accepted accounting principles (GAAP)
* Used by most companies in the U.S.
Selecting measurement principles
Selection of which principle to follow generally relates to trade-offs between
relevance and faithful representation.
Relevance/Materiality
means that financial information is capable of making a difference in a decision.
Faithful representation
means that the numbers and descriptions match what really existed or happened -they are factual
Assumptions
provide a foundation for the accounting process. Two main assumptions are the monetary unit assumption and the economic entity
assumption.
Monetary unit assumption
requires that companies include in the accounting records only transaction data that can be expressed as money terms.
Economic Entity assumption
requires that the activities of the
entity be kept separate and distinct from the activities of its owner and all other economic entities. Typical entity forms are
proprietorship, partnership, corporation.
Soul traders
smaller type operations tend to register in companies, have limited liabilities (tend to have ltd or limited in their name)
Risks-personal assets can be seized if bankrupt
Partnerships-
is a business owned by two or more persons associated as partners, liable for mistakes for self and partners
Companies or corporations
is a business organized as a separate legal entity under jurisdiction corporation law and having ownership divided into transferable shares. Examples are: Apple Inc, Royal Dutch Shell and Toyota
Convergence
,refers to the reduction of GAAP and IFRS
The Basic Accounting Equation
Assets=Liabilities + Equity/Capital (left hand should always be the same as right)
Equity
investment made by companies/owner.
Service Revenue increases Equity
Salaries/Costs decreases Equity
Dividends decreases Equity
it consists of share, capital and remaining profits (retained earnings)
Accounts payable and receivable
Accounts payable-crediters
Accounts receivable- debters
Crediters- person we bought goods from credit
What do accounts not do?
Accountants prepare but do not interpret financial reports
