Notesale: Turn your study into money

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ACCOUNTING 101
● Fundamentals of Accounting
● Introduction to Accounting

● Financial Statements

 Fundamentals of Accounting

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Accounting

Service activity
Provides quantitative
information, financial in
nature, about economic
entities which is useful in
making economic decisions

-

Art
Of recording, classifying,
summarizing in terms of
money, transactions, and
events that are of financial
character and interpreting
results thereof

-

Regarded as the language of
business
Provides relevant information
to various users, which help
make economic decisions

-

-

Information system
Identifies
Records
Communicates
the economic events of an
org
...
Identification
- Of economic events
- Of accountable transactions
- Of activities relevant to an entity
2
...
Communication
- Relaying of accounting info to intended users through accounting reports
- Financial Statements: most common form of accounting report
- Also involved: analysis & interpretation of aggregate accounting


Importance of Accounting
o Assists people to make decisions about allocation of scarce resources
o Provides info to assist users to understand past, present, & future position of an entity
o Means of measuring business activity and communication this to decision makers



Users of Accounting Information
INTERNAL USERS
- Managers & owners
who plan, organise, &
run the business
- Direct involvement

EXTERNAL USERS
- Potential investors,
creditors (suppliers
bankers), government
& regulatory bodies
- Indirect involvement

 Introduction to Accounting
 Brief History of Accounting
o Luca Pacioli: Father of Accounting
 Earliest record of double entry bookkeeping
 1494 work: “Everything about Arithmetic, Geometry, and Proportions”
o Accounting development increased during the Industrial Revolution as countries began
to mass-produce goods
o 19th century: growth of corporations sparked the development
o Globalization & technology affects the accounting practice nowadays




Bookkeeping vs
...
Bookkeeping
- Recording only economic events (only the clerical part of accounting)
2
...
Financial Accounting
 External reporting
 General purpose
 Available to the public
b
...
Ownership
a
...
Partnership
 2 or more persons make the investment and agree to operate under certain
conditions
 Partners
 Contract: governed by law

c
...
Activity
a
...
Salon, Laundry, Restaurant, Law Firm, Accounting Firm
b
...
Department Store, Groceries, Bookstores
c
...
Unilever, Nestle, Apple


Basic Accounting Principles
Ground rules that govern how to measure, process, and communicate financial information
Defines accepted accounting practice



Basic Purposes of Accounting Principles
o Increase confidence of financial statement users that the statements are represented
faithfully
o Provide preparers of financial statements with guidance on how to account for and report
economic acitivites
o Enhance the decision usefulness of the financial statement



Principles/Concepts
1
...
Monetary Unit Assumption
Data must be expressed in terms of money to be included in accounting records
Quantify and measure economic events
Money: unit of measure
Assumes money is constant (no inflation)

3
...
Time Period/Periodicity
Divide the life of the business into regular intervals, at the end of which financial
statements are prepared
Financial reports at least once a year; timely measurement of accounting info
Regular Intervals: one year = Interim Period: less than one year
Calendar Year: Jan-Dec
Financial Year: Depending on nature of business
5
...
paid for asset)
Time of acquisition: Fair Market Value = Historical Cost
6
...
Materiality
Financial reporting is concerned only with relevant information which could affect
valuations and decisions
Materiality is relativity
8
...
Income Recognition
Revenue should be recognized when earned whether or not cash has been received
Revenue earned: services fully rendered & goods have been delivered
Revenue: inflow of assets that result from rendering services/producing goods
Income: basically the profit
*more on ‘when’
10
...

12
...
Conservatism/Prudence
Generally choose a method that will yield a lower amount of income and asset value
Exercise care and caution cause uncertainties exist, lean towards the method with lowest
net income and lowest asset
This is done to not raise expectations of users to an unreasonable level
 Financial Statements
o Provides information of the economic activities of an entity
o Useful in making economic decisions
o Measures business activity
1
...
Sept – Dec)
o Elements: Revenues and Expenses
o Revenue – Expense = Net Income (Profit or Loss for Period)
a
...
Functional Form
 Arranges income and expense according to function – different presentation
 Usually used by merchandising business
2
...
Owner’s Investments
 Initial Investment: amt
...
invested by owner even after the start
b
...
Owner’s Withdrawals
 Owner using assets of business for personal use
...
Statement of Financial Position (Balance Sheet)
o informing users the financial condition/position of an entity at a given date (Ex
...
Account Form
 assets listed on left, liabilities on right
 horizontally presented
b
...
Statement of Cash Flows
o Financial report explaining the changes in cash and cash equivalents of a business
for an accounting period
o “where i get the money & where i use the money”
5
...
that will help enhance the user’s understanding of
the financial statement
o *specifying different accounts; breakdown



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