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Fundamental Accounting PrinciplesFundamental Accounting Principles
Fundamental Concepts and
Principles
Chapter
11
Learning objectivesLearning objectives
Conceptual: C1: Explain the purpose and importance of accounting
in the information age. C2: Identify users and uses of accounting. C3: Identify opportunities in accounting and related
fields. C4: Explain why ethics are crucial to accounting. C5: Explain the meaning of GAAP, and define and
apply several key principles of accounting.
Analytical: Define and interpret the accounting equation and each
of its components.
Learning objectiveLearning objective
C1: Explain the purpose and importance of accounting in the information age.
IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of AccountingImportance of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
What is Accounting?What is Accounting?
1. It is a service activity which function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions .
2. It is the art of recording, classifying and summarizing, in a significant manner in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof.
3. It is a language of business
1. It is a service activity which function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions .
2. It is the art of recording, classifying and summarizing, in a significant manner in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof.
3. It is a language of business
Identifying Business Activities
Recording Business Activities
Communicating Business Activities
Accounting ActivitiesAccounting Activities
What is the relation between accounting and bookkeeping? What is the relation between accounting and bookkeeping?
Bookkeeping is the recording of financial transactions and events, either manually or electronically.
Accounting is much more. It includes identifying, measuring, recording, reporting, and analyzing business events and transactions, and helps information users to make economic decisions.
Learning objectiveLearning objective
C2: Identify users and uses of accounting.
Users of Accounting InformationUsers of Accounting Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
Users of Accounting InformationUsers of Accounting Information
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
Users of Accounting Information-ExternalUsers of Accounting Information-External
Lenders: Whether the firm (borrower) can repay the money?
Shareholders: whether to buy, hold, or sell stocks?
Governments: whether the firm pay all due tax?
Customers: whether the firm can exist to provide post-sale services?
External Auditors: whether the financial statements are prepared according to GAAP?
Etc.
Users of Accounting Information-InternalUsers of Accounting Information-Internal
Marketing managers: target customers, set price, monitor sales.
Production managers: monitor cost and ensure quality.
Purchasing managers: what, when and where to purchase materials.
Human resource managers: employees’ performance and compensation.
Learning objectiveLearning objective
C3: Identify opportunities in accounting and related fields.
Opportunities in AccountingOpportunities in Accounting
FinancialFinancial
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
ManagerialManagerial
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
TaxationTaxation
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
Accounting-related
Accounting-related
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
Accounting Jobs by AreaAccounting Jobs by Area
Private accounting
60%Public accounting
25%
Government, not-for-profit, & education
15%
Learning objectiveLearning objective
C4: Explain why ethics are crucial to accounting.
Beliefs that distinguish right from
wrong
Accepted standards of good and bad
behavior
Ethics
Ethics—A Key ConceptEthics—A Key Concept
Identify ethical concerns
Analyze options
Make ethical decision
Use personal ethics to
recognize ethical concern.
Consider all good and bad
consequences.
Choose best option after weighing all
consequences.
Guidelines for Ethical Decision MakingGuidelines for Ethical Decision Making
Learning objectiveLearning objective
C5: Explain the meaning of GAAP, and define and apply several key principles
of accounting.
Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
Setting Accounting PrinciplesSetting Accounting Principles
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
Setting Accounting PrinciplesSetting Accounting Principles
Hong Kong: • Hong Kong Institute of Certified Public Account
ants (HKICPA)
China• Ministry of Finance People’s Republic of China
International Accounting Standard Board (IASB)• International Financial Reporting Standards
(IFRS)
Principles of AccountingPrinciples of Accounting
General principles: basic assumptions, concepts, and guidelines for preparing financial statements.
Usually stem from long-used accounting practice.
Specific principles: detailed rules used in reporting business transactions and events.
Usually created by a pronouncement from an authoritative body.
Principles of Accounting— General PrinciplesPrinciples of Accounting— General Principles
Objectivity PrincipleAccounting information is supported by independent,
unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and
verifiable information.
Ex. Payments must be supported by official receipts, and bank deposits must be supported by deposit slips
Historical Cost PrincipleAccounting information is based on actual
cost.Cost is measured on a cash or equal-to cash basis
Ex. Land bought in 1990 for one million pesos should be recorded at one million pesos even though its market value in the year 2015 is already four million
Accrual Principle states that income should be recognized at the time it is earned such as when goods are delivered or when services have been rendered. Likewise, expenses should be recognized at the time they are incurred such as when goods and services are actually used not when the entity pays for those goods and services
Ex. A hotel cannot consider as income the advance payment of a customer who paid the hotel in advance for one month accommodation until the customer has checked-in
Adequate Disclosure states that all material facts that will significantly affect the financial statements must be indicated.
Ex. Land bought at one million pesos in 1998 should be recorded at historical cost in the 2015 financial statements. However, the current market value of two million pesos in the year 2006 may be indicated in the financial statements for the year 2015 in the form of footnote or parenthetical note
Adequate Disclosure states that all material facts that will significantly affect the financial statements must be indicated.
Ex. Land bought at one million pesos in 1998 should be recorded at historical cost in the 2015 financial statements. However, the current market value of two million pesos in the year 2006 may be indicated in the financial statements for the year 2015 in the form of footnote or parenthetical note
Materiality means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event. An item is considered significant if knowledge of it would influence prudent users of the financial statements
Ex. Items of significant amount such as paper clips can be charged outright to expenses
Materiality means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event. An item is considered significant if knowledge of it would influence prudent users of the financial statements
Ex. Items of significant amount such as paper clips can be charged outright to expenses
Consistency means that that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained.
Ex. If straight line method of depreciation is being used by the company, then the method should be uniformly used by the company in computing annual depreciation.
Consistency means that that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained.
Ex. If straight line method of depreciation is being used by the company, then the method should be uniformly used by the company in computing annual depreciation.
Business Entity FormsBusiness Entity Forms
ProprietorshipProprietorship PartnershipPartnership CorporationCorporation
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
*
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
Characteristics of BusinessesCharacteristics of Businesses
Exh.1.8
*
Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it
common stock (or capital stock).
CorporationCorporation
Learning objectiveLearning objective
Define and interpret the accounting equation and each of its components.
AssetsLiabilities & Equity
Accounting EquationAccounting Equation
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Accounting EquationAccounting Equation
Assets are resources with future benefits that are owned or controlled by a company.
Liabilities are what a company owes its creditors in future products or services.
Equity refers to the claims of its owner(s).
Forms of funds=Sources of funds (資金佔用=資金來源 )
What resources does the firm have? (Assets) = Where do those resources come from? (Liabilities and Equity)
A firm acquires assets by funds. Liabilities and equity are the sources of funds to acquire those assets.
LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
AssetsAssets
Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
LiabilitiesLiabilities
Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
EquityEquity
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Expanded Accounting EquationExpanded Accounting Equation
RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
Expanded Accounting EquationExpanded Accounting Equation
Revenues: gross increase in equity from a company’s earnings activities.
Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.
Owner investments: the assets an owner puts into the company.
Owner withdrawals: the assets take away from the company for personal use.
End of Chapter 1End of Chapter 1
Chapter 1 HomeworkChapter 1 Homework
Ex. 1-1,1-2,1-7 Problem 1-1A Due on June 12, 2006 (Monday)