Accounting Overview - Principles & Assumptions

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Durkin Group LLC / RBN

ACCOUNTING

OVERVIEW

Basic Terminology &Accounting Objectives


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ACCOUNTING OVERVIEW

Objectives of Financial Reporting Provide information that is useful in credit and

investment decision making.

Provide the users with a tool to assess the amounts,

timing and prospects of future cash flows of an entity. Provide relevant information regarding the entitys

resources, claims against these resources and

changes in them.


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ACCOUNTING OVERVIEW

Accounting Definition Identifying, gathering, organizing and summarizing of

financial information about an economic units

financial activities to interested parties.


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ACCOUNTING OVERVIEW

Financial Accounting The process that culminates in the preparation of

financial reports relative to an enterprise as a whole

for internal and external users.


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ACCOUNTING OVERVIEW

Managerial Accounting The process of identification, measurement,

accumulation, analysis, preparation, interpretation

and communication of financial information used by

management to plan, evaluate and control within an

organization and to assure appropriate use of and

accountability for the entities resources.


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ACCOUNTING OVERVIEW

Financial Management Efficient use of the sources and uses of funds

Dividend payout, debt restructuring, mergers, acquisitions,corporate reengineering

Focus on both internal and external conditions Global

economy Forecasting and planning

Coordination and control of the entities activities

Dealing with the financial markets, banks & other financinginstitutions

Risk management Maximize business value


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ACCOUNTING OVERVIEW

Objectives of an Accounting System Recordation

Journal entries

Subsidiary journals

Dual system of entry debits and credits

Summarization

Grouping of common activities

Timely and accurate reporting

Financial statements


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ACCOUNTING OVERVIEW

Objectives of an Accounting System Present fairly the financial condition of an entity

Summarizes economic activity and reports suchactivities via a report.

GAAP Generally Accepted Accounting Principles

Established by:

FASB, SEC, AICPA & GASB

International Accounting Practices, Industry,

Management Groups GAAS

Generally Accepted Auditing Standards


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ACCOUNTING OVERVIEW

Basic Accounting Terminology Event

Generally the source or cause of changes in assets,

liabilities, and equity accounts internal and external

Transaction External event between two or more entities

Account

Reflects the impact of certain activities on a specific account

each asset, liability, equity, revenue/sales and expense has

its own account


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ACCOUNTING OVERVIEW

Basic Accounting Terminology General Ledger

Subsidiary Ledger

General Journal

Trial Balance

Adjusted Trial Balance

Adjusting Entries

Closing Entries


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ACCOUNTING OVERVIEW

Sources of Accounting Information Source Documents

A/R invoicing, checks, vendor invoices, etc.

Subsidiary Journals

Sales

Cash Receipts, Cash Disbursements

Purchases

General Ledger

Trial Balance and Adjusted Trial Balance


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ACCOUNTING OVERVIEW

Trial Balance

GeneralLedger

SJ CR CM CD PUR JE

Source

Documents

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Financial Statement


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ACCOUNTING OVERVIEW

Debits and Credits

What do they mean? Are they increases or decreases?

It depends on what?

Assets and Expenses

Increase by debiting

Decrease by crediting Liabilities, Equity, Partners Capital & Revenue

Increase by crediting

Decrease by debiting

Dual accounting entries / compound entries

Debits = Credits


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ACCOUNTING OVERVIEW

Fundamental Accounting Equation

Assets = Liabilities + Owners Equity

Or

Assets = Liabilities + Partners Capital

Assets Liabilities Owners Equity= +

Assets Liabilities Partners Capital= +


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ACCOUNTING OVERVIEW

Types of Accounts Permanent or Real Accounts Balance Sheet

Balances carry over from one period to the next

Assets

Liabilities Equity or Capital Accounts

Temporary or Nominal Accounts Income Statement

Balances closed out periodically

Sales, Revenue and Income Accounts

Expenses or Costs


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ACCOUNTING OVERVIEW

Expanded Accounting Equation

Expenses

Assets Liabilities Owners Equity=+

RevenuesRetained

Earnings

Paid in

Capital

Surplus

Common

Stock


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ASSUMPTIONS AND PRINCIPLES

The Accountants Roadmap Rules of Engagement

Assumptions

Principles

Modifying Conventions Role of the accountant regarding financial statements

Role of management regarding financial statements


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Economic Entity Assumption The economic activity of an entity can be kept

separate and distinct from its owners and any other

business unit. The entity concept is not necessarily a

legal entity concept; a parent and its subsidiaries areseparate legal entities, but merging their activities for

accounting and reporting purposes is not a violation

of the economic entity assumption.


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Going Concern Assumption Most accounting methods are based on the premise

that the business enterprise will have a long life.

Acceptance of this assumption provides credibility to

the historical cost principle.


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Monetary Unit Assumption Implies which monetary unit is the most effective

means of expressing economic activity.


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Periodicity Assumption Implies that the economic activities of an enterprise

can be divided into artificial time periods, i.e.:

monthly, quarterly or annually. This allows for

comparative analysis.


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The Basic Assumptions

and Principles ofAccounting

Six Principles


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Revenue Recognition Principle Revenue is recognized at a point in the earnings

process when:

all, or a substantial portion, of the services to be provided

have been performed and cash, receivables or some other asset susceptible to

objective measurement is achieved.


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Historical Cost Principle Non-monetary assets are initially recorded at their

acquisition cost.

Non-monetary assets are stated at acquisition cost

until all or a portion of their service potential hasbeen consumed. At this time, all or a portion of the

acquisition cost becomes an expense.


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Matching Principle Expenses directly associated with particular

revenues are recognized as expenses in the period

which the revenues are recognized.


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Consistency Principle Accounting principles and procedures selected by

an entity should be used consistently over time.


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Full Disclosure Principle Information in the financial statements is presumed

to be sufficiently adequate so that a reader can

make an informed judgment or decision.


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Objectivity Principle Information is objective and verifiable, essentially

similar measures and conclusions would be

reached if two or more persons examined the same

data.


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Modifying Conventions Because there are certain exceptions in the practical

application of these six principles.

Materiality

Objectivity Industry Practices