An Overview of Entire Accounting 1

8/9/2019 An Overview of Entire Accounting 1

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11--11Copyright Houghton Mifflin Company. All rights reserved.

Financial and ManagementFinancial and Management

AccountingAccounting Accountings role of assistingAccountings role of assisting

decision makers by measuring,decision makers by measuring,

processing, and communicatingprocessing, and communicatinginformation is usually divided intoinformation is usually divided intotwo categories:two categories:1.1. Management accounting.Management accounting.

2.2. Financial accounting.Financial accounting.

The two may be distinguished by theThe two may be distinguished by theprincipal users of their information.principal users of their information.


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Is oriented toward the needs ofIs oriented toward the needs of

internal decision makers.internal decision makers.

Provides managers and employeesProvides managers and employeeswith information regarding howwith information regarding how

they have done in the past andthey have done in the past and

what they can expect in the future.what they can expect in the future.

Management AccountingManagement Accounting


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Is oriented toward the needs ofIs oriented toward the needs of

external decision makers.external decision makers.

Provides information in the form ofProvides information in the form offinancial statements so that externalfinancial statements so that external

decision makers can evaluate howdecision makers can evaluate how

well the business has achieved itswell the business has achieved itsgoals.goals.

Financial AccountingFinancial Accounting


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Financial statements report directlyFinancial statements report directly

on the goals of profitability andon the goals of profitability and

liquidity.liquidity.

yy Financial statements are usedFinancial statements are used

extensively both inside and outside aextensively both inside and outside a

business to evaluate the businesssbusiness to evaluate the businesss

success.success.

Financial AccountingFinancial Accounting


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Processing AccountingProcessing Accounting

InformationInformation

yy BookkeepingBookkeepingis the mechanical andis the mechanical and

repetitive process of recordingrepetitive process of recording

financial transactions and keepingfinancial transactions and keeping

financial records.financial records.

yy Bookkeeping is a small part ofBookkeeping is a small part of

accounting.accounting.

Accounting versus bookkeeping.Accounting versus bookkeeping.


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yy Accounting includes the design of anAccounting includes the design of an

information system that meets usersinformation system that meets usersneeds.needs.

yy Accounting goals are the analysis,Accounting goals are the analysis,

interpretation, and use of information.interpretation, and use of information.yy Computers are used extensively inComputers are used extensively in

accounting as a tool for theaccounting as a tool for the

accountant.accountant.

Accounting versus bookkeeping.Accounting versus bookkeeping.


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A businesss many informationA businesss many information

needs are organized into aneeds are organized into a

Management Information SystemManagement Information System

(MIS).(MIS).

yy An MIS consists of variousAn MIS consists of various

interconnected subsystems.interconnected subsystems.

yy The Accounting Information SystemThe Accounting Information System

(AIS) is the most important subsystem.(AIS) is the most important subsystem.




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Q.Q. What is the difference betweenWhat is the difference between

profitabilityprofitabilityandand liquidityliquidity??

A.A. Profitability means earning enoughProfitability means earning enoughincome to attract and holdincome to attract and hold

investment capital.investment capital.Liquidity means being able to payLiquidity means being able to paydebts when they fall due.debts when they fall due.

DiscussionDiscussion


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The Users of Accounting InformationThe Users of Accounting Information

THOSE WITH INDIRECTFINANCIAL INTEREST

Tax Authorities

Regulators

Labor Unions

Customers

Economic Planners

Investors

Creditors

THOSE WITH DIRECTFINANCIAL INTEREST

Finance

Operations and

Production

Marketing

Human Resources

Information Systems

Accounting

MANAGEMENT

DECISION MAKERS


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The people who use accountingThe people who use accountinginformation to make decisions fall intoinformation to make decisions fall intothree categories.three categories.1.1. Management.Management.

2.2. Outside users with a direct financialOutside users with a direct financialinterest.interest.

3.3. People, organizations, and agenciesPeople, organizations, and agencieswith an indirect financial interest.with an indirect financial interest.

These categories apply both to profitThese categories apply both to profit--oriented ventures as well as tooriented ventures as well as togovernment and notgovernment and not--forfor--profitprofit

organizations.organizations.

Decision MakersDecision Makers


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Requires financial information to carryRequires financial information to carryout its basic functions.out its basic functions.

1.1. Financing the business.Financing the business.

2.2. Investing the resources of theInvesting the resources of thebusiness.business.

3.3. Producing goods and services.Producing goods and services.

4.4. Marketing goods and services.Marketing goods and services.5.5. Managing employees.Managing employees.

6.6. Providing information to decisionProviding information to decision

makers.makers.

ManagementManagement


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Investors.Investors.Creditors.Creditors.

Outside Users withOutside Users with

a Direct Financial Interesta Direct Financial Interest


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Tax Authorities.Tax Authorities.

Regulatory Agencies.Regulatory Agencies.

Labor Unions.Labor Unions.

Customers.Customers.

Economic Planners.Economic Planners.

People, Organizations, andPeople, Organizations, and

Agencies with an IndirectAgencies with an IndirectFinancial InterestFinancial Interest


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QQ.. Which decision makers useWhich decision makers use

accounting information?accounting information?



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A.A. Three groups of decision makersThree groups of decision makers

use accounting information.use accounting information.

1.1. Those who manage a business.Those who manage a business.

2.2. Those outside a businessThose outside a business

enterprise who have a directenterprise who have a direct

financial interest in the business.financial interest in the business.

3.3. Those people, organizations, andThose people, organizations, and

agencies that have an indirectagencies that have an indirect

financial interest in the business.financial interest in the business.


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Accounting MeasurementAccounting Measurement

OBJECTIVE 3OBJECTIVE 3

Explain the importance ofExplain the importance of

business transactions, moneybusiness transactions, money

measure, and separate entitymeasure, and separate entity

to accounting measurement.to accounting measurement.


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The AccountantsThe Accountants

FourBasic QuestionsFourBasic Questions1.1. What is measured?What is measured?

2.2. When should the measurementWhen should the measurement

be made?be made?

3.3. What value should be placed onWhat value should be placed on

what is measured?what is measured?

4.4. How should what is measuredHow should what is measured

be classified?be classified?


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Business transactions as the objectBusiness transactions as the objectof measurement.of measurement.

Business transactionsBusiness transactions are economicare economic

events that affect the financialevents that affect the financialposition of a business entity.position of a business entity.

yy Transactions are the raw material ofTransactions are the raw material of

accounting reports.accounting reports.yy Transactions must relate directly to aTransactions must relate directly to a

business entity.business entity.

What Is Measured?What Is Measured?


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Money Measure.Money Measure.

yy Money is the only factor common to allMoney is the only factor common to all

business transactions.business transactions.yy The monetary unit a business usesThe monetary unit a business uses

depends on the country in which thedepends on the country in which the

business resides.business resides.

yy Exchange rates translate one currencyExchange rates translate one currency

to another.to another.

How Is It Measured?How Is It Measured?


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A business is a separate entity,A business is a separate entity,

distinct from its creditors anddistinct from its creditors and

customers and from its owner orcustomers and from its owner orowners.owners.

Separate EntitySeparate Entity


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Q.Q. Tell whether each of the followingTell whether each of the followingwords or phrases relates mostwords or phrases relates most

closely to a: (a) businessclosely to a: (a) businesstransaction, (b) separate entity, ortransaction, (b) separate entity, or(c) money measure.(c) money measure.

1. Partnership.1. Partnership.

2. U.S. dollar.2. U.S. dollar.3. Payment of an expense.3. Payment of an expense.4. Corporation.4. Corporation.

5. Sale of an asset.5. Sale of an asset.



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1.1. Partnership: (b)Partnership: (b)2.2. U.S. dollar: (c)U.S. dollar: (c)

3.3. Payment of anPayment of an

expense: (a)expense: (a)4.4. Corporation: (b)Corporation: (b)

5.5. Sale of an asset: (a)Sale of an asset: (a)

KEY

(a) business

transaction

(b) separate

entity(c) money

measure

A.A.


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Types ofBusinessTypes ofBusiness

OrganizationOrganization

Sole Proprietorship.Sole Proprietorship.

Partnership.Partnership.

CorporationCorporation..


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Sole ProprietorshipSole Proprietorship

A business owned by one person.A business owned by one person.

yy Not a separate legal entity.Not a separate legal entity.

yy

Owners personal resources at stake.Owners personal resources at stake.yy Life is limited by choice or death ofLife is limited by choice or death of

owner.owner.

yy Sale by owner establishes newSale by owner establishes new

company.company.

yy Separate accounting entity.Separate accounting entity.


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PartnershipPartnership A business owned by more than oneA business owned by more than one

person.person.

yy Not a separate legal entity.Not a separate legal entity.

yy Partners personal resources at stake.Partners personal resources at stake.

yy Life is limited by choice or death of anyLife is limited by choice or death of any

partner.partner.

yy Changes in any partners % interestChanges in any partners % interestrequires new partnership.requires new partnership.

yy Separate accounting entity.Separate accounting entity.


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CorporationCorporation

A separate legal entity.A separate legal entity.

Liability limited to amount ofLiability limited to amount of

investment.investment.

Life of organization is indefinite.Life of organization is indefinite.

Ownership transferable.Ownership transferable.

Separate accounting entity.Separate accounting entity.


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QQ.. How do sole proprietorships,How do sole proprietorships,partnerships, and corporations differ?partnerships, and corporations differ?

A.A. A sole proprietorship is a businessA sole proprietorship is a businessowned by one individual.owned by one individual.

A partnership is similar in most respectsA partnership is similar in most respects

to a proprietorship except that more thanto a proprietorship except that more thanone owner is involved.one owner is involved.

A corporation is an economic unit that isA corporation is an economic unit that islegally separate from its owners.legally separate from its owners.



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Financial PositionFinancial Position

Economic Resources = Equities.Economic Resources = Equities.

Economic Resources =Economic Resources =

Creditors Equities + Owners Equity.Creditors Equities + Owners Equity.

Assets = Liabilities + Owners Equity.Assets = Liabilities + Owners Equity.

Accounting Equation.Accounting Equation.

Assets.Assets. Liabilities.Liabilities.

Owners Equity.Owners Equity.


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Assets are economic resourcesAssets are economic resources

owned by a business that areowned by a business that are

expected to benefit future operations.expected to benefit future operations.yy Monetary items.Monetary items.

yy Nonmonetary physical things.Nonmonetary physical things.

AssetsAssets


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LiabilitiesLiabilities Liabilities are the presentLiabilities are the present

obligations of a business to payobligations of a business to pay

cash, transfer assets, or providecash, transfer assets, or provide

services to other entities in theservices to other entities in the

future.future.


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Owners equity represents the claimsOwners equity represents the claims

by the owners of a business to theby the owners of a business to the

assets of the business.assets of the business.

Owners equity is the residual equityOwners equity is the residual equity

that remains after deducting liabilitiesthat remains after deducting liabilities

from assets.from assets.

Owners Equity = AssetsOwners Equity = Assets -- Liabilities.Liabilities.

Assets = Liabilities + Owners Equity.Assets = Liabilities + Owners Equity.

Owners EquityOwners Equity


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Four Types of Transactions ThatFour Types of Transactions ThatAffect Owners EquityAffect Owners Equity

INCREASES DECREASES

OwnersInvestments Owners

Equity

OwnersWithdrawals

Expenses

Revenues


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Some IllustrativeSome Illustrative

TransactionsTransactions


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T1. Owners InvestmentsT1. Owners Investments

ASSETS OE

Cash Capital

Assets = $50,000; L+OE = $50,000

Beg. Bal.T1.

End. Bal.

$ 050,000

$50,000

$ 050,000

$50,000


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T3. Purchase of Assets byT3. Purchase of Assets by

Incurring a LiabilityIncurring a Liability

Assets = $50,500; L+OE= $50,500

ASSETS LIABILITIES

Supplies A/PBeg. Bal. $ 0 $ 0

T3. +500 +500

End. Bal. $500 $500


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T4. Payment of a LiabilityT4. Payment of a Liability

with Cashwith Cash

Assets = $50,300; L+OE = $50,300

ASSETS LIABILITIES

Cash A/P$15,000

- 200

$14,800

Beg. Bal.

T4.

End. Bal.

$500

-200

$300


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T5. Revenues EarnedT5. Revenues Earned

Commission That WasCommission That WasPaid in CashPaid in Cash

Assets = $51,800; L+OE = $51,800

ASSETS OE

Cash RevenueBeg. Bal. $14,800 $ 0

T5. + 1,500 +1,500

End. Bal. $16,300 $1,500


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T6. Revenues EarnedT6. Revenues Earned

Commission withCommission withDeferred ReceiptDeferred Receipt

Assets = $53,800; L+OE = $53,800

ASSETS OE

A/R Revenue

Beg. Bal. $ 0 $1,500

T6. +2,000 +2,000

End. Bal. $2,000 $3,500


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T8. Paid Equipment Rental ExpenseT8. Paid Equipment Rental Expense

T9. Paid Wages Expense with CashT9. Paid Wages Expense with Cash

Assets = $52,400; L+OE = $52,400

ASSETS OE

Cash ExpenseBeg. Bal. $ 17,300 $3,500

T8. - 1,000 -1,000

T9. - 400 - 400

End. Bal. $15,900 $2,100


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T10. Paid Utility ExpenseT10. Paid Utility Expense

Incurring a Current LiabilityIncurring a Current Liability

Assets = $52,400; L+OE = $52,400

OE

A/P

ExpenseBeg. Bal. $300 $2,100

T10. +300 - 300

End. Bal. $600 $1,800


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T11. Owner Withdrew CashT11. Owner Withdrew Cash

for Personal Usefor Personal Use

Assets = $51,800; L+OE = $51,800

ASSETS OE

Cash WithdrawalsBeg. Bal. $15,900 $1,800

T11. - 600 - 600

End. Bal. $15,300 $1,200


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Q.Q. Define financial position.Define financial position.A.A. Financial position refers to theFinancial position refers to the

economic resources that belongeconomic resources that belong

to a company and the claimsto a company and the claimsagainst those resources at aagainst those resources at a

point in time.point in time.



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Communication ThroughCommunication ThroughFinancial StatementsFinancial Statements

OBJECTIVE 6OBJECTIVE 6Identify the fourIdentify the four

financial statements.financial statements.


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The Importance ofThe Importance of

Financial StatementsFinancial Statements

The Importance ofThe Importance of

Financial StatementsFinancial Statements Financial statements are the primaryFinancial statements are the primary

means of communicating importantmeans of communicating important

accounting information to users.accounting information to users. Financial statements representFinancial statements represent

models of the business enterprisemodels of the business enterprisebecause they show the business inbecause they show the business infinancial terms.financial terms.

Financial statements are not perfectFinancial statements are not perfectpictures of the real thing.pictures of the real thing.


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The Income StatementThe Income StatementThe Income StatementThe Income Statement

Summarizes revenues earnedSummarizes revenues earnedexpenses incurredexpenses incurred overa period ofovera period oftime.time.

Is considered by many to be theIs considered by many to be themost important financial reportmost important financial reportbecause it shows whether abecause it shows whether a

business achieved its profitabilitybusiness achieved its profitabilitygoal of earning an acceptablegoal of earning an acceptableincome.income.


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[Entity][Entity] Shannon RealtyShannon Realty[Title][Title] Income StatementIncome Statement

[Period][Period] For the Month EndedFor the Month EndedDecember 31, 20xxDecember 31, 20xx

Trace to Statement ofOwners Equity

RevenuesCommissions Earned $3,500

ExpensesEquipment Rental $1,000Wages 400Utilities 300Total Expenses $1,700

Net Income $1,800


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The Statement ofThe Statement of


The Statement ofThe Statement of


Shows the changes in ownersShows the changes in owners

equity over a period of time.equity over a period of time.


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Shannon RealtyShannon RealtyStatement of Owners EquityStatement of Owners Equity

For the Month EndedFor the Month EndedDecember 31, 20xxDecember 31, 20xx

Owners Capital, 12/1/xx $ 0Net Income for the Month 1,800Subtotal $ 1,800Less Withdrawals 600Owners Capital, 12/31/xx $ 1,200

Trace to Owners EquitySection ofBalance Sheet


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The Balance SheetThe Balance SheetThe Balance SheetThe Balance Sheet

Shows financial positionShows financial position ata pointata pointin time.in time.

Is often called the statement ofIs often called the statement offinancial position.financial position.

Presents a view of the business asPresents a view of the business asthe holder of resources, or assets,the holder of resources, or assets,

that are equal to the claims againstthat are equal to the claims againstthose assets.those assets.


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Shannon RealtyShannon RealtyBalance SheetBalance Sheet

As of December 31, 20xxAs of December 31, 20xx

ASSETSASSETS

CashCash $15,300$15,300

A/RA/R 1,0001,000

SuppliesSupplies 500500

LandLand 10,00010,000

BuildingBuilding 25,00025,000

Total AssetsTotal Assets $51,800$51,800


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Shannon RealtyShannon RealtyBalance SheetBalance Sheet

As of December 31, 19xxAs of December 31, 19xx

LIABILITIESLIABILITIES

A/PA/P $ 600$ 600

OWNERSEQUITYOWNERSEQUITY

John Shannon, CapitalJohn Shannon, Capital 51,20051,200

Total Liabilities and OE $51,800Total Liabilities and OE $51,800


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The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

Focuses on a companys liquidity goal.Focuses on a companys liquidity goal. Shows cash produced by operating aShows cash produced by operating a

business as well as importantbusiness as well as important

financing and investing transactionsfinancing and investing transactionsthat take place during an accountingthat take place during an accountingperiod.period.

Is derived from the income statementIs derived from the income statementand balance sheet.and balance sheet.

Is directly related to the other threeIs directly related to the other threestatements.statements.


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Shannon RealtyShannon RealtyStatement of Cash FlowsStatement of Cash Flows


Cash Flows from Operating Activities

Net Income $1,800Noncash Expenses and Revenues

Included in IncomeIncrease in A/R ($1,000)

Increase in Supplies (500)Increase in A/P 600 (900)

Net Cash Flows fromOperating Activities $900


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Purchase of Land ($10,000)

Purchase ofBuilding (25,000)

Net Cash Flows fromInvesting Activities (35,000)

Cash Flows from Investing Activities


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Investments by Owner $50,000

Withdrawals (600)

Net Cash Flows fromFinancing Activities 49,400

Net Increase (Decrease) in Cash $15,300

Cash at Beginning of Month 0

Cash at End of Month $15,300

Cash Flows from Financing Activities


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Q.Q. Why is the balance sheet sometimesWhy is the balance sheet sometimescalled the statement of financialcalled the statement of financial

position?position?A.A. Financial position consists of theFinancial position consists of the

economic resources that belong to aeconomic resources that belong to a

business and the claims againstbusiness and the claims againstthose resources as of a certain date.those resources as of a certain date.This is the information shown on theThis is the information shown on thebalance sheet.balance sheet.



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Generally AcceptedGenerally Accepted

Accounting PrinciplesAccounting PrinciplesOBJECTIVE 7OBJECTIVE 7

State the relationship ofState the relationship ofgenerally accepted accountinggenerally accepted accounting

principles (GAAP) to financialprinciples (GAAP) to financial

statements and the independentstatements and the independentCPAs report, and identify theCPAs report, and identify the

organizations that influenceorganizations that influence

GAAP.GAAP.


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Focus on understandability ofFocus on understandability of

financial statements.financial statements.

Encompass the conventions, rules,Encompass the conventions, rules,

and procedures necessary to defineand procedures necessary to define

accepted accounting practice at aaccepted accounting practice at a

particular time.particular time.

Generally AcceptedGenerally Accepted

Accounting PrinciplesAccounting Principles(GAAP)(GAAP)


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Financial statements are theFinancial statements are the

representations by management andrepresentations by management and

may be biased.may be biased. Financial statements are audited byFinancial statements are audited by

independent CPAs.independent CPAs.

An audit ascertains that the financialAn audit ascertains that the financialstatements have been prepared instatements have been prepared in

accordance with GAAP.accordance with GAAP.

Financial Statements, GAAP, andFinancial Statements, GAAP, and

the Independent CPAs Reportthe Independent CPAs Report


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FASB.FASB.

AICPA.AICPA.

GASB.GASB.

IASC.IASC.

IRS.IRS.

Organizations that InfluenceOrganizations that Influence

Current PracticeCurrent Practice


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Q.Q. What are GAAP?What are GAAP?

A.A. GAAP are generally acceptedGAAP are generally acceptedaccounting principles; they areaccounting principles; they are

the conventions, rules, andthe conventions, rules, and

procedures necessary to defineprocedures necessary to defineaccepted accounting practice at aaccepted accounting practice at a

particular time.particular time.



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Q.Q. Why are GAAP important toWhy are GAAP important to

readers of financial statements?readers of financial statements?

A.A. GAAP ensure that the financialGAAP ensure that the financial

statements will be understandablestatements will be understandableto their users.to their users.



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Professional Ethics and theProfessional Ethics and theAccounting ProfessionAccounting Profession

OBJECTIVE 8OBJECTIVE 8DefineDefine ethicsethics and describeand describe

the ethical responsibilities ofthe ethical responsibilities of

accountants.accountants.


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What Are Professional Ethics?What Are Professional Ethics?

A code of conduct that applies to theA code of conduct that applies to thepractice of a profession.practice of a profession.

Code of conduct adopted by theCode of conduct adopted by the

AICPA and each state.AICPA and each state.yy Responsibility to the public.Responsibility to the public.

yy Integrity.Integrity.

yyObjectivity.Objectivity.

yy Independence.Independence.

yy Due care.Due care.


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The Institute of ManagementThe Institute of Management

Accountants (IMA) Code ofAccountants (IMA) Code ofProfessional ConductProfessional Conduct

Competency.Competency.

Confidentiality.Confidentiality.

Integrity.Integrity.

Avoidance of conflicts of interest.Avoidance of conflicts of interest.

Communication of informationCommunication of information

objectively and without bias.objectively and without bias.


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QQ.. Discuss the importance of professionalDiscuss the importance of professional

ethics in the accounting profession.ethics in the accounting profession.

A.A. Professional ethics forms a code ofProfessional ethics forms a code of

conduct that applies to the practice of aconduct that applies to the practice of a

profession. As members of a profession,profession. As members of a profession,

accountants have a responsibility, notaccountants have a responsibility, notonly to their employers and clients butonly to their employers and clients but

also to society as a whole, to uphold thealso to society as a whole, to uphold the

highest ethical standards.highest ethical standards.



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1. Define accounting, identify business goals and

activities, and describe the role of accounting in

making informed decisions.

2. Identify the many users of accounting

information in society.

3. Explain the importance of businesstransactions, money measure, and separate

entity to accounting measurement.

OK, LETSREVIEW . . .


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4. Identify the three basic forms of business

organizations.

5. Define financial position, state the accounting

equation, and show how they are affected by

simple transactions.

6. Identify the four financial statements.

CONTINUING OURREVIEW . . .


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Documents

An Overview of Entire Accounting 1