Unit 5Adrianna Kerns

Finance Foundations

Accounting Terminology

  • What is accounting?
  • Official language for business that provides information about a company’s financial position
  • Planning, recording, interpreting, and analyzing of financial information
  • Communicate the financial operations of all types of organizations
  • Three main categories of accounting?
  • Operating Information

Constitutes the greatest amount of accounting information

Payments – salaries, sales tracked, track payments, inventory accounted for, customer accounts

  • Financial Accounting Information

Used to make decisions involving the organization and the operations

Shareholders need information about what their investment is worth (buy or sell shares)

  • Managerial Accounting Information

Allows managers to plan, implement and control

Used to set budgets, analyze costs

  • Accounting Equation
  • Assets= Liabilities+Owner’s Equity
  • Assets= Own
  • Liabilities= Owe
  • Equity= the difference between the former two
  • United States Generally Accepted Accounting Principles (GAAP)
  • The Securities Exchange Commission has the authority to establish us GAAP

They allow a series of private organizations to determine these

  • The FASB is the organization that has the authority to set accounting standards
  • Financial Accounting Standards Board (FASB)
  • Certified Public Accountants (CPA)
  • Act as advisors to individual, businesses, financial institutions, nonprofit organizations, and government agencies on a wide range of financial matters
  • Assist in preparing income taxes
  • Planning for personal finances such as retirement
  • Business owners rely on them for auditing services and advice on developing effective accounting systems, maximizing operating results, and resolving management issues
  • Assist designing and installing data processing/management information systems
  • AICPA Objectives (American Institute of Certified Public Accountants)
  • Advocacy

National representative of CPAs before government, regulatory bodies, and other organizations in protecting and promoting members interests

  • Certification and licensing

Seeks the highest level of uniform certification and licensing standards

  • Communications

Promotes public awareness and confidence in the integrity, objectively, competence, and professionalism of CPAs

  • Recruiting and Education

Encourages highly qualified individuals to become CPAs

  • Standards and performance

Establishes professional standards; assists members in improving; and monitors performance

  • Basic Assumptions for US GAAP
  • Entity Assumptions

Business is a separate entity from its owners (entity= 1)

  • Going Concern Assumption

Expectations are that a business will remain in operation

  • Monetary Unit Assumption

Accounting records show only the monetary security of the company

  • Time Period Assumption

Defines a specific period for which an entity’s reports are prepared

  • Principles for US GAAP
  • Cost Principle

Market value is difficult to determine, always record the purchase price of asset

  • Matching Principle

Revenues an related expenses be recorded in the same accounting period

  • Revenue Recognition Principle

Revenues are recognized when earned

  • Disclosure Principle

Companies must include information that may impact decision of users of financial information

  • Constraints of US GAAP
  • Materiality

only record events that are significant enough to justify the usefulness of the information

  • Cost-Benefit Relationship

Financial information provided by an organization is beneficial enough to justify the cost of preparing it

  • Consistency Principle

Once an entity adopts a method of accounting, they must use that same method for all subsequent events

  • Conservatism Principle

Select accounting methods that are least likely to overstate assets(revenues) an understate liabilities (expenses) in the current period

  • Most common and important asset is cash
  • Most common liability is accounts payable (amounts that we owe others)
  • Transaction: every event that causes a change in financial situation in a business
  • T Account: scratch paper for an accountant

Debit cRedit

Left side of T account Right side of T account

  • Normal Balance: every account has a normal balance
  • Source Document: document that is evidence of a transaction
  • Checks
  • Invoices
  • Double Entry Accounting: for every business transaction there will be at least two accounts affected (debit and credit)
  • Chart of accounts: listing of accounts representing the different parts of the accounting equation and accounts representing different forms of revenue and expense
  • Balance sheet accounts: accounts representing different parts of the accounting equation (assets, liability, owner’s equity)
  • Income statement accounts: accounts representing different revenues and expenses
  • Ledger: group of accounts
  • General ledger: contains all accounts needed to prepare a financial statement
  • Five general ledger divisions:
  • Assets
  • Liabilities
  • Owner’s equity
  • Revenue
  • Expenses
  • File maintenance: procedure for arranging accounts, assigning account numbers, and keeping records current
  • Account numbers are assigned based on accounts location in the general ledger
  • Assets in liquid order
  • Liquidity: is the ease with which an asset can be converted to cash