Chapter 1

ACCOUNTING IN BUSINESS

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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IMPORTANCE OF ACCOUNTING
Accounting
Identifying Select transactions and events Recording Input, measure and classify

Communicating Prepare, analyze and interpret

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USERS OF ACCOUNTING INFORMATION

External Users Internal Users

Lenders Consumer Groups Shareholders External Auditors Governments Customers

Managers Sales Staff Officers/Directors Budget Officers Internal Auditors Controllers

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USERS OF ACCOUNTING INFORMATION

External Users Internal Users

Financial accounting provides external users with financial statements.

Managerial accounting provides information needs for internal decision-makers.

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OPPORTUNITIES IN ACCOUNTING

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ACCOUNTING JOBS BY AREA

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ETHICS - A KEY CONCEPT

Ethics
Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

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ETHICS - A KEY CONCEPT

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable Information

Is helpful in contrasting organizations.

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SETTING ACCOUNTING PRINCIPLES

Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock to the public.

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices to create harmony among accounting practices of different countries.

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INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), an independent group (consisting of 16 individuals from many countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices.

IASB

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INTERNATIONAL STANDARDS

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PRINCIPLES AND ASSUMPTIONS OF ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received.

Cost Principle
Accounting information is based on actual cost. Actual cost is considered objective.

Matching Principle
A company must record its expenses incurred to generate the revenue reported.

Full Disclosure Principle

A company is required to report the details behind financial statements that would impact users decisions.

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ACCOUNTING ASSUMPTIONS

Now

Future

Going-Concern Assumption
Reflects assumption that the business will continue operating instead of being closed or sold.

Monetary Unit Assumption

Express transactions and events in monetary, or money, units.

Business Entity Assumption

A business is accounted for separately from other business entities, including its owner.

Time Period Assumption

Presumes that the life of a company can be divided into time periods, such as months and years.

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FORMS OF BUSINESS ENTITIES

Sole Proprietorship

Partnership

Corporation

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CHARACTERISTICS OF BUSINESSES
Characteristic Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

* Proprietorships and partnerships that are set up as LLCs provide limited liability.

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END OF CHAPTER 1