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Fundamental Accounting Principles
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Accounting in
Business
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Learning 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.


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Learning objective
C1: Explain the purpose and importance
of accounting in the information age.

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Identifies
Records
Communicates Relevant
Reliable
Comparable
Importance of Accounting
Accounting
is a
system that
information
that is
to help users make
better decisions.
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Identifying
Business
Activities
Recording
Business
Activities

Communicating
Business
Activities
Accounting Activities
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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.
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Learning objective
C2: Identify users and uses of
accounting.

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Users of Accounting Information
External Users
Lenders
Shareholders
Governments
Consumer Groups
External Auditors
Customers
Internal Users
Managers
Officers
Internal Auditors
Sales Staff
Budget Officers
Controllers
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Users of Accounting Information
External Users
Financial accounting provides
external users with financial
statements.
Internal Users
Managerial accounting provides
information needs for internal
decision makers.
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Users 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.
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Users 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.
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Learning objective
C3: Identify opportunities in accounting
and related fields.
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Opportunities in Accounting
Financial
Preparation
Analysis
Auditing
Regulatory
Consulting
Planning
Criminal
investigation
Managerial
General accounting
Cost accounting
Budgeting
Internal auditing
Consulting
Controller
Treasurer
Strategy
Taxation
Preparation
Planning
Regulatory
Investigations
Consulting
Enforcement
Legal services
Estate planning
Accounting-
related
Lenders
Consultants
Analysts
Traders
Directors
Underwriters
Planners
Appraisers
FBI investigators
Market researchers
Systems designers
Merger services
Business valuation
Human services
Litigation support
Entrepreneurs
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Learning objective
C4: Explain why ethics are crucial to
accounting.
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Beliefs that
distinguish
right from
wrong
Accepted
standards of
good and bad
behavior
Ethics
EthicsA Key Concept
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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 Making
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Learning objective
C5: Explain the meaning of GAAP, and
define and apply several key principles
of accounting.
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Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
Generally Accepted Accounting
Principles
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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The Securities and Exchange Commission
[USA] is the government group that
establishes reporting requirements for
companies that issue stock to the public.
Setting Accounting Principles
Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
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Setting Accounting Principles
Hong Kong:
Hong Kong Institute of Certified Public
Accountants (HKICPA)
China
Ministry of Finance Peoples Republic of China
International Accounting Standard Board
(IASB)
International Financial Reporting Standards
(IFRS)
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Principles 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.
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Principles of Accounting General
Principles
Objectivity Principle
Accounting information is supported by independent,
unbiased evidence. It is intended to make financial
statements useful by ensuring they report reliable and
verifible information.
Source documents.
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Principles of Accounting
Cost Principle
Accounting information is based on actual cost.
Cost is measured on a cash or equal-to cash basis
Information based on cost is
considered objective.
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Principles of Accounting
Now
Future
Going-Concern Principle
Reflects assumption that the business will continue
operating instead of being closed or sold.
The assets are reported at cost but not reported
at liquidation value that assume closure.
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Principles of Accounting
Monetary Unit Principle
Express transactions and events in monetary, or
money, units.
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Principles of Accounting
Revenue Recognition Principle
Provides guidance on when a company must recognize
revenue.
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash (Credit sales).
3. Measure revenue by cash received plus cash
value of items received.
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Principles of Accounting
Business Entity Principle
A business is accounted for separately from
other business entities, including its owner.
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Business Entity Forms
Proprietorship
Partnership Corporation
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Characteristics 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.
Characteristics of Businesses
Exh.
1.8
*
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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).
Corporation
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Learning objective
Define and interpret the accounting
equation and each of its components.
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Assets
Liabilities
& Equity
Accounting Equation
Liabilities Equity Assets
= +
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Accounting 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 ()
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.
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Land
Equipment
Buildings
Cash
Vehicles
Store
Supplies
Notes
Receivable
Accounts
Receivable
Resources
owned or
controlled
by a
company
Assets
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Taxes
Payable
Wages
Payable
Notes
Payable
Accounts
Payable
Creditors
claims on
assets
Liabilities
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Owners
claims
on
assets
Revenues
Owner
Investments
Owner
Withdrawals
Expenses
Equity
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Liabilities Equity Assets
= +
Expanded Accounting Equation
Revenues Expenses
Owner
Capital
Owner
Withdrawals
_
+
_
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Expanded Accounting Equation
Revenues: gross increase in equity from a
companys earnings activities.
Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owners
equity.
Owner investments: the assets an owner puts
into the company.
Owner withdrawals: the assets take away from
the company for personal use.
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End of Chapter 1
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Chapter 1 Homework
Ex. 1-1,1-2,1-7
Problem 1-1A
Due on June 12, 2006 (Monday)