finance foundations chapter 12 mrs. sorrell accounting terminology
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FINANCE FOUNDATIONSCHAPTER 12
MRS. SORRELL
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
• The Securities Exchange Commission has the authority to establish US GAAP.• They allow a series of private organizations to determine
these
• Currently, the FASB is the organization that has the authority to set accounting standards
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 in designing and installing data
processing/management information systems
AICPA OBJECTIVES
• 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,
objectivity, 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
• Going Concern Assumption• Expectations are that a business will remain in operation
• Monetary Unit Assumptions• 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 an asset
• Matching Principle• Revenues and 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
CLASSIFYING ACCOUNTS
•Assets•Liabilities•Capital•Revenue•Expenses
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