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