HFT 2401

Chapter 1

Introduction to Accounting

AccountingA Means to an End

Provides answers to questions How much cash do we have What was our payroll cost When did we buy a piece of equipment & at what

cost What is our food cost What is our revenue What are our expenses What did we keep (net income)

American Accounting Association defines accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of that information”

The Accounting Process

1) Observe events in order to identify the events that are of a financial nature – monetary terms

2) Requires the recording, classifying, and summarizing these events.

3) Produces various financial statements for internal & external users.

4) Communication

Bookkeeping vs. Accounting

Bookkeeping – records & classifies transactions

Accounting – summarizes and interprets

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Branches of Accounting

Financial Accounting – Revenues, expenses, assets & liabilities

Cost Accounting – Record, classify, allocate & report current & prospective costs. Used mainly in manufacturing

Managerial Accounting – Analyzes & provides information to management to enhance controls

Branches of Accounting

Tax Accounting – Prepare & file tax returns

Auditing – Reviews and evaluates documents, records and control systems

Accounting Systems – Information systems

Organizations that Influence Accounting

AICPA

FASB

SEC

IRS

HFTP

Forms of Business Organizations

Sole Proprietorship

Partnerships

Limited Partnerships

Limited Liability Companies (LLC)

Corporations

Sole Proprietorship

Easiest to organize / dissolve

Legally not a separate business – liability issues

It is separate for accounting purposes, however

Owner not paid a salary or wage - withdrawals

Partnerships

Two or more people joined together in a non-corporate manner for conducting business. Can use a written or oral agreement

Partnerships

Advantages Greater financial

strength Does not pay taxes Shares liability Greater

management strength

Disadvantages Partners are taxed on

profits regardless of cash distribution

Limits decision making process

Unlimited legal liability

Limited Partnerships

Offers liability protection to limited partners General Partner(s) – responsible for debts of the

partnership Limited Partner(s) – may not actively participate

in the day to day operations of the business Agreement must be written Limited partners liability is limited to the amount of

their investment

Corporations

A legal entity created by a state or other political authority

Characteristics An exclusive name Continued existence independent of

stockholders Paid in capital represented by shares of stock Overall control vested in its directors

Corporations

Advantages Shareholders liability limited

to amount of investment Owners are taxed on

distributed profits (dividends) Employee equity participation

(ESOP) Lower tax rates Corporation continues on in

perpetuity

Disadvantages Double taxation Ownership control

Other Forms Of Business Organization

S-Corp Eliminates

double taxation Limited to 75

shareholders Only one class

of stock Shareholders

pay taxes

Limited Liability Company (LLC) May have unlimited

number of owners May have a single

owner Not restricted to one

class of stock

Principles of Accounting

Cost Business Entity Continuity of the Business Unit Unit of Measurement Objective Evidence Full Disclosure Consistency Matching Conservatism Materiality

States that when a transaction is recorded, the transaction price (cost) establishes the accounting value.

Cost Principle

Statements are based on the concept that each business maintains its own accounts, & that these accounts are separate from other interests of the owners.

Business Entity

The assumption that the business will continue indefinitely

Continuity of the Business Unit

Unit of Measurement

All transactions are expressed in monetary terms

Accounting records are based on objective evidence ( invoices, checks, cash register receipts)

Objective Evidence

Financial statements must provide all information pertinent to interpretation of the financial statements.

Full Disclosure

The same accounting method from time period to time period.

Consistency

Match revenues with expensesCash versus accrual.

Matching

Recognize expenses as soon as possible, but delay recognition of revenues until they are sure.

Also, Value Inventory, Investments, PPE at the lower of Original Cost or Current Market Value.

Conservatism

Events or information must be accounted for if they make a difference to the readers of the financial statements.

Materiality

Overview of Financial Statements

Balance Sheet

Income Statement

Statement of Cash Flows

Fundamentals of Accounting

Balance Sheet Assets (Things Owned)

= Liabilities ( Obligations )+ Equity ( Residual Claims on Assets )

Fundamentals of Accounting

Income StatementRevenues

- Expenses= Net Income (Loss)

Temporary Accounts are Netted and Closed to Equity (retained earnings)

Fundamental Equation

Assets = Liabilities + Owners Equity

Assets = Liabilities + Permanent OE + Temporary OE

Assets = Liabilities + Permanent OE

+ Revenue - Expenses

Cash vs Accrual

Cash Basis Accounting Recognize revenue or expense when cash

received or disbursed

Accrual Basis Accounting Recognize revenue when earned Recognize expense when incurred

Assets

Resources owned by a business Common characteristic – the capacity to

provide future benefit or service

Use for the purpose production, consumption and exchange of goods or services

Future economic benefits results in cash inflows

Liabilities

Claims against assets Creditors Existing debts and obligations

Accounts payable Notes payable Wages payable Sales, Real Estate and Income Taxes payable

Equity

Claims of the owners on the assets Corporations

Paid in capital Retained earnings Revenues Expenses Dividends

Revenues > Expenses = Net IncomeRevenues < Expenses = (Net Loss)

Transactions

Transactions defined: economic events of the enterprise recorded

Each transaction may be internal or external Each transaction must identify the specific items

affected and the net change on each item Each transaction has a dual effect on the

accounting equation The two sides of the accounting equation must

always equal

Effects of Transactions on the Accounting Equation

Increase in an asset Decrease in another asset Increase in a liability Increase in owners equity

Increase in a liability Increase in an asset Decrease in another liability Decrease in owners equity

Increase in owners equity Increase in an asset Decrease in liability

Homework Assignment

Problem 1 Problem 4 Problem 5 Problem 9 Problem 12