Chapter 1 Basics In Accounting.

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Presentation transcript:

Chapter 1 Basics In Accounting

Accounting Defined Accounting is the process of: recording, summarizing, analyzing and interpreting money related activities to permit individuals and businesses to make informed judgments and decisions.

USERS OF ACCOUNTING INFORMATION Accounting is often referred to as: ‘the language of business’ because it communicates information to help persons make informed decisions. Users of accounting information can be divided into two groups: External Users Internal Users

External Users Lenders/Creditors Shareholders/Investors To assess whether the business can repay its loans. Shareholders/Investors To decide whether to buy, hold or sell shares. External Auditors To verify that accounts are prepared according to generally accepted accounting principles. Employee Unions To bargain for better wages and working conditions. Government To calculate the amount of taxes to be paid.

Internal Users Managers To help to improve the efficiency and effectiveness of the business.

Generally Accepted Accounting Principles Source: Fundamental Accounting Principles17th Edition

Generally Accepted Accounting Principles Money Measurement Items must have a monetary value in order to be recorded. Historical Cost Items are to be recorded at their purchase price. Going Concern The assumption that the business will continue in existence for an indefinite period of time.

Generally Accepted Accounting Principles Objectivity The values used by the accountant must be based on facts that can be tested by anyone. Consistency The same procedure for treating similar items should be maintained at all times. Business Entity (Legal Personality) In the eyes of the law the business is a separate legal person from its owner(s). Therefore separate accounts must be kept for the business.

Generally Accepted Accounting Principles Prudence (Conservatism) The business owner must not record a profit before it is earned but may record a loss if it is likely to occur. Duality (Double Entry) Every transaction affects at least two (2) accounts, once as a debit and once as a credit. Periodicity Accounts are prepared for a specific time period usually 1 month, 3 months, 6 months or 1 year.

Generally Accepted Accounting Principles Accruals (Matching) When calculating profit or loss for a period, all revenue and expenses must be taken into account whether or not cash was actually paid or received. Materiality Only items that are sizable or represent a large part of the business or which have changed considerably in value are recorded.

Accounting Cycle Business Decisions Analysis of Final Reports Transaction Analysis of Final Reports Business Decisions Post to the Ledger Extract a Trial Balance Prepare Source Documents Journalize Accounting Cycle