FINANCE FOUNDATIONS CHAPTER 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