1. Accounting Economics and Management School Lanzhou University of Technology Zhang Qiao-Liang CPA, FPNA,Professor

2. Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information.

3. 3 Identifies Records Communicates Relevant Reliable Comparable Importance of Accounting Accounting is a s that i_________ that is to help users make better d. ystem nformation ecisions

4. The following are some of the rules used to "play" the Accounting "Game“: Accounting asumptiong

5. Business Entity Concept This assumption requires every business to be accounted for separately from the owner. Personal and business-related transactions are kept apart from each other. In other words, the separate personal transactions of owners and others are not commingled with the reporting of the economic activity of the business. One of the first recommendations almost all accountants tell a client is to at least establish a business checking account and to use it to only record their business transactions.

6. The Concept of the Business Entity Vagabon d Travel Agency A business entity is separate from the personal affairs of its owner.

7. Accounting Period Concept This assumption assumes that business operations can be recorded and separated into different time periods such as months, quarters, and years. This is required in order to provide timely information that is used to compare present and past performance.

8. 8 The Time Period Concept Requires that accounting information be reported at regular intervals

9. 9 Accounting Period Managers adopt an artificial period of time to evaluate performance –Monthly –Quarterly –Semiannually –Annually Interim Statements

10. Going Concern Concept This assumption assumes that a business will continue operating and will not close or be sold. It assumes that a business will be in operation for a long time. Based on this assumption, actual costs instead of liquidation values are used for presenting financial information. This assumption is abandoned in the event that a business is actually going out of business.

11. Money Measurement Concept This assumption assumes accounting measures transactions and events in money and only transactions that can be monetized (stated in a monetary unit such as the dollar) are recorded and presented in financial statements. Simply stated, money is the common denominator (measurement unit) used for reporting financial information.

12. To be useful and helpful to users, financial statements and information must have the following Qualitative Characteristics: In other words, the information possesses these qualities or characteristics.. Conservatism Concept Revenues and gains are recognized slower and expenses and losses are recognized quicker. Accountants have a tendency to stray away from painting too rosy a picture. In other words, if in doubt, err to the side of caution. While accountants don't want to misinform users of financial information, they also don't want to be sued

13. Comparable Information must be measured and reported in a similar manner by all types of businesses. This allows comparison of the financial statements of different entities (businesses) or comparisons for the same entity (business) over different periods

14. Materiality Concept The significance and importance of an item should be considered in order to determine what is reported. Insignificant events need not be measured and recorded.

15. Cost-Benefit Convention The benefit of providing the financial information should also be weighed against the cost of providing it.

16. Industry Practices Convention When customary industry practices exists they should be followed and used for financial reporting

17. Relevant: The definition of relevant as it applies to financial information evolves from the general definition of the term relevant

18. –Reliable: The definition of reliable as it applies to financial information evolves from the general definition of the term reliable. Reliable Giving the same result on successive trials. High degree of certainty Worthy of reliance or trust Suitable or fit to be relied on; worthy of dependence or reliance; trustworthy.

19. Constraints and Modifying Conventions: Constraints: Unfortunately, information is not free. The qualitative characteristics of useful accounting information are constrained by two factors. –Materiality- Information is material if it provides information that would effect a decision (decision maker). The materiality of an item requires judgment and depends on the relative size of the item, how accurately the information can be estimated, and the nature of the item. –Relative Cost Benefit- Information should only be provided if its benefits exceed its costs. GAAP attempts to provide guidance in this area.

20. –Materiality- Information is material if it provides information that would effect a decision (decision maker). The materiality of an item requires judgment and depends on the relative size of the item, how accurately the information can be estimated, and the nature of the item. –Relative Cost Benefit- Information should only be provided if its benefits exceed its costs. GAAP attempts to provide guidance in this area.

21. Modifying Conventions: –Conservatism Accountants have a tendency to stray away from painting too rosy a picture. In other words, if in doubt, err to the side of caution. While accountants don't want to misinform users of financial information, they also don't want to be sued. –Industry Practices Are the specific methods or practices that specific industries have developed and use to present information related to their unique needs.

22. Consistency Concept The same accounting methods should be applied from period to period and all changes to more acceptable methods should be well explained and justified. Deviations in measured outcomes from period to period should be the result of deviations in performance not changes in methods.

23. Assets Assets are economic resources that are owned by the business and are expected to benefit future operations.

24. Assets Cost Principle Going-ConcernAssumptionGoing-ConcernAssumption ObjectivityPrincipleObjectivityPrinciple Stable-DollarAssumptionStable-DollarAssumption These accounting principles support cost as the basis for asset valuation.

25. Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

26. Owners’ Equity Owners’ equity represents the owners’ claims on the assets of the business.

27. Owners’ Equity Changes in Owners’ Equity Owners’ Investme nts Busines s Earnings Paymen ts to Owners Busines s Losses

28. Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Generally Accepted Accounting Principles Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. C 5

29. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. C 5 The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices.

30. Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence. C 5

31. Principles of Accounting Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. C 5