accounting overview - principles & assumptions
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ACCOUNTING
OVERVIEW
Basic Terminology &Accounting Objectives
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ACCOUNTING OVERVIEW
Objectives of Financial Reporting Provide information that is useful in credit and
investment decision making.
Provide the users with a tool to assess the amounts,
timing and prospects of future cash flows of an entity. Provide relevant information regarding the entitys
resources, claims against these resources and
changes in them.
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ACCOUNTING OVERVIEW
Accounting Definition Identifying, gathering, organizing and summarizing of
financial information about an economic units
financial activities to interested parties.
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ACCOUNTING OVERVIEW
Financial Accounting The process that culminates in the preparation of
financial reports relative to an enterprise as a whole
for internal and external users.
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ACCOUNTING OVERVIEW
Managerial Accounting The process of identification, measurement,
accumulation, analysis, preparation, interpretation
and communication of financial information used by
management to plan, evaluate and control within an
organization and to assure appropriate use of and
accountability for the entities resources.
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ACCOUNTING OVERVIEW
Financial Management Efficient use of the sources and uses of funds
Dividend payout, debt restructuring, mergers, acquisitions,corporate reengineering
Focus on both internal and external conditions Global
economy Forecasting and planning
Coordination and control of the entities activities
Dealing with the financial markets, banks & other financinginstitutions
Risk management Maximize business value
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ACCOUNTING OVERVIEW
Objectives of an Accounting System Recordation
Journal entries
Subsidiary journals
Dual system of entry debits and credits
Summarization
Grouping of common activities
Timely and accurate reporting
Financial statements
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ACCOUNTING OVERVIEW
Objectives of an Accounting System Present fairly the financial condition of an entity
Summarizes economic activity and reports suchactivities via a report.
GAAP Generally Accepted Accounting Principles
Established by:
FASB, SEC, AICPA & GASB
International Accounting Practices, Industry,
Management Groups GAAS
Generally Accepted Auditing Standards
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ACCOUNTING OVERVIEW
Basic Accounting Terminology Event
Generally the source or cause of changes in assets,
liabilities, and equity accounts internal and external
Transaction External event between two or more entities
Account
Reflects the impact of certain activities on a specific account
each asset, liability, equity, revenue/sales and expense has
its own account
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ACCOUNTING OVERVIEW
Basic Accounting Terminology General Ledger
Subsidiary Ledger
General Journal
Trial Balance
Adjusted Trial Balance
Adjusting Entries
Closing Entries
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ACCOUNTING OVERVIEW
Sources of Accounting Information Source Documents
A/R invoicing, checks, vendor invoices, etc.
Subsidiary Journals
Sales
Cash Receipts, Cash Disbursements
Purchases
General Ledger
Trial Balance and Adjusted Trial Balance
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ACCOUNTING OVERVIEW
Trial Balance
GeneralLedger
SJ CR CM CD PUR JE
Source
Documents
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Financial Statement
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ACCOUNTING OVERVIEW
Debits and Credits
What do they mean? Are they increases or decreases?
It depends on what?
Assets and Expenses
Increase by debiting
Decrease by crediting Liabilities, Equity, Partners Capital & Revenue
Increase by crediting
Decrease by debiting
Dual accounting entries / compound entries
Debits = Credits
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ACCOUNTING OVERVIEW
Fundamental Accounting Equation
Assets = Liabilities + Owners Equity
Or
Assets = Liabilities + Partners Capital
Assets Liabilities Owners Equity= +
Assets Liabilities Partners Capital= +
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ACCOUNTING OVERVIEW
Types of Accounts Permanent or Real Accounts Balance Sheet
Balances carry over from one period to the next
Assets
Liabilities Equity or Capital Accounts
Temporary or Nominal Accounts Income Statement
Balances closed out periodically
Sales, Revenue and Income Accounts
Expenses or Costs
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ACCOUNTING OVERVIEW
Expanded Accounting Equation
Expenses
Assets Liabilities Owners Equity=+
RevenuesRetained
Earnings
Paid in
Capital
Surplus
Common
Stock
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ASSUMPTIONS AND PRINCIPLES
The Accountants Roadmap Rules of Engagement
Assumptions
Principles
Modifying Conventions Role of the accountant regarding financial statements
Role of management regarding financial statements
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ASSUMPTIONS AND PRINCIPLES
Economic Entity Assumption The economic activity of an entity can be kept
separate and distinct from its owners and any other
business unit. The entity concept is not necessarily a
legal entity concept; a parent and its subsidiaries areseparate legal entities, but merging their activities for
accounting and reporting purposes is not a violation
of the economic entity assumption.
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ASSUMPTIONS AND PRINCIPLES
Going Concern Assumption Most accounting methods are based on the premise
that the business enterprise will have a long life.
Acceptance of this assumption provides credibility to
the historical cost principle.
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ASSUMPTIONS AND PRINCIPLES
Monetary Unit Assumption Implies which monetary unit is the most effective
means of expressing economic activity.
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ASSUMPTIONS AND PRINCIPLES
Periodicity Assumption Implies that the economic activities of an enterprise
can be divided into artificial time periods, i.e.:
monthly, quarterly or annually. This allows for
comparative analysis.
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The Basic Assumptions
and Principles ofAccounting
Six Principles
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ASSUMPTIONS AND PRINCIPLES
Revenue Recognition Principle Revenue is recognized at a point in the earnings
process when:
all, or a substantial portion, of the services to be provided
have been performed and cash, receivables or some other asset susceptible to
objective measurement is achieved.
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ASSUMPTIONS AND PRINCIPLES
Historical Cost Principle Non-monetary assets are initially recorded at their
acquisition cost.
Non-monetary assets are stated at acquisition cost
until all or a portion of their service potential hasbeen consumed. At this time, all or a portion of the
acquisition cost becomes an expense.
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ASSUMPTIONS AND PRINCIPLES
Matching Principle Expenses directly associated with particular
revenues are recognized as expenses in the period
which the revenues are recognized.
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ASSUMPTIONS AND PRINCIPLES
Consistency Principle Accounting principles and procedures selected by
an entity should be used consistently over time.
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ASSUMPTIONS AND PRINCIPLES
Full Disclosure Principle Information in the financial statements is presumed
to be sufficiently adequate so that a reader can
make an informed judgment or decision.
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ASSUMPTIONS AND PRINCIPLES
Objectivity Principle Information is objective and verifiable, essentially
similar measures and conclusions would be
reached if two or more persons examined the same
data.
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ASSUMPTIONS AND PRINCIPLES
Modifying Conventions Because there are certain exceptions in the practical
application of these six principles.
Materiality
Objectivity Industry Practices