CH 1: Accounting in Business

ACT 111 Fall 2026 Chapter 1

Accounting

Information and measurement system that identifies, records, and communicates an organization’s business activities. Referred to as the language of business.

External users

Users who do not directly run the organization and have limited acces to its accounting information.

Internal Users

Users who directly manage the organization , focused on the needs of managerial and executive employees within the org.

What users if financial accounting geared towards?

External users

What users is managerial accounting geared towards?

Internal users

Examples of external users of accounting

Lenders/Creditors

Shareholders/Investors

Regulating Agencies

Nonexecutive employees

Suppliers

Customers

Examples of internal users of accounting

CEO (Chief executive officer)

Marketing managers

Purchasing managers

Research and Development managers

Service managers

What are the four majors areas of opportunities in accounting?

Financial, Managerial, Taxation, and Accounting-Related

Some of these amjor areas intersect on certain opportunities

Private accounting

Employees working for businesses. Where the majority of opportunities withtin accounting are founf

Public accounting

accoutnignservies such as auditing, taxation, and advisory services. Do not confuse as having to do with government or non-profits, that’s a separate area.

Data Analytics

Process of analyzing data to identy meaningful relations and trends

What are the four basic types of analytics?

Descriptive, Diagnostic, Predictive, and Prescriptive

Descriptive Analytics

Summarizes and describes events from the past

Diagnostic Analytics

Reveals causes of events from the past

Predictive Analytics

Predicts likely events for the future

Prescribtive Analytics

Creates action plans to achieve a desired future

Cognitive analytics

A risign fifth type of analytics. Aims to extract insigts and knowledge from data using AI and machine learning to analyze and understand it in a way that mimics human cognition.

Data Visualization

A graphical presentation of data to help people understand their significance. Most popular tool for this is a Tableu dashboard

What are the three factors of the fraud triangle that show what could push a person to commit fraud?

Opportunity - There’s a low risk of getting caught

Pressure - There’s an incentive that motivates the person to commit fraud

Rationalization - Person justifies fraud or does not see its criminal nature

Internal Controls

Procedures to protect assets, ensure reliable accounting, promote efficienty, and uphold copany policies. Auditors verify the effectiveness of internal controls. ULTIMATELY DEDICATED TO CLOSING THE WINDOW OF OPPORTUNITY FOR FRAUD.

GAAB

Generally Accepted Principles of Accounting. Financial accounting is governed by the concepts and rules of GAAP, which aims to uphold relevance and faithful/accurate representation of information.

GAAB PERTAINS TO FINANCIAL ACCOUNTING; EXTERNAL USERS. NOT MANAGERIAL ACCOUNTING; INTERNAL USERS

FASB

Financial Accounting Standard Board. In charge of setting up GAAP as directed by the Securities and Exchange Commision (SEC).

SEC

Securities and Exchange Commision. U.S Governement agency that oversees proper use of GAAP by companies that sell stock and debt to the public. An audit examnies whether financial statments are prepared using GAAP.

THE SEC ENFORCES AND OVERSEES GAAP

THE FASB SETS UP GAAB

IASB

International Accoutning Standards Board. In charge of issuing Internations Fincancial Reporting Standards (IFRS).

IASD - international equivalent of FASB

IFRS - international equiavalent of GAAB

Conceptual Framework of FASB

What the FASB thinks are the goals and needs of accounting

Objectives - to provide information useful to investors, creditors, and others.

• NOTE THAT ONLY EXTERNAL USERS ARE LISTED, CAUSE GAAB PERTAINS TO FINANCIAL ACCOUNTING ONLY

Qualitative characteristics - to require information that has relevance and faithful representation

Elements - to identify items in financial statements

Recognition and Measurement - to set criteria for an item to be recognized as an element; and how to measure it

Measurement/cost principle of accounting

Accounting information is based on actual cost. Cost is measured on a cash or equal-to-cash basis. The value of any service is measure in the cash paid for it or the cash value of whatever was exchanged for it.

Cost = Cash Value

Revenue recognition principle of accounting

Revenue is the amount received from selling products and/or services, it can also be a customer’s promise to pay at a future date, called credit sales.

Revenue is recognized AKA recorded when goods and/or services are provided to a customer AND at the amount expected to be received from the customer.

REVENUE DOES NOT = PROFIT

REVENUE RECORDED WHEN THE WORK IS DONE

Expense/matching recognition priciple of accounting

Expenses are recognized in the same perid as the revenue they help generate.

EX. sales salaries expense recorded at the same time as the sales revenue it helped produce.

WHAT I SPEND (EXPENSE) AND WHAT I EXPECT TO EARN (REVENUE) MUST BE RECOGNIZED AT THE SAME TIME

Full disclosure principle of accounting

A company reports the details behind the financial statements that would impact users’ decisions. These disclosures are often in notes/footnotes to the statements.

Going-concern assumption of accounting

Accounting information presumes that the business will continue operating instead of being closed or sold.

Ex. Property is reported at cost instead of at liquidation value

Monetary unit assumption of accounting

Transactions and events are expressed in monetary, or money, units.

Ex. U.S dollar and Mexican peso

*Given the fact that according to the measurement/cost principle accounting info is based on actual cost AKA cash value.

Time period assumption of accounting

The life of a company can be divided into time periods, such as months and years, and useful reports can be prepared for those periods.

Business entity assumption of accounting

A business is accounted for separately from other business entities and its owner(s).

What are the four common business entities?

Sole Proprietorship, Partnership, Corporation, Limited Liability Company (LLC)

Cost-benefit constraint of accounting

Information disclosed by an entity must have benefits to the user that are greater than the costs of providing it.

Accounting has to be worth paying for

Other constraints include: materiality, conservatism, and industry practices

General Principles of Accounting

The concepts, guidelines, and assumptions for preparing financial statements. They serve as the building blocks of GAAB as designed by the FASB.

These principles govern the amount, timing, and/or method of reporting information in financial statements

Sole proprietorship

Only 1 owner

No additional business income tax

Unlitimed liability

Not a separate legal entity

Business ends with owner death or choice

Partnership

Two or more owners called partners

No additional business income tax

Unlimited liability

Not a separate legal entity

Business ends with a partner death or choice

Corporation

One or more owners called shareholders

Additional corporate income tax

Limited liability; shareholders not liable for corporate acts and debts

Separate legal entity with the same responsabilities as a person

Indefinite business life

Limited Liability Company (LLC)

One or more owners called members

No additional business income tax

Limited liability

Separate legal entity with the same rights as a person

Indefinite business life

Materiality Constrant of Accounting

Materiality is the ability of information to influence decisions.

Information included on the financial statements must be relevant enough to be included.

Example of materiality constraint

After financial statement is finalized, the company loses a factory in a fire. This information is important to the decisions of investors, shareholders, etc. Financial statement is revisited to include this information .

Example of cost-benefit constraint

A one hundred dollar invoice is left out of the financial statement. Given that revising the statement would cost more than the benefit it would provide this invoice is left out as it is not significant enough.

Assets

Resources a company owns or controls

Assets include cash, supplies, equipment, land, and account receivables

Liability

Claims on a company’s assets by non-owners

Company obligations to provided assets, products, or services to others

*Liabilities are considered part of a company’s assets

Equity

Claims on a company’s assets made by the owner

Also called net assets or residual equity

Account payables

Liabilities that promise a future outflow of resources

Account receivables

Assets that promise a future inflow of resources