BA 220 Notes

Semester 1: 1/10/23

Accounting is the process of:

Identifying, Measuring, Communicating-economic information about an entity-for decisions and informed judgments

3 Forms of Acconting

1. financial accounting (reports)

2. management accounting (costs of product, prices, budgeting

3. tax accounting (filling annual returns)

Financial accounting

\-income statement

\-statement of O.E

\-Balance sheet

\-cash flow statement

\-end notes

management accounting

\-cost accounting

\-budgeting

\-internal audit

\-investment analysis

\-responsbility accounting

tax accounting

\-tax planning

\-filling return

\-defending tax cases

differentiate between management and financial accounting

1. management accounting (within the company, stay in the company, specific, knowing costs of each product)

   1. very detailed

   2. specific

   3. unregulated (no rules, do want you want, you can add a cost to the product)

   4. short as required by managers (used internally they can be short)

   5. project the future

   6. financial and non-financial information (numbers and not numbers)

2. financial accounting: general (sales and profit: sending to outsiders, consumption of 3rd parties, not within the business)

   1. general

   2. broad overview

   3. regulated (rules to what you do, GAAP (generally accepted accounting principles)

   4. annual or biannual

   5. historical (already been done, we bought, sold, purchased and were recording it)

   6. financial information (pure numbers)

Main users of financial information relating to a business

1. owners

2. customers

3. competitors

4. management

5. lenders

6. suppliers

7. investment analysts

8. community representatives

9. government

   1. employees and their representatives

Management users decision/informed judgment made

planning, directing, and controlling. Management users decision/informed judgment made

Investors/Share Holders users decision/informed judgment made

assessing the amounts, timing, and uncertainty of future cash returns on their investments

Creditors/Suppliers users decision/informed judgment made

Assessing the probability of collection and the risk of late (or non-) payment

Employees users decision/informed judgment made

assessing a company’s ability to offer long-term job prospects and an attractive retirement benefits package

Securities and Exchange Commission users decision/informed judgment made

reviewing for compliance of all required information

Alternative sources of information

1. meetings with managers of the business

2. public announcements made by the business

3. newspaper and magazine articles

4. websites, including the website of the business

5. radio & tv reports

6. information-gathering agencies

7. industry reports

8. economy-wide reports

Accounting’s objectives

to provide useful information for making financial decisions

\*fundamental qualitative characteristics

relevance (includes materiality), faithful representation

\*enhancing qualitative characteristics

1. comparability

2. verifiability (audit comes in, see physical standard and receipt)

3. timeliness (every accounting info provided to users quickly), annual basis, financial report, yearly, consistent)

4. understandability (understandable by everybody in your financial report)

Constraint

cost (expensive to do accounting, everyday record, compare costs and benefits, benefits should always outweigh the costs

\-financial reporting standards

Various forms of business Organization:

1. owners


1. personal liability of owner(s) for business’s debts

Owners

1. proprietorship: one owner

2. partners-two or more owners

3. LLC (limited liability company)-members

4. corporation-stockholders-generally many owners

Personal liability of owner(s) for business’s debts

1. proprietorship: personally liable

2. partners-general partners are personally liable; limited partners are not

3. LLC (limited liability company)-members are not personally liable

   1. corporation-stockholders are not personally liable

LLC

limited liability company ( can share shares)

Financial Accounting

\-General

\-External

\-Regulated (rules)

Expense

the money spent, or costs incurred

Sales

the proceeds a business generates from selling goods or services to its customers

\-used interchangeably with revenue

\-1 t-shirt (sale), 1 marker (sale), money all together all sales is the revenue

Revenue

the total amount of incomes (entire income) generated by the sale of goods or services related to the company’s primary operations

transaction

a monetary exchange for a good or service

Introduction: financial accounting

\-there are a number of accounting principles based on which we prepare our accounts

\-these Generally Accepted Accounting Principles (GAAP) lay down accepted assumptions and guidelines

Types of accounting principles

Accounting principles split to:

1. accounting concepts (assumptions)

2. accounting conventions (unwritten rules)

   1. convention: an agreement

accounting concepts are assumptions that:

serve as a foundation for preparing final accounts and recording business transactions

accounting convention refers to common practices:

which are universally followed in recording and presenting accounting

\-customs and traditions (used for a long time)

\-information of the business entity

13 accounting concepts

1. Full disclosure principle

   1. meaning: the business will continue in operational existence for the foreseeable future

   2. financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so

   3. $200 (initial 2021)+ 500 (2022) =700 keeping adding (record each amount and total)

2. accounting period concept

3. money measurement:

   1. meaning: all transactions of the business are recorded in terms of money. provides a common unit of measurement

   2. examples: market conditions, technological changes and the efficiency of management would not be disclosed in the accounts

   3. Total Price $ doesn’t care about the features

4. business entity: (opposite from Mariners resourcing)

   1. meaning: the business and its owner(s) are two separate entities

   2. any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business

      1. Look at examples (13)

5. Historical cost or just cost concept (principle):

   1. meaning: assets should be shown on the balance sheet at the cost of purchase instead of current value

   2. example: the cost of fixed assets is recorded at the date of acquisition cost. It includes the invoice price of the assets, freight charges, insurance or installation costs.

   3. initial costs: amount we payed

   4. $200 (initial cost of laptop)

6. Objectivity

   1. meaning: the accounting information should be free from bias and capable of independent vertification

   2. the information should be based upon verifiable evidence such as invoices or contracts, receipts

7. accruals/matching

   1. meaning: expenses are recognized as they are incurred, but not when cash is paid. the net income for the period is determined by subtracting expenses incurred from revenues earned

   2. (record all expenses) expenses match with -revenues=Net Income (every process/steps) (find the difference)

8. Revenue Recognition

   1. meaning: revenues should be recognized when the major economic activities have been completed

      1. revenues are recognized (record) when they are earned, but not when cash is received

4 accounting conventions (monetary and non-monetary (things that are relevant and influence consumers decisions)

1. disclosure convention

   1. meaning: all material and relevant information must be fully disclosed in the financial statements

   2. all details in any report should be disclosed and recorded

2. materiality convention

   1. meaning: immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately. Materiality depends on the size and nature of the item

   2. not combined, separately

   3. little things you buy (pencil, pen, eraser) from home depot, don’t record each one. Just sum it all up and put it under supplies as one. However, need evidence (receipts)

   4. examples: small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses

3. consistency convention

   1. meaning: companies should choose the most suitable accounting methods and treatments, and consistently apply them in every period

      1. changes are permitted only when the new method is considered better and can reflect the true and fair view of the financial position of the company

      2. the change and its effect on profits should be disclosed in the financial statements

   2. car example of depreciation: DDB or straight line methods

4. conservation convention

   1. meaning: revenues and profits are not anticipated. This treatment minimizes the reported profits and the valuation of assets

      1. anticipate losses but cannot anticipate profits

Look at Matching Slide

Slides

tools and technologies allow accountants to make better decision through:

1. more accurate data

2. more timely data

3. more visual data

spreadsheets

1. generated by a software program

   1. examples: microsoft excel, google sheets, apple numbers

2. allows data to be organized in rows and columns

3. data can be entered, results calculated, and graphs generated

technology risks

1. technology used properly can facilitate better decisions

2. technology used improperly can lead to catastrophic decisions