Concise Summary of Financial Accounting Principles

Accounting Definitions

  • Accounting: Process that identifies, measures, records, and reports business economic activities.
    • Two areas: Managerial Accounting (internal) and Financial Accounting (external).
    • Users: Internal (management) and External (investors, creditors, customers, labor unions).

Types of Business Organizations

  • Business Organization: Sells products/services for profit.
  • Non-business Organization: No profit goal (e.g., hospitals, schools).
  • Types:
    • Proprietorship: Owned by one person, not a separate legal entity, unlimited liability.
    • Partnership: Owned by two or more individuals, not a separate legal entity, unlimited liability.
    • Corporation: Owned by shareholders, separate legal entity, liability limited to investment, files own tax returns.

Accounting Standards

  • Generally Accepted Accounting Principles (GAAP):
    • IFRS: For publicly-traded corporations.
    • ASPE: For privately held corporations.

Qualitative Characteristics of Financial Information

  • Relevance: Information makes a difference.
  • Faithful Representation: Free from error and bias.
  • Comparability: Similar accounting practices.
  • Verifiability: Financial reports are reproducible.
  • Timeliness: Availability of information when needed.
  • Understandability: Information should be clear.

Accounting Principles

  1. Business Entity: Separate records for each entity.
  2. Consistency: Same accounting policies over time.
  3. Cost: Based on original transaction cost.
  4. Full Disclosure: Sufficient information for decisions.
  5. Going Concern: Business will continue into the future.
  6. Matching: Report revenues and expenses in the correct period.
  7. Materiality: Significant items affect decisions.
  8. Monetary Unit: Financial information in stable money units.
  9. Recognition: Revenue when earned, expenses when incurred.

Key Financial Statements

  1. Income Statement: Reports revenues and expenses.
  2. Statement of Changes in Equity: Changes in equity accounts.
  3. Balance Sheet: Assets, liabilities, and equity at a given time.
    • Accounting Equation: Assets = Liabilities + Equity.
  4. Statement of Cash Flows: Changes in cash balance during the period.
  5. Notes to Financial Statements: Additional details on figures.

Sources of Business Financing

  • Internally Generated Funds: Retained profits.
  • Debt Financing: Borrowing from creditors.
  • Equity Financing: Issuing shares to investors.

Transaction Analysis

  • Steps:

    1. Identify affected accounts.
    2. Determine account changes (+/-).
    3. Record journal entry.

  • Double-entry Accounting: Debits must equal Credits; the accounting equation must balance after every transaction.

Knowledge Check: Transaction Analysis Examples

  • Assess impact on the accounting equation for given transactions.