Introduction to Accounting and Business Activities

Fundamentals of Accounting

  • Accounting is an information and measurement system that identifies, records, and communicates business activities.

  • Key activities:

    • Identifying: Selecting specific transactions and events (e.g., entering sales invoices).

    • Recording: Maintaining a chronological log of transactions measured in .\n - Communications: Preparing accounting reports and financial statements.\n- Recordkeeping (Bookkeeping): The manual or electronic recording of transactions.\n\n# Accounting Users\n\n- External Users: Do not directly run the organization and have limited access to information. They rely on general purpose financial statements.\n - Lenders (Creditors): Banks and mortgage companies assessing loan repayment.\n - Shareholders (Investors): Owners who decide to buy, hold, or sell stock.\n - External Auditors: Independent parties verifying that statements follow Generally Accepted Accounting Principles (GAAP).\n - Others: Regulators (Internal Revenue Service (IRS)), labor unions, voters, contributors to nonprofits, and suppliers.\n- Internal Users: Directly manage the organization.\n - Roles include Purchasing, Human Resource, Production, Distribution, Marketing, Service, and Research and Development managers.\n\n# Professional Opportunities and Data Analytics\n\n- Areas of Opportunity: Financial, Managerial, Taxation, and Accounting Related.\n- Public Accounting: Services such as auditing and tax via Certified Public Accountants (CPA). \n- Big 4 Firms: Deloitte, ppricewaterhouseCoopers (PwC), Ernst & YOung, and KPMG.\n- Certifications: Certified Management Accounting (CMA), Chartered Global Management Accountant (CGMA), Certified Internal Auditor (CIA), Certified bookkeeper (CB), Certified Payroll professional (CPP), Certified Financial Planner (CFP), Certified Fraud Examiner (CFE), and Certified Forensic Accountant (CrFA).\n- Data Analytics classifications:\n - Descriptive: Summarizes past events.\n - Diagnostic: Reveals causes of past events.\n - Predictive: Predicts future events.\n - Prescriptive: Creates action plans.\n\n# Ethics and Financial Standards\n\n- Fraud Triangle: Three factors including opportunity, pressure/incentive, and rationalization/attitude.\n- Internal Controls: Procedures used to protect assets and ensure reliable accounting.\n- Generally Accepted Accounting Principles (GAAP): Financial information must have relevance and faithful representation.\n- Regulatory Bodies:\n - Financial Accounting Standard board (FASB): Sets GAAP.\n - Securities and Exchange Commission (SEC): Oversees GAAP use by public companies.\n - International Accounting Standards Board (IASB): Issues International Financial Reporting Standards (IFRS).\n\n# Accounting Principles and Assumptions\n\n- Measurement Principle (Cost Principle): Accounting info is based on actual cost ( quipment is recorded at 500500, regardless of perceived value).

  • Revenue Recognition Principle: Revenue is recognized when goods or services are provided to customers, not necessarily when cash is received.

  • Expense Recognition Principle (Matching Principle): Expenses are recorded in the same period as the revenues they helped generate.

  • Full Disclosure Principle: Reporting details that would impact user decisions.

  • Assumptions:

    • Going-concern: Presumes the business will continue operating.

    • Monetary unit: Transactions are expressed in money units (e.g., U.S. dollar).

    • Time period: Company life is divided into months or years.

    • Business entity: Business is accounted for separately from its owner.

Transaction Impact and Constraints

  • Cost-Benefit Constraint: Benefits of providing information must exceed the costs.

  • Materiality: Information impact on decisions.

  • Impact Examples:

    • Investment by owner: Increases assets and equity.

    • Purchasing supplies/equipment in cash: Asset exchange; no change in total assets or equity.

    • Providing services for cash: Increases assets (cash) and equity (revenue).

    • Payment of cash dividends: Decreases assets and equity (not included in net income calculation).