ACCT Notes

Relevance: Information must be pertinent to decision-making.
- Free from Error: Information must be accurate and reliable.
- Comparability: Information should enable comparisons, like comparing financial statements of companies (e.g., Ford vs. General Motors).
- Application of US GAAP: Financial statements follow the Generally Accepted Accounting Principles of the United States to ensure consistency.

Separate Entity Assumption:
- Financial records must be kept separate for the business and its owners. Commingling of financial statements is prohibited.
Going Concern Assumption:
- Businesses are assumed to continue operating into the foreseeable future.
- Implication: When reporting assets, businesses should not consider the possibility of liquidation. Reported assets are typically at historical cost; for instance, a truck bought for $50,000$ is recorded at that amount, not at a potentially diminished liquidation value.

Recording Transactions:
- Transactions must reflect exchanges, which can be categorized as:
  - External Transactions: Exchanges of assets, goods, or services involving at least one party.
  - Internal Events: Certain events that impact the entity directly without external exchanges (not all internal events are transactions).
Definition of a Transaction:
- Involve exchanges where something is given and something is received (at least one must be an asset, good, or service).
- Example: Signing a contract to buy services is not recorded as a transaction in accounting as no goods or services have changed hands yet.

Example of a Transaction: A company buying goods on account represents a promise to pay, considered a credit (liability).
Non-example: A year-end bonus may involve cash changing hands but without an asset exchange with an external party; hence it's a different nature of transaction.

Impact of Transactions on Accounts:
- Each transaction affects at least two accounts; these can include assets, liabilities, and equity.
- Example: Carver Corp purchases a truck with cash.
  - Transaction Analysis:
  - New asset (truck) is gained while cash (another asset) decreases.
Purchasing Land Example:
- If Carver Corp purchases land using a note payable, they receive land (asset) but also incur a liability in the form of the note.

Assets:
- Economic resources that have probable future benefits and are controlled or obtained by a business due to past transactions.
Liabilities:
- Obligations resulting from past transactions or events, requiring future payments. These may arise from exchanges (e.g., employee services).
Equity:
- Represents the owner's claim after liabilities have been deducted from assets.

Asset Validation Process:
- Example: Purchasing a micro assembly machine for $50,000$ confirms it as an asset because it has future economic benefits, is controlled by the firm due to the purchase, and results from a past transaction.
- Hired Staff Analogy:
  - Hiring office staff implies economic future benefits but does not qualify as an asset since they do not represent controlled resources under the asset definition until services are rendered.
Implication for Liabilities:
- Liabilities arise when work is performed for which payment is owed. For instance, an employee working for two weeks without payment creates an obligation for the company.