Accounting in Action Overview

Accounting in Action

• Accounting involves identifying, recording, and communicating economic events to decision-makers.
• Bookkeeping is the recording of economic events.
• Internal users (managers): evaluate companies' expected future performance. These reports help make key decisions.
• External users (investors, creditors, taxing authorities, regulatory agencies, customers, and labor unions): asses companies' past performance and financial health. They evaluate financial risk or suitability of investing or providing credit.

Ethics in Financial Reporting

• Ethics are standards of conduct by which actions are judged as right/wrong, fair/unfair.
• Ethics evaluation involves recognizing an ethical issue, identifying the principal elements in the situation (identifying stakeholders and their responsibilities/obligations), and weighing different options.

Accounting Standards

• Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are primary accounting standard bodies.
• These standards provide rules and guidelines for financial reporting. The aim is to ensure consistency, transparency, and comparability worldwide.
• Efforts to reduce disparities between IFRS and GAAP. This process is known as convergence.

Measurement Principles

• Relevance: financial information capable of influencing a decision.
• Faithful representation: information accurately depicts the past.

The Accounting Equation

• The accounting equation applies to all economic entities.
• Accounting equation: Assets = Liabilities + Equity
• Assets: resources owned by the business, with the capacity to provide future services or benefits.
• Liabilities: existing debts or obligations to outside parties.
• Equity: owner's claims on the company's total assets.

Financial Statements

• Income statement: Presents revenue and expenses, showing net income/loss over a period.
• Retained earnings statement: Explains the changes in retained earnings over a period.
• Statement of financial position (balance sheet): Summarizes assets, liabilities, and shareholders' equity.
• Statement of cash flows: Summarizes all cash inflows and outflows during a period. Provides evidence of a company's ability to generate cash.

The Journal

• A journal is a chronological record of all transactions.
• A journal entry records the effect of a transaction on the debit and credit sides.
• Simple entries involve two accounts, while compound entries involve three or more accounts.

The Ledger and Posting

• Ledger: a complete collection of accounts for the company.
• Posting: the process of transferring journal entries into the general ledger accounts.

The Trial Balance

• A trial balance summarizes accounts and their balances at a specific point in time to ensure debits equal credits.
• It helps locate errors if either side doesn't balance.

Adjusting Entries

• Adjusting entries are needed when the trial balance may not precisely reflect the true financial performance up to the statement date. They refine the balance sheet and income statement accounts.
• Adjusting entries involve deferrals and accruals.
• Deferrals are expenses or revenues recorded at a different point in time than the cash was exchanged.
• Accruals are expenses or revenues recognized when they're earned or incurred, rather than when cash is exchanged.

Adjusting Entries: Deferrals

• Prepaid expenses (e.g., insurance, supplies): Assets are reduced when the expense is recognized.
• Unearned revenues: Liabilities are reduced as revenue is earned.

Adjusting Entries: Accruals

• Accrued revenues (e.g., interest receivable, rent receivable or fees earned): Assets increase when revenue is recognized.
• Accrued expenses (e.g., salaries payable, interest payable, or utilities payable): Liabilities increase when expenses incurred are recognized.

Depreciation

• Depreciation is the process of cost allocation.
• Allocates the cost of plant assets over their useful life, recording them as an expense.

Closing Entries

• Closing entries finalize the temporary accounts, transferring their balances to retained earnings. Preparing for the next accounting period.

The Worksheet

• A worksheet is a multiple-column form used for adjustments and financial statements.
• Summarizes adjustments.

Classified Statement of Financial Position

• Organizes similar assets and liabilities, which aids in evaluating company health.

Inventory Cost Flow Methods

• Companies employ methods like FIFO (first-in, first-out), average cost, and LIFO (last-in, first-out) to value inventory during the accounting period.
• FIFO, which assumes the earliest goods are sold first, often results in higher net income during inflationary periods.
• Usefulness of estimated inventory methods: the gross profit method and retail inventory method help test the reasonableness of ending inventory calculations when a physical count isn't available.

Accounting for Receivables

• Companies record accounts receivable when the value from services they provide is received.
• Unearned revenue is a liability, representing money collected in advance for goods or services not yet provided.
• Companies record notes receivable at the face value to denote money loaned.

Accounting for Current Liabilities

• Current liabilities are obligations that must be paid within one year of the financial report's date. Common examples include accounts payable, short-term notes payable, unearned revenue and accruals like salaries and wages payable.
• Value-added taxes (VAT) and sales taxes are consumption taxes collected on the sale of goods and services that generate revenue for the government.

Accounting for Payroll Deductions

• Payroll deductions: deductions from employee pay for taxes, insurance premiums, union dues.
• Companies recognize these as payroll liabilities.

Payroll Taxes

• Companies are required to withhold taxes from employee paychecks and remit them to the relevant government authorities.

Accounting for Share Transactions

• Ordinary shares are the most basic type of share issued.
• Preference shares have priority over ordinary shares in dividend distributions and asset liquidation.
• Treasury shares are a company's own shares repurchased from the public.

Dividends & Splits

• Dividends are a corporation's payout to shareholders.
• A dividend split involves increasing the number of shares outstanding while adjusting the par value per share.
• A share dividend involves issuing additional shares to shareholders, thereby reducing retained earnings.

Statement of Cash Flows

• Statement of cash flows measures the cash inflows and outflows for a period.
• Cash is separated into three activities: operating, investing and financing.
• The indirect method starts with net income, then adjusts to reconcile changes in assets, liabilities and equity.
• The direct method lists the cash inflows and outflows in categories of operating, investing and financing activities.