Accounting Principles: Definition and Users

Accounting Principles

• Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.

Who Uses Accounting Data

• Internal users: individuals inside a company who plan, organize, and run the business.
• External users: individuals and organizations outside a company who want financial information about the company, such as investors and creditors.

Functions of Accounting

• Keeping systematic records of business transactions.
• Protecting properties of the business.
• Communicating the results to various parties interested in or connected with the business.
• Meeting legal requirements.

Objectives of Accounting

• To keep systematic records.
• To protect business properties.
• To ascertain the operational profit or loss.
• To ascertain the financial position of business.
• To facilitate rational decision making.

Accounting Cycle

• The accounting cycle is the financial process starting with recording business transactions and leading up to the preparation of financial statements.
• The purpose of the accounting cycle is to create useful financial information in the form of general-purpose financial statements.

Accounting Equation

• The accounting equation is the foundation of double-entry accounting.
• The equation is: Assets = Liabilities + Owner's Equity.
• Assets are resources with future benefits that are owned or controlled by a company.
• Liabilities are what a company owes its creditors in future products or services.
• Owner's Equity: the ownership claim on total assets is known as owner's equity, equal to total assets minus total liabilities.

Expanded Accounting Equation

• The expanded equation is: Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses.
• Revenues: gross increase in equity from a company's earnings activities.
• Expenses: the cost of assets or services used to earn revenue, which decreases owner's equity.
• Investments: the assets an owner puts into the company.
• Withdrawals: the assets taken away from the company for personal use.

Assets

• Cash
• Accounts Receivable
• Notes Receivable
• Resources owned or controlled by a company
• Cars
• Lands
• Buildings
• Equipment
• Goods

Liabilities

• Accounts Payable
• Notes Payable
• Creditors' claims on assets
• Taxes Payable
• Wages Payable

Capital

• Increases: investments by owner, revenues
• Decreases: withdrawals by owner, expenses
• Owner's Capital: the ownership claim on total assets, equal to total assets minus total liabilities.

This quiz covers the basics of accounting, including its definition, three main activities, and the types of users who utilize accounting data, including internal and external users.