Introduction to Accounting

• Accounting defined as identifying, measuring, recording, and communicating economic information for informed judgements and economic decisions

Financial Accounting Process

• The process involves establishing goals
• The process involves gathering information on alternatives
• The process involves determining consequences
• The process involves choosing a course of action

Accounting Information

• Involves identification of transactions
• Measurement includes quantification in dollar terms
• Recording consists of classification and summarization
• Communication includes accounting reports, analysis, and interpretation

Types of Organizations

• By purpose: commercial (for profit) or non-commercial (non-profit)
• By form: sole trader, partnership, or company

Conceptual Framework

• A guide for regulators to develop consistent and logically formulated accounting standards
• Provides guidance to accountants where no standards exist

Balance Sheet

• A report listing assets, liabilities, and equity of a business at a specific date
• Assets: a resource controlled by the entity from past events, expected to yield future economic benefits
• Liabilities: a present obligation from past events, expected to result in an outflow of resources
• Equity: the residual interest in the assets after deducting all liabilities

Income Statement

• A report listing income, expenses, and profit or loss of a business for a certain time period
• Income: increases in economic benefits during the accounting period, leading to increases in equity (excluding contributions from equity participants)
• Expenses: decreases in economic benefits during the accounting period, leading to decreases in equity (excluding distributions to equity participants)
• Profit: The change in equity from all events other than contributions or withdrawals by owners
• Loss: the excess of expenses over income

Statement of Changes in Equity

• Links the balance sheet and the income statement
• Explains the changes in equity during the period

Financial Accounting Process

• Identification: selecting transactions/economic events which affect financial statement elements
• Measurement: measuring the quantitative effect of events, including measurement attribute (e.g., financial attribute) and unit (e.g., $A)
• Recording: classifying consequences of events, affecting at least two items
• Communication

Accounting Equation

• Assets = Liabilities + Equity

• Equity = Capital Contributions - Drawings + Income - Expenses

• Profit = Income - Expenses, which increases Equity

• Capital Contributions: amounts contributed by owners, increasing equity

• Drawings (Capital Withdrawals): assets withdrawn by owners, decreasing equity

Transaction Analysis

• Expenses: recognized when a decrease in future economic benefits related to a decrease in an asset or increase in liability can be reliably measured
• Recognition of expenses occurs with the recognition of an increase in liabilities or a decrease in assets
• Income: recognized when an increase in future economic benefits related to an increase in an asset or decrease in liability can be reliably measured
• Recognition of income occurs with the recognition of increases in assets or decreases in liabilities

Three Transaction Analysis Questions

• Which items are affected (at least 2)?
• How much is the change?
• Does the item increase, or decrease?