Introduction to Accounting Principles

Definition of Accounting

• Involves identifying, measuring, and communicating economic information for sound decision-making.
• Aims to provide quantitative information on economic activities for informed judgments.

Identifying

• Analyzes events and transactions to decide their recognition in financial records.
• Events are categorized into:
  • Accountable Events: Recorded via journal entries.
  • Non-Accountable Events: Not recorded in books but noted in financial statement disclosures.

Types of Events or Transactions

• External Events:
  • Exchange: Transactions involving mutual transfer of goods or services.
  • Non-reciprocal Transfer: One-way transfers without a corresponding exchange.
  • Other than Transfer: Various transactions that don’t fit the above categories.
• Internal Events:
  • Production: Activities involving the creation of goods.
  • Casualty: Incidents causing loss or damage.

Measuring - Measurement Bases

• Measurement bases include various valuation methods:
  • Historical Cost: Original cost at the time of acquisition.
  • Current Cost: Current replacement cost of an asset.
  • Realizable (Settlement) Value: Amount expected from the sale of an asset.
  • Present Value: Future cash flows discounted to present value.
  • Fair Value: Current market value for an asset.
  • Fair Value less Costs to Sell: Net sale value after deducing costs.
  • Revalued Amount: Adjusted asset value based on market re-evaluations.
  • Inflation-adjusted Costs: Costs modified for inflation impact.

Valuation

• By fact: Measured items not influenced by estimates.
• By opinion: Measured items reliant on estimates and judgments.

Communicating - Aspects of the Communication Process

• Involves three main activities:
  • Recording: Documenting financial transactions.
  • Classifying: Organizing recorded data into categories.
  • Summarizing: Condensing information for reporting purposes.

Interpreting Processed Information

• Entails calculating financial ratios derived from statements to assess performance and financial health.
• Distinction made between bookkeeping (simple record-keeping) and accounting (involves interpretation and analysis).