Accounting Principles PDF

ACCOUNTING PRINCIPLES  Definition of Accounting Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. Three Activities  Who Uses Accounting Data 1- INTERNAL USERS Internal u...

ACCOUNTING PRINCIPLES  Definition of Accounting Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. Three Activities  Who Uses Accounting Data 1- INTERNAL USERS Internal users of accounting information are those individuals inside a company who plan, organize, and run the business.  Who Uses Accounting Data 2- EXTERNAL USERS External users are individuals and organizations outside a company who want financial information about the company. Investors & Creditors  Functions of Accounting From the definition of the above the main functions of accounting can be summarized as: (1) Keeping systematic record of business transactions. (2) Protecting properties of the business. (3) Communicating the results to various parties interested in or connected with the business. (4) Meeting legal requirements.  Objectives of Accounting The following are the main objectives of accounting: (1) To keep systematic records. (2) To protect business properties. (3) To ascertain the operational profit or loss. (4) To ascertain the financial position of business. (5) To facilitate rational decision making.  ACCOUNTING CYCLE Accounting cycle is the financial process starting with recording Business Transactions and leading up to the preparation of Financial Statements. This process demonstrates the purpose of financial accounting--to create useful financial information in the form of general-purpose financial statements.  ACCOUNTING EQUATION THE EQUATION THAT IS THE FOUNDATION OF DOUBLE ENTRY ACCOUNTING. THE ACCOUNTING EQUATION DISPLAYS THAT ALL ASSETS ARE EITHER FINANCED BY BORROWING MONEY OR PAYING WITH THE MONEY OF THE COMPANY'S SHAREHOLDERS. THUS, THE ACCOUNTING EQUATION IS ASSETS = LIABILITIES + OWNER’S EQUITY  ACCOUNTING EQUATION 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. IT IS EQUAL TO TOTAL ASSETS MINUS TOTAL LIABILITIES.  REVENUES: GROSS INCREASE IN EQUITY FROM A COMPANY’S EARNINGS ACTIVITIES. EXPENSES: THE COST OF ASSETS OR SERVICES USED TO EARN REVENUE. EXPENSES DECREASE OWNER’S EQUITY. INVESTMENTS: THE ASSETS AN OWNER PUTS INTO THE COMPANY. WITHDRAWALS: THE ASSETS TAKE AWAY FROM THE COMPANY FOR PERSONAL USE.  EXPANDED ACCOUNTING EQUATION BASIC EQUATION ASSETS = LIABILITIES + OWNER’S EQUITY EXPANDED EQUATION ASSETS = LIABILITIES + OWNER’S CAPITAL - OWNER’S DRAWINGS + REVENUES - EXPENSES  ASSETS Cash Accounts Receivable Notes Receivable Resources owned or Cars controlled Lands by a company Buildings Goods Equipment  LIABILITIES Accounts Notes Payable Payable Creditors’ claims on assets Taxes Wages Payable Payable  CAPITAL INCREASES DECREASES Investments Withdrawals by Owner by Owner Owner’s Capital Revenues Expenses