Accounting book financial and managerial accounting
Chapter 1, LO 1-5
LO1
Accounting: identifies, records and communicates the economic events relevant to its
business to interested users by means of accounting reports.
Recording: keeping a systematic, chronological diary of events, measured in dollars
The most common reports are called financial statements.
A vital element in communicating economic events is the accountant’s ability to analyze and
interpret the reported information in his own way. Interpretation involves explaining the
uses, meaning and limitations if reported data.
Activities of the accounting process:
Identification (select economic events) recording (record, classify and summarize)
communication (prepare accounting reports0 analyze and interpret for users.
Accounting process includes the bookkeeping function, involves only the recording of
economic events. Accounting involves the entire process of identifying, recording and
communicating economic events.
There are two broad groups of financial information:
1 Internal users: managers who plan, organize and run the business. Managerial
accounting provides internal reports to help users make decisions about their
companies.
2 External users: individuals and organizations outside the company who want
financial information about the company, mainly investors and creditors. Investors
use accounting information to decide whether to buy, hold or sell ownership shares
of a company. Creditors use accounting information to evaluate the risks of granting
credit or lending money. Financial accounting answers these questions.
Taxing authorities want to know whether the company complies with tax laws. Regulatory
agencies want to know whether the company is operating within prescribed rules.
Customers are interested in whether the company will continue to honor product warranties
and support its product line. Labor unions want to know whether the owners have the ability
to pay increased wages and benefits.
,LO2
SOX intent is to reduce unethical corporate behavior and decrease the likelihood of
future corporate scandals. Top managers must now certify the accuracy of financial
information.
- Generally accepted accounting principles
- Financial accounting standards boars
- Securities and exchange commission
- International accounting standards board
- International financial reporting standards
LO3
Basic elements of a business are what it owns and what it owes. Assets are the resources a
business owns (activa). Liabilities are claims of those to whom the company owes money
(creditors). Claims of owners are called stockholders’ equity.
Assets = liabilities + stockholders’ equity
This equation is called the basic accounting equation. Liabilities are paid first of a business is
liquidated. The equation applies to all economic entities regardless of size, nature of
business or form of business organization.
The business uses its assets in carrying out such activities as production and sales.
The capacity to provide future services or benefits the common characteristic possesses
by all assets.
Liabilities are claims against assets, existing debt and obligations.
- Account payable
- Note payable
- Salaries and wages payable
- Sales and real estate taxes payable
Stockholders’ equity is the ownership claim on a corporation’s total assets, also called
residual equity.
1) Common stock: the total amount paid in by stockholders for the shares they
purchase
2) Retained earnings: revenues, expenses and dividends. Revenues are the gross
increases in stockholders’ equity resulting from business activities entered into for
the purpose of earning income. Expenses are decreases in stockholders’ equity that
result from operating the business. They are costs of assets consumed or services
used in the process of earning revenue. Dividends is the distribution of cash or other
assets to stockholders. Dividends reduce retained earnings, however they are not an
expense.
,Increases investments by stockholders and revenues
Decreases dividends to stockholders and expenses
LO 4
Transactions are a business’s economic events recorded by accountants. May be internal or
external.
External transactions: involve economic events between the company and some outside
enterprise.
Internal transactions: are economic events that occur entirely within the company.
Criterion of a transaction is the financial position of the company changed?
Yes? it is a transaction
No? it is no transaction
Each transaction must have a dual effect on the accounting equation. E.g., if an asset is
increased, there must be a corresponding decrease in another asset, increase in a specific
liability or increase in stockholders’ equity.
Expanded accounting equation:
Assets = liabilities + Stockholders' equity
Stockholders' equity = common stock + retained earnings
Retained earnings = revenues – expenses – dividends
Transaction 1 investment by stockholders.
Investments by stockholders do not represent revenues and they are excluded in
determining net income.
Transaction 2 purchase of equipment for cash.
If you buy a thing, there will be a decrease in cash (which is an asset), but also a decrease in
stuff (which is also an asset).
Transaction 3 purchase of supplies on credit
If you buy something but pay later, the supplies will rise (which is an asset) and the liabilities
will rise also because you owe a price to someone.
Transaction 4 service performed for cash
You get revenue in return for good/service. Also, this will go on the stockholders’ equity side,
because it is a revenue, and there are no expenses or dividend.
Transaction 5 purchase of advertising on credit
This means that the money will go from the cash side, except when the payment is
postponed, then it goes on the liabilities side. Also, it will go on the stockholders’ equity
because it is a expense. So, the revenue – expense – dividend will be affected.
, Transaction 6 services performed for cash and credit
Accounts receivable = debiteuren
It bills the balance of $2.000 on account = op rekening.
Transaction 7 payment of expenses.
Paying expenses will decrease the stockholders’ equity at the expenses and in will decrease
the cash side of the assets.
Transaction 8 Payment of accounts payable
If they eventually pay the bill from a month ago, the amount of money can be removed from
the liabilities side, which at first increased the liabilities side. Also, it can be taken from the
cash on the assets side.
Transaction 9 receipt of cash on account
If people pay back what they have borrowed from the company, it will increase on the cash
and decrease on the accounts receivable, which are both on the assets side. It will not
change the total of assent but the composition of those assets.
Transaction 10 dividends
Paying the stockholders will decrease the cash and the stockholders’ equity, the dividend
side. Dividends are not expenses.
(Page 20, illustration 1-9)
LO 5
Companies prepare 4 financial statements from the summarizes accounting data:
1) Income statement revenues and expenses, net income or net loss in a period of
time.
2) Retained earnings statement summarizes the changes in retained earnings for a
specific period of time.
3) Balance sheet reports the assets, liabilities and stockholders’ equity at a specific
date
4) Statement of cash flow summarizes information about the cash inflows and
outflows for a specific period of time.
Income statement
- List the revenues first, followed by the expenses and finally it shows net income or
net loss.
- Does not include investments and dividend between stockholders and business.
Retained earnings statement
- Period of time is the same as the income statement.
- Starts with the net income, the final amount on the income statement. After that, the
dividend will be subtracted from the net income, then you’ll get the retained
earnings.
Chapter 1, LO 1-5
LO1
Accounting: identifies, records and communicates the economic events relevant to its
business to interested users by means of accounting reports.
Recording: keeping a systematic, chronological diary of events, measured in dollars
The most common reports are called financial statements.
A vital element in communicating economic events is the accountant’s ability to analyze and
interpret the reported information in his own way. Interpretation involves explaining the
uses, meaning and limitations if reported data.
Activities of the accounting process:
Identification (select economic events) recording (record, classify and summarize)
communication (prepare accounting reports0 analyze and interpret for users.
Accounting process includes the bookkeeping function, involves only the recording of
economic events. Accounting involves the entire process of identifying, recording and
communicating economic events.
There are two broad groups of financial information:
1 Internal users: managers who plan, organize and run the business. Managerial
accounting provides internal reports to help users make decisions about their
companies.
2 External users: individuals and organizations outside the company who want
financial information about the company, mainly investors and creditors. Investors
use accounting information to decide whether to buy, hold or sell ownership shares
of a company. Creditors use accounting information to evaluate the risks of granting
credit or lending money. Financial accounting answers these questions.
Taxing authorities want to know whether the company complies with tax laws. Regulatory
agencies want to know whether the company is operating within prescribed rules.
Customers are interested in whether the company will continue to honor product warranties
and support its product line. Labor unions want to know whether the owners have the ability
to pay increased wages and benefits.
,LO2
SOX intent is to reduce unethical corporate behavior and decrease the likelihood of
future corporate scandals. Top managers must now certify the accuracy of financial
information.
- Generally accepted accounting principles
- Financial accounting standards boars
- Securities and exchange commission
- International accounting standards board
- International financial reporting standards
LO3
Basic elements of a business are what it owns and what it owes. Assets are the resources a
business owns (activa). Liabilities are claims of those to whom the company owes money
(creditors). Claims of owners are called stockholders’ equity.
Assets = liabilities + stockholders’ equity
This equation is called the basic accounting equation. Liabilities are paid first of a business is
liquidated. The equation applies to all economic entities regardless of size, nature of
business or form of business organization.
The business uses its assets in carrying out such activities as production and sales.
The capacity to provide future services or benefits the common characteristic possesses
by all assets.
Liabilities are claims against assets, existing debt and obligations.
- Account payable
- Note payable
- Salaries and wages payable
- Sales and real estate taxes payable
Stockholders’ equity is the ownership claim on a corporation’s total assets, also called
residual equity.
1) Common stock: the total amount paid in by stockholders for the shares they
purchase
2) Retained earnings: revenues, expenses and dividends. Revenues are the gross
increases in stockholders’ equity resulting from business activities entered into for
the purpose of earning income. Expenses are decreases in stockholders’ equity that
result from operating the business. They are costs of assets consumed or services
used in the process of earning revenue. Dividends is the distribution of cash or other
assets to stockholders. Dividends reduce retained earnings, however they are not an
expense.
,Increases investments by stockholders and revenues
Decreases dividends to stockholders and expenses
LO 4
Transactions are a business’s economic events recorded by accountants. May be internal or
external.
External transactions: involve economic events between the company and some outside
enterprise.
Internal transactions: are economic events that occur entirely within the company.
Criterion of a transaction is the financial position of the company changed?
Yes? it is a transaction
No? it is no transaction
Each transaction must have a dual effect on the accounting equation. E.g., if an asset is
increased, there must be a corresponding decrease in another asset, increase in a specific
liability or increase in stockholders’ equity.
Expanded accounting equation:
Assets = liabilities + Stockholders' equity
Stockholders' equity = common stock + retained earnings
Retained earnings = revenues – expenses – dividends
Transaction 1 investment by stockholders.
Investments by stockholders do not represent revenues and they are excluded in
determining net income.
Transaction 2 purchase of equipment for cash.
If you buy a thing, there will be a decrease in cash (which is an asset), but also a decrease in
stuff (which is also an asset).
Transaction 3 purchase of supplies on credit
If you buy something but pay later, the supplies will rise (which is an asset) and the liabilities
will rise also because you owe a price to someone.
Transaction 4 service performed for cash
You get revenue in return for good/service. Also, this will go on the stockholders’ equity side,
because it is a revenue, and there are no expenses or dividend.
Transaction 5 purchase of advertising on credit
This means that the money will go from the cash side, except when the payment is
postponed, then it goes on the liabilities side. Also, it will go on the stockholders’ equity
because it is a expense. So, the revenue – expense – dividend will be affected.
, Transaction 6 services performed for cash and credit
Accounts receivable = debiteuren
It bills the balance of $2.000 on account = op rekening.
Transaction 7 payment of expenses.
Paying expenses will decrease the stockholders’ equity at the expenses and in will decrease
the cash side of the assets.
Transaction 8 Payment of accounts payable
If they eventually pay the bill from a month ago, the amount of money can be removed from
the liabilities side, which at first increased the liabilities side. Also, it can be taken from the
cash on the assets side.
Transaction 9 receipt of cash on account
If people pay back what they have borrowed from the company, it will increase on the cash
and decrease on the accounts receivable, which are both on the assets side. It will not
change the total of assent but the composition of those assets.
Transaction 10 dividends
Paying the stockholders will decrease the cash and the stockholders’ equity, the dividend
side. Dividends are not expenses.
(Page 20, illustration 1-9)
LO 5
Companies prepare 4 financial statements from the summarizes accounting data:
1) Income statement revenues and expenses, net income or net loss in a period of
time.
2) Retained earnings statement summarizes the changes in retained earnings for a
specific period of time.
3) Balance sheet reports the assets, liabilities and stockholders’ equity at a specific
date
4) Statement of cash flow summarizes information about the cash inflows and
outflows for a specific period of time.
Income statement
- List the revenues first, followed by the expenses and finally it shows net income or
net loss.
- Does not include investments and dividend between stockholders and business.
Retained earnings statement
- Period of time is the same as the income statement.
- Starts with the net income, the final amount on the income statement. After that, the
dividend will be subtracted from the net income, then you’ll get the retained
earnings.
