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ACCOUNTING OVERVIEW

Basic Terminology & Accounting Objectives


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ACCOUNTING OVERVIEW

Objectives of Financial Reporting Provide information that is useful in credit and investment decision making. Provide the users with a tool to assess the amounts, timing and prospects of future cash flows of an entity. Provide relevant information regarding the entitys resources, claims against these resources and changes in them.

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ACCOUNTING OVERVIEW

Accounting Definition Identifying, gathering, organizing and summarizing of financial information about an economic units financial activities to interested parties.

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ACCOUNTING OVERVIEW

Financial Accounting The process that culminates in the preparation of financial reports relative to an enterprise as a whole for internal and external users.

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ACCOUNTING OVERVIEW

Managerial Accounting The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial information used by management to plan, evaluate and control within an organization and to assure appropriate use of and accountability for the entities resources.

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ACCOUNTING OVERVIEW

Financial Management

Efficient use of the sources and uses of funds Dividend payout, debt restructuring, mergers, acquisitions, corporate reengineering Focus on both internal and external conditions Global economy Forecasting and planning Coordination and control of the entities activities Dealing with the financial markets, banks & other financing institutions Risk management Maximize business value

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ACCOUNTING OVERVIEW

Objectives of an Accounting System Recordation


Journal entries Subsidiary journals Dual system of entry debits and credits Grouping of common activities

Summarization

Timely and accurate reporting

Financial statements

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ACCOUNTING OVERVIEW

Objectives of an Accounting System Present fairly the financial condition of an entity Summarizes economic activity and reports such activities via a report. GAAP

Generally Accepted Accounting Principles Established by: FASB, SEC, AICPA & GASB International Accounting Practices, Industry, Management Groups Generally Accepted Auditing Standards

GAAS

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ACCOUNTING OVERVIEW

Basic Accounting Terminology Event

Generally the source or cause of changes in assets, liabilities, and equity accounts internal and external External event between two or more entities Reflects the impact of certain activities on a specific account each asset, liability, equity, revenue/sales and expense has its own account

Transaction

Account

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ACCOUNTING OVERVIEW

Basic Accounting Terminology General Ledger Subsidiary Ledger General Journal Trial Balance Adjusted Trial Balance Adjusting Entries Closing Entries

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ACCOUNTING OVERVIEW

Sources of Accounting Information Source Documents

A/R invoicing, checks, vendor invoices, etc.

Subsidiary Journals

Sales Cash Receipts, Cash Disbursements Purchases

General Ledger Trial Balance and Adjusted Trial Balance

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ACCOUNTING OVERVIEW
Financial Statement
Trial Balance

General Ledger

SJ

CR

CM

CD

PUR

JE

Source Documents
2-10
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ACCOUNTING OVERVIEW

Debits and Credits What do they mean?


Are they increases or decreases? It depends on what? Assets and Expenses Increase by debiting Decrease by crediting Liabilities, Equity, Partners Capital & Revenue Increase by crediting Decrease by debiting Dual accounting entries / compound entries Debits = Credits

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ACCOUNTING OVERVIEW

Fundamental Accounting Equation


=

Assets

Liabilities

Owners Equity

Assets = Liabilities + Owners Equity Or


Assets

Liabilities

Partners Capital

Assets = Liabilities + Partners Capital

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ACCOUNTING OVERVIEW

Types of Accounts Permanent or Real Accounts Balance Sheet

Balances carry over from one period to the next


Assets Liabilities Equity or Capital Accounts

Temporary or Nominal Accounts Income Statement

Balances closed out periodically


Sales, Revenue and Income Accounts Expenses or Costs

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ACCOUNTING OVERVIEW

Expanded Accounting Equation


Assets = Liabilities + Owners Equity

Common Stock

Paid in Capital Surplus

Retained Earnings

Revenues

Expenses

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THE BASIC ASSUMPTIONS AND PRINCIPLES OF ACCOUNTING


Four Assumptions

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ASSUMPTIONS AND PRINCIPLES

The Accountants Roadmap Rules of Engagement


Assumptions Principles Modifying Conventions Role of the accountant regarding financial statements Role of management regarding financial statements

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ASSUMPTIONS AND PRINCIPLES

Economic Entity Assumption The economic activity of an entity can be kept separate and distinct from its owners and any other business unit. The entity concept is not necessarily a legal entity concept; a parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes is not a violation of the economic entity assumption.

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ASSUMPTIONS AND PRINCIPLES

Going Concern Assumption Most accounting methods are based on the premise that the business enterprise will have a long life. Acceptance of this assumption provides credibility to the historical cost principle.

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ASSUMPTIONS AND PRINCIPLES

Monetary Unit Assumption Implies which monetary unit is the most effective means of expressing economic activity.

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ASSUMPTIONS AND PRINCIPLES

Periodicity Assumption Implies that the economic activities of an enterprise can be divided into artificial time periods, i.e.: monthly, quarterly or annually. This allows for comparative analysis.

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The Basic Assumptions and Principles of Accounting


Six Principles

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ASSUMPTIONS AND PRINCIPLES

Revenue Recognition Principle Revenue is recognized at a point in the earnings process when:

all, or a substantial portion, of the services to be provided have been performed and cash, receivables or some other asset susceptible to objective measurement is achieved.

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ASSUMPTIONS AND PRINCIPLES

Historical Cost Principle Non-monetary assets are initially recorded at their acquisition cost. Non-monetary assets are stated at acquisition cost until all or a portion of their service potential has been consumed. At this time, all or a portion of the acquisition cost becomes an expense.

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ASSUMPTIONS AND PRINCIPLES

Matching Principle Expenses directly associated with particular revenues are recognized as expenses in the period which the revenues are recognized.

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ASSUMPTIONS AND PRINCIPLES

Consistency Principle Accounting principles and procedures selected by an entity should be used consistently over time.

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ASSUMPTIONS AND PRINCIPLES

Full Disclosure Principle Information in the financial statements is presumed to be sufficiently adequate so that a reader can make an informed judgment or decision.

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ASSUMPTIONS AND PRINCIPLES

Objectivity Principle Information is objective and verifiable, essentially similar measures and conclusions would be reached if two or more persons examined the same data.

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ASSUMPTIONS AND PRINCIPLES

Modifying Conventions Because there are certain exceptions in the practical application of these six principles.

Materiality Objectivity Industry Practices

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