Chapter 1: Accounting Cont'd

Chapter 1: Accounting Cont'd

1. GAAP

   • IFRS
     • purpose - achieve global agreement on accounting standards
   • Accounting Standards for Private Enterprises( ASPE)
     • -to acocomodate different reporting needs of private businesses
   • ensures usefulness of information
     • must have qualitative characteristics of relevance and presentation
     • comparable, verifiable, timely and understandable
   • Summary of GAAP Framework
     • Business Entity Principle
       • -business entity must be accounted for separate from its owners and the owner's entity
     • Cost Constraint
       • cost in reporting financial info must not exceed benefit received from the value of the reported info to external users
     • Going Concern Assumption
       • -assume that statements reflect business continuing atleast 12months into future unless otherwise stated
     • Currency
       • -currency expressed as units of money -monetary unit is stable and doesnt change due to currency change or inflation
     • Revenue Recognition
       • -revenue is recorded at time it is earned. (revenue is cash plus cash equivalence). ie when service is performed or product delivered)
     • Measurements
       • Historical - transcation recorded based on actual amount received/paid -Current Cost - amount it would cost to acquire the asset Realizable value - amount to be received for selling asset

2. Financial Statements

   • -means of financial communication
   • produces by recorded, stored, classified and sorted transactions
   • income statements
     • expenses, revenues, profits/loss over period of time
       • Profit/Loss = Revenue - Expenses
   • balance sheets
     • reports equity, liability, assests at a pt in time
   • Statement of Change in Equity
     • -covers over a period of time
     • Equity
       • how much of assest belong to owner
         • assets - liability = equity
       • increases with owner's investment and profit
       • decreases with owners withdrawals and net loss
     • profit + investment - withdrawal
   • Statements of Cash Flow
     • resources and uses of cash for a period of time
     • organized by operation, investing, financing

3. Accounting Equation

   • Assests = Liability + Equity
     • assets - what an org has invested in liability - non-owner financing (borrowing) equity - owner financing (what is owned by the owner)
   • Transaction Analysis
     • exchange in economic consideration with 2 parties that causes change in assets, liability or equity.
     • Business events do not cause change in accounting equation
       • -do not require an economic change between 2 parties
     • every transaction must balance accounting equation
     • which acounts are effected; is acount increasing/decreasing

4. Financial Statment Preparation

   • Income Statememt Prepped First
     • uses revenue and expenses to calc profit/loss
     • Statement of Changes in Equity
       • takes profit/loss from income statement
       • Balance Sheet is prepared using Income and Equity statements
     • rev-exp=profit/loss