Session 1: Learning Objectives

What is Accounting?
The measurement, processing and communication of financial information about economic
entities
When financial reports are generated by professional accountants, we have certain
expectations of the information they present to us
Accounting is a highly regulated industry that requires ongoing training in order to maintain
your CPA license.
We expect the accounting information to be reliable, verifiable, and objective.
We expect consistency in the accounting information.
A common set of rules used to create financial statements
We expect comparability in the accounting information
Allows lenders, investors, and other financial statement users to compare, analyze and trust
the information reported on financial statements.
Accounting info must be useful
Information can only be useful if it is both relevant and reliable.
Relevance includes any information that helps the financial statement user determine the
value and performance of the company.
Information that is reliable can be verified independently and repeatedly
Reliability is the main reason companies are audited
Useful to external users including:
Investors (i.e. owners), who use accounting information to make, buy, sell or keep decisions
related to shares, bonds, etc.
Creditors (i.e. suppliers, banks), who utilize accounting information to make lending
decisions.
Taxing authorities (i.e. Internal Revenue Service), who need accounting information to
determine a company' tax
Useful to internal users including:
A company's senior and middle management, who use accounting information to run the
business.
Employees who use accounting information to determine
Accounting Needed:
To make predictions about the future
Help you make more effective commitments of time, energy and money to attract customers
and deliver goods and services at a larger and more efficient scale.
To measure and reassess your progress, so you can reward and encourage profitable
behaviors, report progress to third parties, and change directions when necessary.
Net Present Value (More to gain than it costs me)
Measure anything that is economically significant
Financial Accounting measures anything that can be termed in dollars
The Chart of Accounts enable to group transactions into similar buckets for measurement
By having discrete buckets of similar activities, we can determine their influence on the big
picture.
Key Principals
The Cost Principle
 Businesses are required to record and report assets based on the actually cost incurred to
acquire them rather than the free-market value of the acquired assets themselves
The Accrual Principle
Businesses are required to record and report revenue at the time it is earned and realized
by the business, not when the cash for the revenue is received by the business.
The Matching Principle
This principle allows for real time analysis of the expenses and revenues, Revenues and
their associated costs are matched at the time they are earned and realized to give a real time
analysis of performance.
The Disclosure Principle:
The accounting records of a business must be disclosed so that judgment about the financial
status of a business can be easily made.
Economic Entity
a separately identifiable organization which makes use of resources to achieve its goals and
objectives.
Monetary Unit
Economic activity is measured in U.S. Dollars, with no accommodation for inflation or
buying power
Time Period
Accounting periods of equal length for the purpose of preparing financial reports on
financial position, performance and cash flows.
Cost
Cost refers to the amount spent (cash or cash equivalent) when an item was obtained, not
what it might be worth.
Full Disclosure
If certain information is important to an investor, that information should be disclosed in the
financial statement
Going Concern
assumes that a company will continue to exist long enough to carry out its objectives and
commitments
Matching
expenses are matched with revenues
Revenue
revenues are recognized as soon as a product has been sold or a service has been performed
Materiality
judgment is needed to decide whether an amount is insignificant or immaterial.
Conservatism
If two acceptable alternatives for reporting an item, conservatism directs the accountant to
choose the alternative that will result in less net income and/or less asset amount.
 The Accounting Cycle
1. Transactions
2. Journal Entries
3. Posting
4. Trial Balance
5. Worksheet
6. Adjusting Journal Entries
7. Financial Statements
8. Closing the Books
Accounting Method companies must choose between two methods acceptable to the IRS
Cash Basis Accounting records all revenues and expenditures at the time when payments are
actually received or sent
Accrual Basis Accounting Reports income when earned and expenses when incurred
What is an account?
An account is a descriptive storage unit used to collect and store information of similar
nature.
Examples:
Cash, accounts receivable, revenue, rent expense
Fixed Expense: something you need to pay no matter how much of a product you are producing
(rent, utilities, salaries)
Assets
refer to resources owned and controlled by the entity as a result of past transactions and
events, from which future economic benefits are expected to flow to the entity
classified as current or non-current (long-term or fixed), mostly tangible/sometimes
intangible
Current Assets
assets are considered current if they are held for the purpose of being traded, expected to be
realized or consumed within twelve months after the end of the period or its normal
operating cycle (whichever is longer), or if it is cash
Examples:
Cash, accounts receivable, inventory, pre-paid rent
Liabilities
Liabilities are economic obligations or payables of the business
Classified as current or non-current (long-term)
Equity
Also known as net assets or capital refers to what is left to the owners after all liabilities are
settled. Simply stated, capital is equal to total assets minus total liabilities.
The difference between what is owned (assets) and what is owed (liabilities)
This is what the owners and investors own
Expense
Expenses are decreases in economic benefit during the accounting period in the form of a
decrease in asset or an increase in liability that result in decrease in equity, other than
distribution to owners.
Cost of Sales, Advertising Expenses, Rent Expense, Salaries, Income Tax, Repairs, etc.
Losses: such as loss from fire, typhoon loss, and loss from theft. Like income, they are
 measured every period and then closed as part of capital.
Net income refers to all income minus all expenses.