CHAPTER

1 Accounting Principles and

the Financial Statements

Principles of
Accounting

12e

Needles
Powers
Crosson

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Learning Objectives

 Define accounting and the concepts

underlying accounting.
 Define financial position and the
accounting equation.
 Identify the four basic financial statements
and their interrelationships.
 GAAP vs. IFRS
 Identify the users of accounting information

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO1: Accounting Concepts

 Accounting is an information system that

records, processes, and communicates
financial information about a business or other
economic entity.

 Accountants supply the information decision

makers need
to make “reasoned choices among alternative
uses of scarce resources in the conduct of
business and economic activities.”
Accounting Concepts
Financial and Managerial Accounting

 Accounting is usually divided into

financial accounting and managerial
- accounting.
External decision - Internal decision
makers use financial makers use information
accounting to provided by
evaluate how well a managerial
business has achieved accounting about
its goals. operating, investing,
 These reports, called
and financing activities.
 It provides managers and
financial statements, are
a central feature of employees with information
about how they have done
accounting. They report on
in the past and what they
a business’s financial
can expect in the future.
performance.
Accounting Measurement Concepts

To make an accounting measurement, the

accountant must answer four basic
questions:

 What is measured?
 When should the measurement be made?
 What value should be placed on what is
measured?
 How should what is measured be classified?
Business Transactions

 Business transactions are economic

events that affect a business’s financial
position.
 To be recorded, a transaction must relate
directly to a business entity
 All business transactions are recorded in
terms of money. This concept is called
money measure.
 For accounting purposes, a business
organization is a separate entity, distinct
from its creditors, customers, and its owners
LO2 - Financial Position concepts

 Financial position refers to a company’s

economic resources, such as cash,
inventory, and buildings, and the claims
against those resources at a particular time
(equities)

 Every company has two types of equities:

creditors’ equities, such as bank loans, and
owner’s equity:
Economic Resources = Creditors’ Equities + Owner’s
Equity
Financial position concepts

 In accounting terminology, economic

resources are called assets and
creditors’ equities are called liabilities
Assets

 Assets are the economic resources

that are expected to benefit the
company’s future operations. They
include:
– monetary items (cash and money owed to
the company by customers)
– nonmonetary, physical items (inventories,
land, buildings, equipment)
– nonphysical items (rights granted by
patents, trademarks, and copyrights)
Liabilities

 Liabilities are a business’s present

obligations to pay cash, transfer assets,
or provide services to other entities in
the future. They include:
– amounts to suppliers for goods or services
bought on credit
– borrowed money such as bank loans
– salaries and wages owed to employees
– taxes owed to the government
– services to be performed
Owner’s Equity

 Owner’s equity represents the claims

by the owner of a business to the
assets of the business.
– Owner’s equity is what would be left if all
liabilities were paid.
– It is sometimes said to equal net assets.
– We can define owner’s equity this way:
Owner’s Equity = Assets −
Liabilities
Owner’s Equity

– Owner’s equity is affected by the owner’s

investment in and withdrawals from the
business and by the business’s revenues
and expenses.
 Owners’ investments are assets that the
owner puts into the business.
 Withdrawals are assets that the owner takes
out of the business.
 Revenues are increases in owner’s equity that
result from operating a business.
 Expenses are decreases in owner’s equity that
result from operating a business.

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exercise 1
Exercise 2
LO 3 - Financial Statements

Four major financial statements are used

to communicate accounting information:
The Income Statement, The Statement Of
Owner’s Equity, The Balance Sheet, And
The Statement Of Cash Flows.
Income Statement (I/S)

The income statement summarizes the

revenues earned and expenses incurred by a
business over an accounting period.
Statement of Owner’s Equity (SOE)

The statement of owner’s equity shows

the changes in owner’s equity over an
accounting period.
Balance Sheet (B/S or SFP)

The Balance Sheet show the financial

position of a business on a certain date,
usually the end of a month or year.
Statement of Cash Flows (CFS)

 The statement of cash flows focuses

on liquidity, that is, balancing the
inflows and outflows of cash to enable
the business to operate and pay its bills
when they are due.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Relationships Between Statements

• The order of Financial Statements

Exercise

Complete the following financial statements by

determining the amounts that correspond to the
letters. (Assume no new investment by owners.)
Exercise 2
Exercise 3

Randall Company engaged in activities during the first

year of its operations that resulted in the following: service
revenue, $4,800; expenses, $2,450; and withdrawals,
$410.

In addition, the year-end balances of selected accounts

were as follows: Cash, $1,890; Other Assets, $1,000;
Accounts Payable, $450; and Owner’s Capital, $2,440.

Prepare Randall’s Income Statement, Statement Of

Owner’s Equity, And Balance Sheet at the end of the year.
LO4 - GAAP vs IFRS

 To ensure that financial statements are

understandable to their users, a set of
generally accepted accounting principles
(GAAP) has been developed to provide
guidelines for financial accounting.

 Many companies of all sizes have their financial

statements audited by an independent certified
public accountant (CPA).
GAAP vs. IFRS

 IFRS - International Financial Reporting

Standards. IFRS is the international
accounting framework within which to
properly organize and report
financial information.
 It is derived from the pronouncements of the
London-based
International Accounting Standards Board
(IASB).
 It is currently the required accounting
framework in more than 120 countries.
GAAP vs. IFRS (Vietnam)
LO 5 - The Users of Accounting Information

 The people who use accounting

information to make decisions fall into
two categories:

– Internal users: managers, directors,

CEOs…

– External users: outsiders who have a

direct financial interest in the business,
and outsiders who have an indirect
financial interest.
Management, Investors, and Creditors

 Management is responsible for

ensuring that a company meets its goals
of profitability and liquidity.
 Investors: owners and stockholders who
have a direct financial interest in the
success of their companies.
 Creditors: those who lend money or
deliver goods or services before being
paid
CHAPTER HOMEWORK

 E4A, E5A, E7A, E8A

 P1, P2, P3