Lesson 1.1 - Accounting in Action
By the end of this lesson you will be able to
- Why you want to study Accounting?
Answer the questions briefly.
Accounting is the information system that identifies, records and communicates economic events of organizations to interested users.
Internal users are those who work for the company and use accounting data in planning, organizing and running the organization.
External users are those users outside of the business who need information about the financial position and performance of the company.
Proprietorship. A business owned by one person is generally a proprietorship.
Partnership. A business owned by two or more persons associated as partners is a partnership
Corporation. A business organized as a separate legal entity under federal or provincial corporation law and having ownership divided into transferable shares is called a corporation.
Generally Accepted Accounting Principles (GAAP) The common set of standards used by accountants in reporting economic events are called generally accepted accounting principles (GAAP) which includes broad principles and practices, as well as rules and procedures
Economic Entity Concept. The economic entity concept requires that the activities of the entity be kept separate and distinct from the activities of its owners, and all other economic entities.
Going Concern Assumption. It is assumed that a company will continue to operate in the foreseeable future.
The Balance Sheet (sometimes called statement of financial position) provides information about the economic resources that the business can use to carry out its business activities to earn a profit and the claims to these economic resources.
Assets are resources owned or controlled by a business. Every asset is capable of providing future services or benefits and helps the business generate revenue which results in future cash inflows.
Liabilities are current obligations, arising from past events, to make a future payment of assets or services. In other words, liabilities are present debts and obligations.
Owner’s equity is the owner’s claim on total assets. It is equal to total assets minus total liabilities.
The basic accounting equation (sometimes referred to as the balance sheet equation) is:
Assets = Liabilities + Owner’s Equity
The Income Statement (sometimes called statement of earnings or statement of operations) reports the profitability of the business’s over a specified period of time (a month, quarter, or year).
Revenues are increases in net assets (i.e. an increase in an asset or a decrease in a liability and an increase in owner’s equity) that result from business activities performed to earn profit. Common sources of revenue include sales, fees, services, commissions, interest, and renting property out to tenants
Expenses are the costs of assets consumed or services used in the company’s ordinary business activities.
- Self study questions for practice
Why Financial Statements are prepared?
Attempt he following questions for practice:
Study Objectives
Questions
Brief
Exercises
Exercises
Problems
Set A
Identify the use and users of accounting and the objective of financial reporting.
1, 2, 3, 4, 5,6, 8 and 9
1, 2
1,2, and 3
1