Montclair State University

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Montclair State University

• Accounting 520
• Basic
• Recording
• Process

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Function of Accounting
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Function of Accounting

• Decisions
• What product to make
• What raw materials to use
• How to manufacture product
• with machinery
• with manual labor
• How to finance operations
• Government tax decisions
• Investor and creditor decisions

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Yankee Stadium
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• Score
• Toronto 7
• Yankees 6
• Bottom of the ninth
• Two outs

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ABCDE

• Who Should Bat
• ?

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• Score
• Toronto 7
• Yankees 6
• Bottom of the ninth
• Two outs

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ABCDE

• Batter A
• Career Batting Average .340
• Batting Average This Year .350
• Average With Runners in Scoring Position .570
• Average Against Pitcher .880

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ABCDE

• Batter B
• Career Batting Average .190
• Batting Average This Year .160
• Average With Runners in Scoring Position .050
• Average Against Pitcher .000

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ABCDE

• Batter A or Batter B
• ?

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Definitions of Accounting

• (Accounting is) . . . the process of
  identifying, measuring, and communicating
  economic information to permit informed judgments
  and decisions by users of the information.
• A Statement of Basic Accounting Theory
• American Accounting Association, 1966

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Definitions of Accounting

• Accounting is the art of recording, classifying,
  and summarizing in a significant manner and in
  terms of money transactions and events which are,
  in part at least, of a financial character, and
  interpreting the results thereof.
• AICPA Committee on Terminology, 1941

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Definitions of Accounting

• Accounting is a service activity. Its function
  is to provide . . . financial . . . information
  about economic entities that i intended to be
  useful in making economic decisions.
• APB Statement 4, 1980

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Essential Characteristics of Accounting

Economic Entity
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Essential Characteristics of Accounting

Economic Entity
Financial Activities
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Essential Characteristics of Accounting

Economic Entity
Accounting
Measure Financial Activities of
an Economic Entity
Financial Activities
Measure
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Essential Characteristics of Accounting

Economic Entity
Accounting
Measure Financial Activities of
an Economic Entity
Financial Activities
Measure
Decision Maker
Communicate a Summary
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FinancialAccountingStandardsBoard
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Conceptual Framework
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
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Objectives
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Owners
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Owners
Creditors
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Owners
Creditors
Suppliers
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Owners
Creditors
Suppliers
Potential Owners
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Owners
Creditors
Suppliers
Potential Owners
Potential Creditors
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Owners
Creditors
Suppliers
Potential Owners
Potential Creditors
Potential Suppliers
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Owners
Creditors
Suppliers
Potential Owners
Potential Creditors
Potential Suppliers
Employees
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Owners
Creditors
Suppliers
Potential Owners
Potential Creditors
Potential Suppliers
Management
Employees
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Owners
Creditors
Suppliers
Potential Owners
Potential Creditors
Customers
Potential Suppliers
Management
Employees
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Owners
Creditors
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Management
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Management
Employees
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Owners
Creditors
Government
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Government
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Owners
Creditors
Financial Press
Suppliers
Potential Owners
Labor Unions
Potential Creditors
Customers
Potential Suppliers
Employees
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Accounting Information for Investors and Creditors

• Uses of information by investors and creditors
  and their advisors have been studied extensively
• such information is likely to be generally useful
  to other users

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Objectives
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Provide information useful in investment and
credit decisions
Objectives
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Basic Recording Process

• Based on person-made rules
• Basic Underlying Assumption 1 (BUA 1)
• Economic Entity
• Accounting Data

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Basic Recording Process

• Based on person-made rules
• Basic Underlying Assumption 1 (BUA 1)
• Economic Entity
• Accounting Data
• financial exchange

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Basic Recording Process

• Based on person-made rules
• Basic Underlying Assumption 1 (BUA 1)
• Economic Entity
• Accounting Data
• financial exchange
• Accounting Equation
• Asset Liabilities Owners Equity

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Assets

• Probable future economic benefits obtained or
  controlled by a particular entity as a result of
  past transaction or events

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Liabilities

• Probable future sacrifices of economic benefits
  arising from present obligations to transfer
  assets or provide services to other entities in
  the future as a result of past transactions or
  events

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Owners Equity

• The financial interest of the owners arising from
  initial, and possibly subsequent, investments and
  accumulated profits

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Basic Underlying Assumption 2Monetary Unit

• the monetary unit is the most effective means of
  expressing changes in capital and exchanges of
  good and services
• the unit of measure remains reasonably stable

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Debit/Credit Concept

Assets
Liabilities
Owners Equity
Debit
Debit -
Debit -
Credit -
Credit
Credit
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Debit/Credit Concept
Debits
Credits

• Debits should always equal credits

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Nature of Account Titles

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Factors Determining Account Titles

• Information needs of investors and creditors
• Nature of operations

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Chart of Accounts
Assets Revenue 11 Cash 41 Sales
12 Accounts Receivable 14 Supplies Expen
ses 15 Prepaid Rent 18 Printing
Equipment 51 Salary Expense 19 Accumulated
Depreciation 52 Supplies Expense 53 R
ent Expense Liabilities 54 Depreciation
Expense 59 Miscellaneous
Expense 21 Accounts Payable 22 Salaries
Payable Owners Equity 31 Charles Bell,
Capital 32 Charles Bell, Drawing 33 Income
Summary

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Basic Recording Process