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Samenvatting Accounting and Financial Reporting
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Good summary of the accounting course. Includes very relevant general information about accounting.
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Summary financial reporting and accountingChapter 1: Accounting in action
1.1: Accounting activities and users
Three activities of accounting:
Identifying: starting point of the accounting process, identifying economic events
relevant to the business.
Recording: recording economic events to provide a systematic and chronological
history of the firm’s financial activities (bookkeeping).
Communicating:
1. Communicating collected information to interested users by means of
accounting reports (financial statements).
2. Reporting data in a standardized way; accumulating information resulting
from similar transactions.
3. Data reported in the aggregate; simplifies a multitude of transactions.
4. Ability to analyse and interpret information; explaining the uses, meaning and
limitations of reported data.
Users of accounting data:
Internal users: managers who plan, organize and run the business. People who must
answer questions which are related to finance (managerial accounting).
External users: individuals outside the company that want financial information
about the company for example investors and creditors (financial accounting).
1.2: The building blocks of accounting
Ethics in financial reporting:
Faith in the reliability of earnings reports decreased: tumbling share prices.
If you could not depend on financial statements to be honestly prepared: no
credibility.
Well-functioning economy depends on accurate and dependable financial reporting.
When analysing ethic cases these three steps must be applied:
1. Recognize an ethical situation and the ethical issues involved.
2. Identify and analyse the principal elements in the situation.
3. Identify the alternatives and weigh the impact of each alternative on various
stakeholders.
,Accounting standards:
To ensure high-quality financial reporting, accountants present financial statements
in conformity with accounting standards issued by standard setting bodies:
1. International Accounting Standards Board (IASB): determines International
Financial Reporting Standards (IFRS). In Europe this form is mostly used.
2. Financial Accounting Standards Board (FASB): determines generally accepted
accounting principles (GAAP). In the USA this form is mostly used.
Convergence: use both GAAP and IFRS to reduce differences.
Measurement principles:
To keep the financial information relevant and capable of making a difference in a
decision and to keep the numbers to what they are (faithful representation).
Historical cost principle: company’s must record their assets at their real cost. Also,
over the time that the asset is held.
Fair value principle: assets and liabilities must be reported at fair value. The true
value of the asset now of reporting.
Assumption:
Monetary unit assumption:
1. Companies include only transaction data that can be explained in money
terms in the accounting records.
2. Enables accounting to quantify economic events.
3. Essential to applying historical cost principle.
4. Prevents inclusion of some relevant information that cannot quantify into
money terms.
Economic entity assumption:
Proprietorship Partnership Corporation
Owner(s) Proprietor - one Partners - two or more Shareholders - many
• Personally liable • General partners • not personally liable
Personal liability for
personally liable
owner(s) for business
• Limited partners not
debts
liable
• small retail store • real estate
• individual providers • professional service
Examples
of professional firms (law, accounting)
services
,1.3: The accounting equation
Assets:
Resources a business owns.
Firm uses assets to carry out activities, production, sales, etc. and provide future
services or benefits.
The future economic benefit eventually results in cash inflows (receipts)
Liabilities:
Claims against assets; existing debts and obligations.
Business borrows money and purchase merchandise on credit.
Economic activities result in payables of various sorts:
1. Accounts payable (Pizza service: purchase cheese, beverages etc. on credit
from suppliers).
2. Note payable (Pizza service: borrowed money from bank to purchase delivery
truck).
3. Salaries and wages payable → to employees.
4. Sales and real estate taxes payable → to local government.
Creditors:
1. The people to whom a business owes money.
2. May force liquidation of business that does not pay its debts. Law requires
creditor claims to be paid before ownership claims
Equity:
Ownership claims on a company’s total assets.
Total assets – liabilities = Equity (residual equity)
Consists of:
1. Share capital/ordinary: funds by selling shares to investors.
2. Retained earnings: determined by revenues, expenses and dividends.
1.4: Analysing Business Transactions
Accounting information system:
System of collecting and processing transaction data and communicating financial
information to decision makers.
Factors: nature of company ś business, types of transactions, size of company,
volume of data, information demands.
Most businesses use computerized accounting systems (EDP): handle all steps in the
recording process.
Rely on accounting cycle.
, Accounting transactions:
Transactions: businesses economic event recorded by accountants.
External transactions:
o Economic events between company and outside enterprise.
Internal transactions:
o Economic events that occur entirely within one company.
Companies do many activities that do not represent business transactions:
o Hiring employees, responding to e-mails, talking with customers.
o Some of the activities lead to business transactions (for example: employees
will earn wages).
Analyse each event leads to finding out if it affects accounting equation.
Each transaction must have dual effect on accounting equation (for example: asset
increases which leads to an increase in equity).
Transaction analysis:
Expanded accounting equation:
1. Share capital/ordinary: Affected when company issues new ordinary shares in
exchange for cash.
2. Retained earnings: Affected when company earns revenue, incurs expenses,
pays dividends.
Summary of transactions:
Indicates transaction number and specific effects of each transaction.
Demonstrates number of significant facts:
1. Each transaction must be analysed in terms of its effect on the 3 components
of the accounting equation and specific types within each component.
2. Two sides of equation are always equal.
3. Share capital/ordinary, retained earnings columns show causes of each
change in shareholders’ claim on assets.
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