Chapter

Accounting in Business

Importance of Accounting
is a
Accounting

system that

Identifies

Records information Relevant Reliable Comparable to help users make better decisions. that is Communicates

Characteristics of Accounting Information

USEFUL FINANCIAL INFORMATION

RELEVANCE 1. Predictive value 2. Feedback value 3. Timely

RELIABILITY 1. Verifiable 2. Faithful representation 3. Neutral

COMPARABILITY

CONSISTENCY

Accounting Activities
Identifying Business Activities Recording Business Activities

Communicating Business Activities

Users of Accounting Information

External Users

Internal Users

Lenders

Consumer Groups Managers

Officers

Sales Staff
Budget Officers

Shareholders External Auditors Governments Customers

Internal Auditors Controllers

The Operating Guidelines of Accounting

ASSUMPTIONS
Economic entity Monetary unit Going concern

PRINCIPLES
Historical costs Revenue recognition Matching

CONSTRAINTS
Conservatism Materiality

Time period

Full disclosure

Accounting Assumptions

Now

Future

Economic Entity The business is accounted for separately from other business entities, including its owner

Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold

Monetary Unit Principle Express transactions and events in monetary, or money, units

Time Period The economic life of business can be divided into artificial time period for the purpose of financial reporting

Accounting Constraints

Conservatism Income and assets be reported at their lowest reasonable amounts (i.e. minimizing the assets and understating the income)

Materiality Accountants are required to accurately account for significant items and transactions

Business Entity Forms

Proprietorship

Partnership

Corporation

Characteristics of Businesses
Characteristics Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no no yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

Corporation

Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of share, we call it common share (or capital share).