Fundamental Accounting PrinciplesFundamental Accounting Principles

Fundamental Concepts and

Principles

Chapter

11

Learning objectivesLearning objectives

Conceptual: C1: Explain the purpose and importance of accounting

in the information age. C2: Identify users and uses of accounting. C3: Identify opportunities in accounting and related

fields. C4: Explain why ethics are crucial to accounting. C5: Explain the meaning of GAAP, and define and

apply several key principles of accounting.

Analytical: Define and interpret the accounting equation and each

of its components.

Learning objectiveLearning objective

C1: Explain the purpose and importance of accounting in the information age.

IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Importance of AccountingImportance of Accounting

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.

What is Accounting?What is Accounting?

1. It is a service activity which function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions .

2. It is the art of recording, classifying and summarizing, in a significant manner in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof.

3. It is a language of business

1. It is a service activity which function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions .

2. It is the art of recording, classifying and summarizing, in a significant manner in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof.

3. It is a language of business

Identifying Business Activities

Recording Business Activities

Communicating Business Activities

Accounting ActivitiesAccounting Activities

What is the relation between accounting and bookkeeping? What is the relation between accounting and bookkeeping?

Bookkeeping is the recording of financial transactions and events, either manually or electronically.

Accounting is much more. It includes identifying, measuring, recording, reporting, and analyzing business events and transactions, and helps information users to make economic decisions.

Learning objectiveLearning objective

C2: Identify users and uses of accounting.

Users of Accounting InformationUsers of Accounting Information

External Users

•Lenders

•Shareholders

•Governments

•Consumer Groups

•External Auditors

•Customers

Internal Users

•Managers

•Officers

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers

Users of Accounting InformationUsers of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.

Users of Accounting Information-ExternalUsers of Accounting Information-External

Lenders: Whether the firm (borrower) can repay the money?

Shareholders: whether to buy, hold, or sell stocks?

Governments: whether the firm pay all due tax?

Customers: whether the firm can exist to provide post-sale services?

External Auditors: whether the financial statements are prepared according to GAAP?

Etc.

Users of Accounting Information-InternalUsers of Accounting Information-Internal

Marketing managers: target customers, set price, monitor sales.

Production managers: monitor cost and ensure quality.

Purchasing managers: what, when and where to purchase materials.

Human resource managers: employees’ performance and compensation.

Learning objectiveLearning objective

C3: Identify opportunities in accounting and related fields.

Opportunities in AccountingOpportunities in Accounting

FinancialFinancial

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

ManagerialManagerial

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

TaxationTaxation

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

Accounting-related

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

Accounting Jobs by AreaAccounting Jobs by Area

Private accounting

60%Public accounting

25%

Government, not-for-profit, & education

15%

Learning objectiveLearning objective

C4: Explain why ethics are crucial to accounting.

Beliefs that distinguish right from

wrong

Accepted standards of good and bad

behavior

Ethics

Ethics—A Key ConceptEthics—A Key Concept

Identify ethical concerns

Analyze options

Make ethical decision

Use personal ethics to

recognize ethical concern.

Consider all good and bad

consequences.

Choose best option after weighing all

consequences.

Guidelines for Ethical Decision MakingGuidelines for Ethical Decision Making

Learning objectiveLearning objective

C5: Explain the meaning of GAAP, and define and apply several key principles

of accounting.

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

Relevant Information

Relevant Information

Affects the decision of its users.

Affects the decision of its users.

Reliable InformationReliable Information Is trusted by users.

Is trusted by users.

Comparable Information

Comparable Information

Is helpful in contrasting organizations.

Is helpful in contrasting organizations.

The Securities and Exchange Commission is the government group that establishes

reporting requirements for companies that issue stock to the public.

The Securities and Exchange Commission is the government group that establishes

reporting requirements for companies that issue stock to the public.

Setting Accounting PrinciplesSetting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

Setting Accounting PrinciplesSetting Accounting Principles

Hong Kong: • Hong Kong Institute of Certified Public Account

ants (HKICPA)

China• Ministry of Finance People’s Republic of China

International Accounting Standard Board (IASB)• International Financial Reporting Standards

(IFRS)

Principles of AccountingPrinciples of Accounting

General principles: basic assumptions, concepts, and guidelines for preparing financial statements.

Usually stem from long-used accounting practice.

Specific principles: detailed rules used in reporting business transactions and events.

Usually created by a pronouncement from an authoritative body.

Principles of Accounting— General PrinciplesPrinciples of Accounting— General Principles

Objectivity PrincipleAccounting information is supported by independent,

unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and

verifiable information.

Ex. Payments must be supported by official receipts, and bank deposits must be supported by deposit slips

Historical Cost PrincipleAccounting information is based on actual

cost.Cost is measured on a cash or equal-to cash basis

Ex. Land bought in 1990 for one million pesos should be recorded at one million pesos even though its market value in the year 2015 is already four million

Accrual Principle states that income should be recognized at the time it is earned such as when goods are delivered or when services have been rendered. Likewise, expenses should be recognized at the time they are incurred such as when goods and services are actually used not when the entity pays for those goods and services

Ex. A hotel cannot consider as income the advance payment of a customer who paid the hotel in advance for one month accommodation until the customer has checked-in

Adequate Disclosure states that all material facts that will significantly affect the financial statements must be indicated.

Ex. Land bought at one million pesos in 1998 should be recorded at historical cost in the 2015 financial statements. However, the current market value of two million pesos in the year 2006 may be indicated in the financial statements for the year 2015 in the form of footnote or parenthetical note

Adequate Disclosure states that all material facts that will significantly affect the financial statements must be indicated.

Ex. Land bought at one million pesos in 1998 should be recorded at historical cost in the 2015 financial statements. However, the current market value of two million pesos in the year 2006 may be indicated in the financial statements for the year 2015 in the form of footnote or parenthetical note

Materiality means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event. An item is considered significant if knowledge of it would influence prudent users of the financial statements

Ex. Items of significant amount such as paper clips can be charged outright to expenses

Materiality means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event. An item is considered significant if knowledge of it would influence prudent users of the financial statements

Ex. Items of significant amount such as paper clips can be charged outright to expenses

Consistency means that that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained.

Ex. If straight line method of depreciation is being used by the company, then the method should be uniformly used by the company in computing annual depreciation.

Consistency means that that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained.

Ex. If straight line method of depreciation is being used by the company, then the method should be uniformly used by the company in computing annual depreciation.

Business Entity FormsBusiness Entity Forms

ProprietorshipProprietorship PartnershipPartnership CorporationCorporation

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLC’s provide limited liability.

* Proprietorships and partnerships that are set up as LLC’s provide limited liability.

Characteristics of BusinessesCharacteristics of Businesses

Exh.1.8

*

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it

common stock (or capital stock).

CorporationCorporation

Learning objectiveLearning objective

Define and interpret the accounting equation and each of its components.

AssetsLiabilities & Equity

Accounting EquationAccounting Equation

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Accounting EquationAccounting Equation

Assets are resources with future benefits that are owned or controlled by a company.

Liabilities are what a company owes its creditors in future products or services.

Equity refers to the claims of its owner(s).

Forms of funds=Sources of funds (資金佔用＝資金來源 )

What resources does the firm have? (Assets) = Where do those resources come from? (Liabilities and Equity)

A firm acquires assets by funds. Liabilities and equity are the sources of funds to acquire those assets.

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

VehiclesVehicles

Store Supplies

Store Supplies

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

Resources owned or controlled

by a company

Resources owned or controlled

by a company

AssetsAssets

Taxes Payable

Taxes Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LiabilitiesLiabilities

Owner’sclaims

on assets

Owner’sclaims

on assets

RevenuesRevenues

Owner Investments

Owner Investments

Owner Withdrawals

Owner Withdrawals

ExpensesExpenses

EquityEquity

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Expanded Accounting EquationExpanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

_ + _

Expanded Accounting EquationExpanded Accounting Equation

Revenues: gross increase in equity from a company’s earnings activities.

Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.

Owner investments: the assets an owner puts into the company.

Owner withdrawals: the assets take away from the company for personal use.

End of Chapter 1End of Chapter 1

Chapter 1 HomeworkChapter 1 Homework

Ex. 1-1,1-2,1-7 Problem 1-1A Due on June 12, 2006 (Monday)