ACCOUNTING
TERMINOLOGY
F I N AN C E F O U N D AT I O N S
C H AP T E R 1 2
M R S . S O R R E L L
WHAT IS ACCOUNTING?
• Official language for business that provides
information about a company’s financial position
• Planning, recording, interpreting, and analyzing of
financial information
• Communicate the financial operations of all types
of organizations
THREE MAIN CATEGORIES OF
ACCOUNTING?
• Operating Information
• Constitutes the greatest amount of accounting
information
• Payments—salaries, sales tracked, track payments,
inventory accounted for, customer accounts
• Financial Accounting Information
• Used to make decisions involving the organization and
the operations
• Shareholders need information about what their
investment is worth (buy or sell shares)
• Managerial Accounting Information
• Allows managers to plan, implement and control
• Used to set budgets, analyze costs
ACCOUNTING EQUATION
• Assets = Liabilities + Owner’s Equity
• Assets = own
• Liabilities = owe
• Equity = the difference between
the former two
UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
• The Securities Exchange Commission has the
authority to establish US GAAP.
• They allow a series of private organizations to determine
these
• Currently, the FASB is the organization that has the
authority to set accounting standards
CERTIFIED PUBLIC ACCOUNTANTS
(CPA)
• Act as advisors to individual, businesses, financial
institutions, nonprofit organizations, and
government agencies on a wide range of financial
matters
• Assist in preparing income taxes
• Planning for personal finances such as retirement
• Business owners rely on them for auditing services
and advice on developing effective accounting
systems, maximizing operating results, and resolving
management issues
• Assist in designing and installing data
processing/management information systems
AICPA OBJECTIVES
• Advocacy
• National representative of CPAs before government,
regulatory bodies, and other organizations in protecting and
promoting members’ interests
• Certification and licensing
• Seeks the highest level of uniform certification and licensing
standards
• Communications
• Promotes public awareness and confidence in the integrity,
objectivity, competence, and professionalism of CPAs
• Recruiting and education
• Encourages highly qualified individuals to become CPAs
• Standards and performance
• Establishes professional standards; assists members in
improving; and monitors performance
BASIC ASSUMPTIONS FOR US GAAP
• Entity Assumptions
• Business is a separate entity from its owners
• Going Concern Assumption
• Expectations are that a business will remain in operation
• Monetary Unit Assumptions
• Accounting records show only the monetary security of the
company
• Time Period Assumption
• Defines a specific period for which an entity’s reports are
prepared
PRINCIPLES FOR US GAAP
• Cost Principle
• Market value is difficult to determine, always record the
purchase price of an asset
• Matching Principle
• Revenues and related expenses be recorded in the same
accounting period
• Revenue Recognition Principle
• Revenues are recognized when earned
• Disclosure Principle
• Companies must include information that may impact
decision of users of financial information
CONSTRAINTS OF US GAAP
• Materiality
• Only record events that are significant enough to justify the
usefulness of the information
• Cost-Benefit Relationship
• Financial information provided by an organization is
beneficial enough to justify the cost of preparing it
• Consistency Principle
• Once an entity adopts a method of accounting, they must
use that same method for all subsequent events
• Conservatism Principle
• Select accounting methods that are least likely to overstate
assets (revenues) an understate liabilities (expenses) in the
current period
CLASSIFYING ACCOUNTS
• Assets
• Liabilities
• Capital
• Revenue
• Expenses