Accounting
Zhang Qiao-Liang
CPA, FPNA,Professor
Economics and Management School
Lanzhou University of Technology
• Accounting is the art of analyzing,
recording, summarizing, reporting,
reviewing, and interpreting financial
information.
Importance of Accounting
is a
Accounting
system that
Identifies
Records
i_________
nformation
Relevant
that is
Communicates
Reliable
Comparable
3
to help users make
better decisions.
• The following are some of the rules used
to "play" the Accounting "Game“:
• Accounting
asumptiong
• Business Entity Concept
This assumption requires every business to be
accounted for separately from the owner.
Personal and business-related transactions are
kept apart from each other. In other words, the
separate personal transactions of owners and
others are not commingled with the reporting of
the economic activity of the business. One of the
first recommendations almost all accountants tell
a client is to at least establish a business
checking account and to use it to only record
their business transactions.
The Concept of the Business
Entity
Vagabon
d Travel
Agency
A business
entity is
separate from
the personal
affairs of its
owner.
• Accounting Period Concept
This assumption assumes that business
operations can be recorded and separated
into different time periods such as months,
quarters, and years. This is required in
order to provide timely information that is
used to compare present and past
performance.
The Time Period Concept
• Requires that accounting
information be reported at regular
intervals
8
Accounting Period
• Managers adopt an artificial period of time
to evaluate performance
– Monthly
– Quarterly
– Semiannually
– Annually
Interim Statements
9
• Going Concern Concept
This assumption assumes that a business
will continue operating and will not close or
be sold. It assumes that a business will be
in operation for a long time. Based on this
assumption, actual costs instead of
liquidation values are used for presenting
financial information. This assumption is
abandoned in the event that a business is
actually going out of business.
• Money Measurement Concept
This assumption assumes accounting
measures transactions and events in
money and only transactions that can be
monetized (stated in a monetary unit such
as the dollar) are recorded and presented
in financial statements. Simply stated,
money is the common denominator
(measurement unit) used for reporting
financial information.
To be useful and helpful to users, financial statements and
information must have the following Qualitative
Characteristics: In other words, the information
possesses these qualities or characteristics.
.Conservatism Concept
Revenues and gains are recognized slower and
expenses and losses are recognized quicker.
Accountants have a tendency to stray away from
painting too rosy a picture. In other words, if in
doubt, err to the side of caution. While
accountants don't want to misinform users of
financial information, they also don't want to be
sued
• Comparable
Information must be measured and
reported in a similar manner by all types of
businesses. This allows comparison of the
financial statements of different entities
(businesses) or comparisons for the same
entity (business) over different periods
• Materiality Concept
The significance and importance of an
item should be considered in order to
determine what is reported. Insignificant
events need not be measured and
recorded.
• Cost-Benefit Convention
The benefit of providing the financial
information should also be weighed
against the cost of providing it.
• Industry Practices Convention
When customary industry practices exists
they should be followed and used for
financial reporting
• Relevant:
The definition of relevant as it applies to
financial information evolves from the
general definition of the term relevant
– Reliable:
The definition of reliable as it applies to
financial information evolves from the general
definition of the term reliable. Reliable
•
•
•
•
Giving the same result on successive trials.
High degree of certainty
Worthy of reliance or trust
Suitable or fit to be relied on; worthy of
dependence or reliance; trustworthy.
• Constraints and Modifying
Conventions:
• Constraints:
Unfortunately, information is not free. The
qualitative characteristics of useful
accounting information are constrained by
two factors.
– Materiality- Information is material if it
provides information that would effect a
decision (decision maker). The materiality of
an item requires judgment and depends on
the relative size of the item, how accurately
the information can be estimated, and the
nature of the item.
– Relative Cost Benefit- Information should only
be provided if its benefits exceed its costs.
GAAP attempts to provide guidance in this
area.
• Modifying Conventions:
– Conservatism
Accountants have a tendency to stray away
from painting too rosy a picture. In other
words, if in doubt, err to the side of caution.
While accountants don't want to misinform
users of financial information, they also don't
want to be sued.
– Industry Practices
Are the specific methods or practices that
specific industries have developed and use to
present information related to their unique
needs.
• Consistency Concept
The same accounting methods should be
applied from period to period and all
changes to more acceptable methods
should be well explained and justified.
Deviations in measured outcomes from
period to period should be the result of
deviations in performance not changes in
methods.
Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2007
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Assets are economic
resources that are
owned by the business
and are expected to
benefit future
operations.
Assets
Cost Principle
Stable-Dollar
Assumption
These accounting
principles support
cost as the basis for
asset valuation.
Objectivity
Principle
Going-Concern
Assumption
Liabilities
Vagabond Travel Agency
Balance Sheet
December 31, 2007
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Liabilities are debts
that represent
negative future cash
flows for the
enterprise.
Owners’ Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2007
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Owners’ equity
represents the
owners’ claims on the
assets of the business.
Owners’ Equity
Changes in Owners’
Equity
•Owners’
Investme
nts
•Busines
s
•Paymen
ts to
Owners
•Busines
s Losses
C5
Generally Accepted Accounting
Principles
Financial accounting practice is governed by concepts and
rules known as generally accepted accounting principles
(GAAP).
Relevant Information
Affects the decision of its
users.
Reliable Information
Is trusted by
Comparable
Information
users.
Is helpful in contrasting
organizations.
C5
Setting Accounting
Principles
Financial Accounting Standards Board is the
private group that sets both broad and
specific principles.
The Securities and Exchange Commission is the government group
that establishes reporting requirements for companies that issue
stock to the public.
The International Accounting Standards Board (IASB) issues
International Financial Reporting Standards that identify preferred
accounting practices.
C5
Principles of Accounting
Cost Principle
Objectivity
Accounting
Principle
information is
Accounting
based
on
actual
informationNowis
Future
cost.
supportedGoing-Concern
by
independent,Principle
unbiased evidence.
C5
Principles of Accounting
Monetary Unit
Principle
Express transactions
and events in
monetary, or money,
Business Entity
units.
Principle
A business is
Revenue
Recognition
Principle
1.Recognize revenue
when it is earned.
2.Proceeds need not
be in cash.