Unit 5
Adrianna Kerns
Finance Foundations
Accounting Terminology

What is accounting?
o
o
o

Three main categories of accounting?
o
o
o

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
o
o
o
o

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
Assets= Liabilities+Owner’s Equity
Assets= Own
Liabilities= Owe
Equity= the difference between the former two


United States Generally Accepted Accounting Principles (GAAP)
o The Securities Exchange Commission has the authority to establish us GAAP
 They allow a series of private organizations to determine these
The FASB is the organization that has the authority to set accounting standards
Financial Accounting Standards Board (FASB)

Certified Public Accountants (CPA)
o
o
o
o
o

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 designing and installing data processing/management information systems
AICPA Objectives (American Institute of Certified Public Accountants)
o Advocacy
 National representative of CPAs before government, regulatory bodies,
and other organizations in protecting and promoting members interests
o Certification and licensing
 Seeks the highest level of uniform certification and licensing standards
Unit 5
o
o
o
Adrianna Kerns
Finance Foundations
Communications
 Promotes public awareness and confidence in the integrity, objectively,
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
o Entity Assumptions
 Business is a separate entity from its owners (entity= 1)
o Going Concern Assumption
 Expectations are that a business will remain in operation
o Monetary Unit Assumption
 Accounting records show only the monetary security of the company
o Time Period Assumption
 Defines a specific period for which an entity’s reports are prepared

Principles for US GAAP
o Cost Principle
 Market value is difficult to determine, always record the purchase price of
asset
o Matching Principle
 Revenues an related expenses be recorded in the same accounting
period
o Revenue Recognition Principle
 Revenues are recognized when earned
o Disclosure Principle
 Companies must include information that may impact decision of users of
financial information
Constraints of US GAAP
o Materiality
 only record events that are significant enough to justify the usefulness of
the information
o Cost-Benefit Relationship
 Financial information provided by an organization is beneficial enough to
justify the cost of preparing it
o Consistency Principle
 Once an entity adopts a method of accounting, they must use that same
method for all subsequent events
o Conservatism Principle
 Select accounting methods that are least likely to overstate
assets(revenues) an understate liabilities (expenses) in the current period
Most common and important asset is cash
Most common liability is accounts payable (amounts that we owe others)
Transaction: every event that causes a change in financial situation in a business
T Account: scratch paper for an accountant





Unit 5













Debit
cRedit
Left side of T account
Right side of T account
Adrianna Kerns
Finance Foundations
Normal Balance: every account has a normal balance
Source Document: document that is evidence of a transaction
o Checks
o Invoices
Double Entry Accounting: for every business transaction there will be at least two
accounts affected (debit and credit)
Chart of accounts: listing of accounts representing the different parts of the
accounting equation and accounts representing different forms of revenue and
expense
Balance sheet accounts: accounts representing different parts of the accounting
equation (assets, liability, owner’s equity)
Income statement accounts: accounts representing different revenues and
expenses
Ledger: group of accounts
General ledger: contains all accounts needed to prepare a financial statement
Five general ledger divisions:
1. Assets
2. Liabilities
3. Owner’s equity
4. Revenue
5. Expenses
File maintenance: procedure for arranging accounts, assigning account
numbers, and keeping records current
Account numbers are assigned based on accounts location in the general
ledger
Assets in liquid order
Liquidity: is the ease with which an asset can be converted to cash