LO1 – Define accounting.
Accounting is the process of identifying, measuring, recording, and communicating an organization’s economic activities to users for decision making. Internal users work for the organization while external users do not. Managerial accounting serves the decision-making needs of internal users like managers. Financial accounting reports financial information useful for users external to the organization, like shareholders.
LO2 – Identify and describe the forms of business organizations.
There are two types of organizations. A business organization sells products or services for profit. A non-business organization such as a charity or hospital, exists to meet various societal needs and does not have profit as a goal. Three types of business organizations are a proprietorship, partnership, and corporation. A corporation is different because it is considered a separate legal entity from shareholders, and these shareholders have limited liability for the debts of the corporation.
LO3 – Identify and explain generally accepted accounting principles(GAAP).
GAAP are the guidelines that shape the way financial information is reported in financial statements prepared for external users. GAAP have qualitative characteristics of relevance, faithful representation, comparability, verifiability, timeliness, and understandability. Development of GAAP is guided by the principles of the business entity, consistency, historical cost, full disclosure, going concern, matching, materiality, a stable monetary unit, and revenue recognition.
LO4 – Identify, explain, and prepare the financial statements.
The four financial statements are: income statement, statement of changes in equity, balance sheet, and statement of cash flows. The income statement reports financial performance by detailing revenues less expenses to arrive at net income for the period. The statement of changes in equity shows the changes during the period to share capital and retained earnings. The balance sheet identifies financial position at a point in time by listing assets, liabilities, and shareholders’ equity. Finally, the statement of cash flows details the sources and uses of cash during the period.
LO5 – Analyze transactions by using the accounting equation.
The accounting equation (Assets equals liabilities plus shareholders’ equity, or A = L + E), describes the asset investments (the left side of the equation) and the liabilities and shareholders’ equity that financed the assets (the right side of the equation). The accounting equation provides a system for processing and summarizing financial transactions resulting from a business’s activities. A financial transaction is an economic exchange between two parties that impacts the accounting equation. The equation must always balance.
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