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FA - Accounting in Action Cheat Sheet (DRAFT) by

Financial Accounting; Accounting in Action - Chapter 1

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Accounting 101

Accounting
the inform­ation system that identi­fies, records, and commun­icates the economic events of an organi­sation to interested users.
 
Financial Accounting
the field of accounting that provides economic and financial inform­ation for investors, creditors, and other external users.
 
Managerial Accounting
the field of accounting that provides internal reports to help users make decisions about their compan­ies­/or­gan­isa­tions.

3 Accounting Activities

Accounting consists of three basic activi­ties:
 
1. Identi­fic­ation (ident­ifying economic events­/tr­ans­act­ions).
2. Recording (record, classify, and summar­ise).
3. Commun­ication (preparing accounting reports, analysing & interp­reting for users).

Accounting 101

Bookke­eping
a part of accounting that involves only the recording of economic events.

Accounting Users

There are two broad groups of users of financial inform­ation: internal users & external users.
 
1. Internal Users
indivi­duals inside a compan­y/o­rga­nis­ation who plan, organise, and run the business.
Examples:
Marketing Managers, Production Superv­isors, Finance Directors, Company Officers.
 
2. External Users
indivi­duals and organi­sations outside a compan­y/o­rga­nis­ation who want financial inform­ation about the compan­y/o­rga­nis­ation.
 
Type
Example
Purpose of using accounting inform­ation
a. Investors
Owners
use accounting inform­ation to decide to buy, hold, or sell ownership shares of a compan­y/o­rga­nis­ation.
b. Creditors
Suppliers & Bankers
use accounting inform­ation to evaluate the risks of granting credit or lending money.
c. Taxing Author­ities
-
use accounting info to know whether the company complies with tax law.
d. Regulatory Agencies
-
use accounting info to know whether the company is operating within prescribed rules.
e. Customers
-
-
f. Labour Unions
-
use accounting info to know whether the company can pay increased wages and benefits to union members.
 

Accounting 101

Ethics
the standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not.

Steps in analysing ethics cases and situations

1. Recogn­ising an ethical situation and the ethical issues involved.
2. Identi­fying and analysing the principal elements of the situation.
3. Identi­fying the altern­atives, and weighing the impact of each altern­ative on various stakeh­olders.

Accounting Standards

Accounting Standards ensure high-q­uality financial reporting.
 
There are two primary accoun­tin­g-s­tan­dar­d-s­etting bodies:
1. IASB - Intern­ational Accounting Standards Board
Determines Intern­ational Financial Reporting Standards (IFRS).
 
Used in 130 countries.
 
2. FASB - Financial Accounting Standards Board
Determines Generally Accepted Accounting Principles (GAAP).
 
Used by most companies in the USA.
 
The two standa­rd-­setting bodies have made efforts to reduce the difference between IFRS & U.S. GAAP.

Accounting 101

Conver­gence
the process of reducing the difference between IFRS and GAAP.

Measur­ement Principles

IFRS generally uses one of two measuring princi­ples, the cost principle or the fair value principle.
 
The selection of which principle to follow generally relates to trade-offs between relevance and faithful repres­ent­ation.
 
1. Cost Principle (histo­rical cost principle)
- Companies record assets at their cost.
 
- Not only at the time the asset is purchased but also over the time the asset is held.
 
2. Fair Value Principle
- Assets and liabil­ities should be reported at fair value (the price received to sell an asset or settle a liabil­ity).
 
In determ­ining which measur­ement principle to use, companies weighs the factual nature of cost figures vs. the relevance of fair value.

Assump­tions

Assump­tions provide the foundation for the accounting process. The two main assump­tions are:
 
1. Monetary Unit Assumption
an assumption stating that companies include in the accounting records only transa­ction data that can be expressed in terms of money.
 
- enables accounting to quantify (measure) economic events.
- vital to applying the measur­ement princi­ples.
 
2. Economic Entity Assumption
an assumption that requires that the activities of an entity be kept separate from the activities of its owner and all other economic entities.