Chapter 1 KEY POINTS
Main objective of financial reporting – to provide useful information to decision makers
2 types of users – internal/external
3 types of business organizations
Proprietorship
Partnership
Corporation
Different characteristics of business organizations
Conceptual framework for accounting
Accounting Standards
Follow generally accepted accounting principles (GAAP)
Reporting Standards
International Financial Reporting Standards (IFRS) used by public companies
Accounting Standards for Private Enterprise (ASPE) used by private companies
Accounting Model
The accounting model can be described as a structure that is used to prepare financial
statements. The model includes:
the elements of the financial statements, and
the accounting equation.
Accounting Equation
The relationship between assets, liabilities, and owner’s equity is expressed as an equation,
called the accounting equation
There are four financial statements that are prepared for most businesses:
Balance sheet
Income statement
Statement of owner’s equity
Cash flow statement
Balance sheet
Income Statement
Statement of Owner’s Equity
Calculation for Owner's Equity Formula for Owner’s Equity
Beginning Balance
+ Investment by owner
+ Profit or - Loss
- Withdraw by owner
= Ending Balance
Transaction Analysis
The system of collecting and processing transaction data and communicating financial
information to decision-makers is known as the accounting information system
Every company’s asset, liabilities and owner’s equity are given an account title
Each transaction analysis:
identifies the specific accounts that are affected, and
identifies the amount of change in each account.
Each transaction must have a dual effect on the equation for the two sides of the accounting
equation to remain equal. For example, if an asset is increased, there must be a corresponding
decrease in another asset,
or increase in liability,
or increase in owner’s equity.
Examples of transaction analysis
Financial Statements:
Income statement: A financial statement that presents the revenues and expenses and
resulting profit (or loss) for a specific period of time.
Statement of owner's equity A financial statement that summarizes the changes in owner's
equity for a specific period of time.
Balance sheet: Financial statement that reports assets, liabilities, and owner's equity at a
specific date in time.
Cash flow statement: Financial statement that provides information about the cash receipts
and cash payments for a specific period of time.
