Study guide: Accounting in Business

📋 Course Outline

1. Accounting Purpose and Users
2. Accounting Careers and Analytics
3. Ethics and Fraud Prevention
4. GAAP and Reporting Frameworks
5. Principles Assumptions and Constraints
6. Accounting Equation Components
7. Transaction Analysis
8. Financial Statements and Links
9. Return on Assets

📖 1. Accounting Purpose and Users

🔑 Key Concepts & Definitions

• Accounting: an information and measurement system that identifies, records, and communicates an organization’s business activities

★ Must-know

📌 Bookkeeping records transactions and events, whereas accounting also analyzes and interprets the resulting information.

📌 External users do not directly run the organization and have limited access to accounting information, whereas internal users directly manage the organization and receive reports designed for their needs.

Further detail

• Financial accounting serves external users, while managerial accounting focuses on internal users such as executives and managers.

💡 Memory Hook

External users evaluate the organization; internal users manage it.

📖 2. Accounting Careers and Analytics

🔑 Key Concepts & Definitions

• Data analytics: the process of analyzing data to identify meaningful relations and trends
• Data visualization: a graphical presentation of data that helps users understand its significance and make informed business decisions

★ Must-know

• Accounting opportunities include:

  • financial
  • managerial
  • taxation
  • accounting-related
  • government and not-for-profit work

• The four basic types of analytics are:

  • descriptive analytics
  • diagnostic analytics
  • predictive analytics
  • prescriptive analytics

Further detail

• Public accounting provides auditing, taxation, and advisory services, while private accounting employs accountants within businesses.

💡 Memory Hook

Describe the past → diagnose causes → predict the future → prescribe action.

📖 3. Ethics and Fraud Prevention

🔑 Key Concepts & Definitions

• Ethics: accepted standards of good and bad behavior that separate right from wrong

★ Must-know

• When facing an ethical concern, a person should recognize the concern, analyze the options and consequences, and choose the best option after weighing those consequences.

• The fraud triangle consists of:

  • opportunity
  • pressure or incentive
  • rationalization or attitude

Further detail

📌 Internal controls are procedures that protect assets, ensure reliable accounting, promote efficiency, and uphold company policies.

💡 Memory Hook

Fraud triangle: OPR — opportunity, pressure, rationalization.

📖 4. GAAP and Reporting Frameworks

🔑 Key Concepts & Definitions

• GAAP: concepts and rules governing financial accounting so that information has relevance and faithful representation

★ Must-know

• The Financial Accounting Standards Board sets GAAP under authority provided by the Securities and Exchange Commission.

• The FASB conceptual framework includes:

  • objectives
  • qualitative characteristics
  • elements
  • recognition and measurement criteria

Further detail

• The International Accounting Standards Board issues International Financial Reporting Standards, which are similar to but sometimes different from U.S. GAAP.

💡 Memory Hook

Relevance affects decisions, whereas faithful representation reflects results accurately.

📖 5. Principles Assumptions and Constraints

★ Must-know

• The four general accounting principles are:
  • measurement principle
  • revenue recognition principle
  • expense recognition principle
  • full disclosure principle

📌 Revenue is recognized when goods or services are provided to customers and at the amount expected to be received from the customer.

• The four fundamental accounting assumptions are:
  • monetary unit assumption
  • business entity assumption
  • time period assumption
  • going-concern assumption

Further detail

📌 The cost-benefit constraint requires the benefits of disclosed information to exceed the cost of providing it, while materiality concerns the information’s ability to influence user decisions.

📖 6. Accounting Equation Components

🔑 Key Concepts & Definitions

• Assets: resources a company owns or controls that are expected to yield future benefits
• Liabilities: creditors’ claims on assets and represent obligations to provide assets, products, or services to others

📝 Essential Points

📐 Formula - The accounting equation is $Assets = Liabilities + Equity$, and equity equals assets minus liabilities.

• Equity consists of common stock, dividends, revenues, and expenses; common stock and revenues increase equity, while dividends and expenses decrease equity.

💡 Memory Hook

Assets are financed by liabilities and equity; revenues increase equity, while expenses and dividends decrease it.

📖 7. Transaction Analysis

★ Must-know

• 🔄 Transaction analysis involves:

  1. identifying affected accounts
  2. determining increases or decreases
  3. recording equal effects
  4. checking that the equation remains balanced

• A $30,000 cash investment in exchange for common stock increases both cash and common stock by $30,000.

• Providing services for cash or credit increases cash or accounts receivable and increases revenue, while paying expenses decreases cash and total equity.

Further detail

• Purchasing supplies or equipment for cash exchanges one asset for another and leaves total assets and total equity unchanged.

• Collecting accounts receivable exchanges one asset for another without changing total assets, while paying accounts payable decreases cash and liabilities.

💡 Memory Hook

Invest → purchase → earn → pay → collect → settle → distribute.

📖 8. Financial Statements and Links

🔑 Key Concepts & Definitions

• Income statement: reports revenues and expenses and computes net income or loss over a period of time
• Balance sheet: reports the types and amounts of assets, liabilities, and equity at a point in time
• Statement of cash flows: reports cash inflows and outflows over a period of time

📝 Essential Points

• The statement of retained earnings begins with beginning retained earnings, adds net income or subtracts net loss, subtracts dividends, and produces ending retained earnings.

• Cash flows are classified as:

  • operating activities
  • investing activities
  • financing activities

💡 Memory Hook

Income statement → retained earnings → balance sheet, with cash flows reported separately.

📖 9. Return on Assets

🔑 Key Concepts & Definitions

• Return on assets: also called return on investment, is net income divided by average total assets

★ Must-know

📐 Formula - Return on assets is calculated as $ROA = \frac{Net\ income}{Average\ total\ assets}$.

Further detail

📐 Formula - Average total assets are calculated as $Average\ total\ assets = \frac{Beginning\ total\ assets + Ending\ total\ assets}{2}$.

• Return on assets is useful for evaluating management, analyzing and forecasting profits, and planning activities.

📊 Synthesis Tables

Accounting Information Users

Basic Financial Statements