ACCT 2610 Lecture 1: Conceptual Framework

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Washington University in St. Louis
Accounting ACCT 2610
Lemayian Zawadi

Lectures 4: Conceptual Framework and Transactions I. Conceptual Framework A. Basics 1. The Conceptual Framework (CF) a. The objectives and fundamentals which provide a structure for developing accounting standards b. Significance: helps us to understand how accounting works, which is necessary in learning why things are done a certain way 2. Characteristics of Useful Information a. Relevance • Capable of influencing decisions, has predictive and/or feedback value b. Faithful representation • Info is complete, neutral and free from error c. Other useful attributes • Comparability (between firms, similar framework), verifiability (prove beyond reasonable doubt true and audit to confirm), timeliness, clarity 3. Assumptions a. Separate-entity assumption • Business’ activities are accounted for separately from those of its owners b. Continuity (going-concern) assumption • Business assumed to continue for foreseeable future c. Stable monetary unit assumption • Accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power 4. Measurement Concepts a. Mixed-attribute measurement • GAAP requirement that various attributes be used in measuring elements of the balance sheet b. Revenue realization and expense matching c. Full disclosure II. Transactions A. Basics 1. Transactions a. Economic events recorded in the accounting process 2. Result from 2 general types of events a. Internal Event • Not an exchange between company or other parties, have a direct and measurable effect on the company b. External event • Exchanges of assets or services by one party for assets, service, or promises to pay by an external party B. Transaction Recording Process 1. Understand and analyze the transaction a. Essential to understand the transaction before attempting subsequent steps in the transaction recording process b. Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return 2. Determine impact on the accounting equation a. An account is • An organized format used by companies to accumulate the dollar effects of transactions on each financial statement • Belongs to one of the accounting elements in the conceptual framework (e.g., assets, liabilities, stockholders’ equity) • E.g., inventory, notes payable, accounts receivable Assets Liabilities Stockholders' Equity Revenues Expenses Cash Accounts Payable Common Stock Sales Revenue Costs of Good Sold Short-Term InvestmenAccrued Expenses Additional Paid in Capital Fee Revenue Wages Expense Accounts Receivable Payable Retained Earnings Interest Revenue Rent Expense Notes Receivable Notes Payable Rent Revenue Interest Expense Inventor (to be soldTaxes Payable Service Revenue Depreciation Expense Supplies
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