ECON 2710 INTRODUCTION TO FINANCIAL ACCOUNTING
CHAPTER ONE: ACCOUNTING IN BUSINESS
ACCOUNTING: an information system that identifies, measures, records and communicates faithfully
and accurately an organization’s economic activities.
RECORDKEEPING: (BOOKKEEPING) a part of accounting that involves recoding economic transactions
THREE FORMS OF BUSINESS ORGANIZATION
SOLE PROPRIETORSHIP: is an individual owning and operating a business alone; is fully responsible for
all profits, losses, and debt as there is no legal distinction between the owner and their business.
PARTNERSHIP: like a sole proprietorship is fully responsible for all profits, losses, and debt; except
business is owned and operated by two or more individuals.
CORPORATIONS: unlike a sole proprietorship or partnership is a separate legal entity from its owner,
responsible for its own profits, debt, losses; is able to act with rights, duties and responsibilities of a
UNLIMITED LIABILITY: applies to sole proprietorship and partnerships; when debts are greater
the business’ resources, the owners are financially responsible.
LIMITED LIABILITY: applies to corporations; the owner’s liability is limited to the amount
invested into the business.
USERS OF ACCOUNTING INFORMATION
Accounting provides information to help internal and external users make decisions
EXTERNAL USERS: who are not directly involved in running the organization; do not have permitted
access to day to day records of the company; refers to shareholders, lenders, customers, lawyers…
INTERNAL USERS: who are directly involved in managing and operating an organization; refers to
managers, officers, and sales staff.
FINANCIAL ACCOUNTING: aimed at serving external users; provides external reports called
financial statements that report on financial performance and condition of the organization.
MANAGERIAL ACCOUNTING: aimed at serving the decision making needs of internal users GENERALLY ACCEPTED ACCOUNTING PRINCICPLES (GAAP)
GAAP: underlying concepts that make up acceptable accounting practises for the preparation of
PRINCIPLES OF GAAP
BUSINESS ENTITY PRINCIPLE: accounting records must be separate from its owner(s) or any
other economic entity of the owner(s); accounting information cannot mix records from two
companies, or from owner’s personal activities.
COST PRINCIPLE: financial statement information to be based on actual cash amounts/cash
equivalents received or paid in business transactions.
GOING CONCERN PRINCIPLE: financial statements must reflect the assumption that the
business will continue operating instead of being sold or closing down; additional information
must be provided in other sources if that occurs.
MONETARY UNIT PRINCIPLES: consistent with the cost principle; transactions must express
using stable monetary units; no adjustments can be made for changes in currency value or
REVENUE RECOGNITION PRINCIPLE: revenue is to