Accounting Activities and Users

Accounting consists of three basic activities 

-Identification
-Recording
-Communication
The economic events of an organization to interested users .

**Who uses Accounting Data?

Ans:-
There are two broad groups of users of financial information:-
*(1)Internal Users:
*Internal users of accounting information include managers like marketing managers,
production supervisors, finance directors, and company officers. They use this data to
plan, organize, and run the business effectively.
# Internal users must answer many important questions in running a Business:
Finance:
Example: "Is cash sufficient to pay dividends to Microsoft stockholders?"
This reflects financial managers' responsibility to ensure that the company has enough
liquidity to meet obligations, like dividends.
Marketing:
Example: "What price should Apple charge for an iPad to maximize the company’s net
income?"
Marketing managers use accounting data to set prices that balance competitiveness and
profitability.
Human Resources:
Example: "Can General Motors afford to give its employees pay raises this year?"
HR managers rely on financial information to make decisions about wages, benefits, and
labor costs.
Management:
Example: "Which PepsiCo product line is the most profitable? Should any product lines
be eliminated?"
Top-level managers analyze profitability data to decide which products to focus on or
discontinue for strategic growth.
*(2) External Users:
External users are people or entities outside a company who rely on its financial
information for decision-making. The two primary types are:
*Investors: They use accounting information to determine whether to buy, hold, or sell
shares in a company.
*Creditors: These include suppliers and bankers who evaluate financial data to assess
the risks of extending credit or loans to the company.
examples of questions external users might ask about a company:
Investors:
Example: "Is General Electric earning satisfactory income?"
Investors want to know if the company is profitable enough to justify their investment.
Example: "How does Disney compare in size and profitability with Time Warner?"
They analyze performance and market position compared to competitors to make
informed decisions.
Creditors:
Example: "Will United Airlines be able to pay its debts as they come due?"
Creditors evaluate whether the company has the financial stability to meet its
obligations, helping them decide whether to lend money or extend credit.

Accounting Standards :
GAAP (Generally Accepted Accounting Principles):
A universally practiced set of standards that guide how economic events should be
reported.
Developed and maintained by the Financial Accounting Standards Board (FASB) in the
United States.
Role of the SEC:
The Securities and Exchange Commission (SEC) oversees U.S. financial markets and
accounting standard-setting bodies.
It relies on the FASB to create accounting standards that public companies must
follow.
IFRS (International Financial Reporting Standards):
Developed by the International Accounting Standards Board (IASB), these standards are
used by many countries outside the U.S. to ensure consistency in financial reporting
globally.
Convergence of Standards:
As global markets expand, comparing financial results of companies across countries
becomes essential.
Efforts are underway to align U.S. GAAP and IFRS through a process called
convergence, with the goal of creating a unified set of high-quality accounting standards
worldwide.
International Note:
Differences between GAAP and IFRS are highlighted in "International Notes".

**Questin: What is Transection?

Ans: A Transection is a business event or activity that has a measurable financial impact
on an organization and is recorded in its accounting system.

**The IFAC (International Federation of Accountants) has established a set of five

fundamental ethical principles to guide accountants and other professionals in the field
of accounting and finance. These principles are designed to ensure the highest
standards of professionalism and ethical behavior:
Integrity: Be honest and straightforward in all dealings.
Objectivity: Make decisions based on facts, avoiding bias or conflicts of interest.
Professional Competence and Due Care: Continuously improve skills and perform
duties with care and diligence.
Confidentiality: Keep information private, unless required by law to disclose it.
Professional Behavior: Follow laws and regulations, and act in a way that upholds the
profession's reputation.

**Question: How accounts is integrated in our society?

Ans: Accounting is deeply integrated into society as it plays a crucial role in various
aspects of daily life and economic systems. Here’s how:
Economic Stability: Ensures transparency for stable economies.
Business Support: Tracks income and expenses for business growth.
Job Creation: Provides essential services, creating employment.
Public Trust: Builds trust through transparent financial reporting.
Tax Management: Helps calculate and report taxes accurately.
Financial Planning: Aids in budgeting and sound decision-making.
Legal Compliance: Ensures adherence to laws and prevents fraud.
**Question: What are the accounting threats?
Answer:
#Self interest threat : Personal interests ( like financial gain) influencing decisions

#Self review threat : Evaluating your own work ,which can lead to biased judgments

#Advocacy threat : Promoting a clients position the point of losing objectivity

#Familiarity threat : Close relationship causing lack of objectivity or professional

skepticism .

#Intimidation threat : Pressure or threats from others compromising professional

judgment .

**What are the measurement principles in accounting by GAAP?

Answer:
The measurement principles in accounting under GAAP (Generally Accepted
Accounting Principles) are guidelines that dictate how financial elements like assets,
liabilities, income, and expenses should be measured and recorded. Key principles
include:
Historical Cost Principle:
Assets are recorded at their original purchase cost and remain at that value over time,
regardless of changes in market value.
Example: If a company buys land for $300,000, it will report the land at $300,000 in its
accounting records, even if its market value later increases to $400,000.

Fair Value Principle:

Assets and liabilities are recorded at their current market value, reflecting the price
that would be received to sell an asset or settle a liability.
Example: Investment securities are typically recorded at fair value because market
prices are readily available for these assets.
Companies decide between historical cost and fair value based on the relevance and
availability of information, with fair value often used for actively traded assets.
Question: What are the Accounting Assumptions?
Answer :
1.Monetary Unit Assumption:
Only transactions measurable in money are recorded.
Non-quantifiable elements like employee morale or service quality are excluded.
This ensures consistency in financial reporting.
2.Economic Entity Assumption:
Business activities are separate from the owner’s or other entities' activities.
Examples include proprietorships, partnerships, and corporations:
(i)Proprietorship: Owned by one person, with unlimited personal liability for debts.
(ii)Partnership: Owned by two or more, with shared unlimited liability. Used for
professional practices.
(iii)Corporation: A separate legal entity with limited liability for shareholders,
transferable ownership, and an unlimited lifespan. It dominates revenue generation in
the economy.

Assets= Liabilities + Owners Equity **

Components:
Assets: What the company owns (e.g., cash, inventory, equipment).
Liabilities: What the company owes (e.g., loans, accounts payable).
Equity: The owner's residual interest in the company (e.g., capital, retained
earnings).
Explanation:
Assets are financed either by borrowing (liabilities) or by the owner’s
investment (equity). This equation must always balance; any transaction affects
at least two components.
Example: If a company has:
Assets: $50,000 Liabilities: $20,000
Then: Equity=Assets−Liabilities=50,000−20,000=30,000
This balance ensures the financial statements are accurate and reliable.
Question : How Owner’s Equity changes in a proprietorship?
Answer:
Increases in Owner’s Equity
Investments by Owner:
 Assets the owner contributes to the business.
Recorded as Owner’s Capital and increase equity.
Revenues:
Increases in assets (e.g., sales income) or decreases in liabilities
from normal business operations.
Examples: Pizza sales, beverage sales, or service fees.
Decreases in Owner’s Equity
Drawings:
Cash or assets withdrawn by the owner for personal use.
Recorded in Owner’s Drawings and reduce equity.
Expenses:
Costs incurred to generate revenue (assets consumed or services used).
Examples: Salaries, rent, utilities, supplies, delivery, and property tax
expenses
This forms the Expanded Accounting Equation:
Assets= Liabilities + Owners Equity
 Assets = Liabilities+ (Owner’s Capital + Revenues − Drawings - Expenses)
 Tabular Analysis Math

Question :1.8 Prepare a tabular analysis to show the cumulative effect of these
transactions on the accounting equation (Assets = Liabilities + Owner’s Equity).
Use the following accounts.
The following transactions occurred for Softbyte, a smartphone app
development company, in September:
1. The owner invested $15,000 cash in the business.
2. Equipment was purchased for $7,000 in cash.
3. Supplies worth $1,600 were purchased on account.
4. Services worth $1,200 were performed for cash.
5. An advertising expense of $250 was incurred but not yet paid.
6. Additional services worth $3,500 were performed; $1,500 was received in
cash, and $2,000 was billed to customers.
7. Expenses of $1,700 (office rent: $600, salaries: $900, utilities: $200) were
paid in cash.
8. The advertising bill of $250 (from transaction 5) was paid in cash.
9. $600 was received from customers who had been billed earlier (transaction
6).
10. The owner withdrew $1,300 in cash for personal use.
Answer:
Question: DO IT 4:
Transactions made by Virmari & Co., a public accounting fi rm, for the month of
August are shown below.
Prepare a tabular analysis which shows the effects of these transactions on the
expanded accounting equation, similar to that shown in Illustration 1.8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of offi ce equipment on credit.
3. The company received $8,000 cash in exchange for services performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal use.

Answer :
Question: Describe the four financial statements and how they are prepared.
Answer:
1. Income Statement (Profit and Loss Statement)
Purpose: Shows the profitability of a business over a specific period (e.g., a
month, quarter, or year).
Key Components:
Revenue: Income earned from sales or services.
Expenses: Costs incurred to generate revenue (e.g., salaries, rent, utilities).
Net Income: The difference between total revenue and total expenses. A
positive result indicates profit, while a negative result indicates a loss.
2. Balance Sheet (Statement of Financial Position)
Purpose: Provides a snapshot of an entity's financial position at a specific point
in time.
Key Components:
Assets: Resources owned by the entity (e.g., cash, inventory, property).
Liabilities: Obligations or debts owed to others (e.g., loans, accounts
payable).
Equity: The owner's claim on the assets after liabilities are deducted
(Assets = Liabilities + Equity).
3. Cash Flow Statement
Purpose: Details the inflow and outflow of cash within the organization over a
specific period.
Key Components:
Operating Activities: Cash flows from core business operations.(revenues
,expenses )
Investing Activities: Cash flows from buying or selling assets (e.g.,
equipment, investments).
Financing Activities: Cash flows related to borrowing, repaying debt, or
issuing equity.
4. Statement of Changes in Equity (Owner’s Equity Statement)
Purpose: Explains changes in the owner's equity during a specific period.
Key Components:Opening equity balance. Contributions by owners.
Net income or loss for the period. Dividends paid. Ending equity
balance.
Question : 1.9 :“For the Month Ended September 30, 2020.”) Softbyte’s
Financial statement is prepared from the data appearing in the owner’s equity
columns of Illustration 1.8.

Answer: