free Accounting Practicum

l  Accounting Theory Defined

l  Structure of Accounting Theory Formal Approach

Accounting theory provides a logical frameworkfor accounting practice.

l  Structure of Accounting Theory Formal Approach

Accounting theory provides a logical frameworkfor accounting practice.

l  Structure of Accounting Theory Formal Approach

Accounting theory provides a logical frameworkfor accounting practice.

l  Structure of Accounting Theory Formal Approach

Accounting theory provides a logical frameworkfor accounting practice.

l  Structure of Accounting Theory Informal Approach

l  Structure of Accounting Theory Informal Approach

l  The terms "assumptions", "principles", "rules", "concepts", "postulates", "standards", etc. are used many different ways in the profession.

l  Therefore, the authors' classification of        these terms is not important to us in this course.

        i.e., you do not have to understand the authors’ theory structure - just know the meaning and relevance of the items/“ideas” on the following slides.

l  Business Entity “Idea”

l  Each business has an identity separate from its owners.

l  The business is the accounting entity.

u Financial statements report only the activities, resources, and obligations of that business.

l  Going-Concern

l  In the absence of evidence to the contrary, we assume that a business will continue to exist indefinitely.

u For example, a company is more likely to acquire long-term assets if it can assume that the company will continue to exist indefinitely.

l  It is fundamental to the matching principle.

l  MONEY MEASUREMENT

l  Stable Dollar or
Stable Monetary Unit

l  Stable Dollar or
Stable Monetary Unit

l  Stable Dollar or
Stable Monetary Unit

l  Periodicity

l  Other Basic Ideas

l  Substance Over Form

   The substance of a transaction or economic event is more important
than its legal form.

l  Other Basic Ideas

l  Substance Over Form

   The substance of a transaction or economic event is more important than its legal form.

l  Other Basic Ideas

l  Other Basic Ideas

 Double-Entry Bookkeeping

  Every transaction will have both a debit effect and a credit effect on the primary financial statements.

Total debits must equaltotal credits.

 Articulation

  The primary financial statements are fundamentally related to each other
as shown on page 19.

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Major Principles/Ideas

¶Exchange-Price or Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Exceptions to
Revenue Recognition Principle

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Gain and Loss Recognition

l  Gain and Loss Recognition

l  Major Principles/Ideas

¶Exchange-Price or Historical Cost

·Matching

¸Revenue Recognition

¹Expense Recognition

ºGain and Loss Recognition

»Full Disclosure

l  Cost-Benefit Consideration

Optional information should be included in the primary financial statements only if the benefits of providing it exceed the costs.

For example, providing a listing of every sales transaction may be interesting, but the cost of providing that information to every shareholder might bankrupt the company.

l  Materiality

l  An item is material if knowledge of the item would affect the decision of an informed user, therefore, this is a somewhat nebulous concept.

l  Material items must be reported.

l  An item can be material either in amount or in nature.

        Materiality in amount is relative to the size of the amounts on a company’s fin. stmts.

  (e.g. $50,000,000 may not be material …)

l  Conservatism

Transactions should be recorded so that net assets and net income are not overstated.

Anticipate losses, but do not anticipate gains.

l  Summary of Significant Accounting Policies

l  Appears in the notes to the financial statements.

l  Includes a discussion of the major accounting policies.