Forms of Business Organization

Sole Proprietorship

- This business organization has a single owner called the proprietor who generally is also a manager. - It tends to be small service-type businesses and retail establishments. - The owner receives all profits, absorbs all losses and is solely responsible for all debts of the business.

Forms of Business Organization

Partnership - It is a business owned and operated by two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Forms of Business Organization

Corporation

- It is business owned by the stockholders.

- It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
- The stockholders personally liable corporations debt. are for not the

Activities Performed by Business Organizations

Merchandising
-

Purchase goods that are ready for sale and then sell these to customers.

Manufacturing
- Buy raw materials, convert them into products and them sell the products to other companies or to final consumers.

Services
- Perform services for a fee.

Classification of Users of Accounting Information

External Users individuals and others that have current or potential financial interest in the reporting entity but are not involved in the daily operations of the entity. Internal Users have different specific goals that are designed to help the entity attain its overall strategies and mission.

Users of Financial Statements

Investors need information to help them determine whether they should buy, hold or sell. Employees interested in information about the stability and profitability of their employers. Lenders interested in information that enables them to determine whether their loans and the related interest will paid when due.

Users of Financial Statements

Suppliers and other creditors interested in information that enables them to determine whether amounts owing to them will be paid when due. Customers interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on , the enterprise.

Users of Financial Statements

Government interested in the allocation of resources and, therefore, the activities of the enterprises. Public

Underlying Assumptions

Accrual Basis the effects of transactions and other events are recognized when they occur and not as cash is received or paid. Going Concern - The accounting is viewed as continuing in operation indefinitely in the absence of evidence to the contrary.

>CASH BASIS the accountant does not record a transaction until cash is received.

QUALITATIVE CHARCATERISTICS OF FINANCIAL STATEMENTS

-the attributes that make the information provided in financial statement useful to others.

Threshold Quality (Material) - One that needs to be considered before considering the other qualities of information.

PRIMARY QUALITATIVE CHARACTERICTISITIC RELATING TO CONTENT

RELEVANCE
- information should influence the economic decisions of users by helping them evaluate past, present, or future events, or confirming, or correcting, their past evaluation.
Confirmatory role
Financial information used to confirm or correct the decision-makers earlier expectations.

Predictive role
Financial information is used to make

PRIMARY QUALITATIVE CHARACTERICTISITIC RELATING TO CONTENT

RELIABILITY - Information must be from free from material error and bias and can be depended upon by users to represent faithfully that which it either it purports to represent or could reasonably be expected to represent.

Faithful representation
Information must represent faithfully the transactions and other events it purports to represent or could reasonably be expected to

PRIMARY QUALITATIVE CHARACTERICTISITIC RELATING TO CONTENT

Substance over form

It is necessary that transactions and other events are accounted for and presented in accordance with their substance and economic reality, and not merely their legal form.

Neutrality
Free from bias.

PRIMARY QUALITATIVE CHARACTERICTISITIC RELATING TO CONTENT

Prudence/Conservatism
It is the inclusion of a degree of caution in the exercise of judgments needed in making the estimates required under conditions of uncertainty, such as assets or income are not overstated and liabilities or expenses are not understated. (to anticipate no profits and provide for all
probable and estimable losses)

Completeness
Information must be complete within the bounds of materiality and cost.

PRIMARY QUALITATIVE CHARCTERISTICS RELATING TO PRESENTATION

COMPARABILITY - Users must be able to compare the financial statements of an enterprise over time in order to identify trends in its financial position and performance. - Users must be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and financial adaptability.

PRIMARY QUALITATIVE CHARACTERISTICS RELATING TO PRESENTATION

UNDERSTANDABILITY - Users are assumed to have a reasonable knowledge of accounting, business and economic activities.

CONSTRAINTS ON RELEVANT AND RELIABLE INFORMATION

Timeliness - Accounting information is communicated early enough to be used for the economic decisions that it might influence.

Balance between benefit and cost - The benefits derived from information should exceed the cost of providing it.

CONSTRAINTS ON RELEVANT AND RELIABLE INFORMATION

Balance between Qualitative Characteristics - A balancing or trade-off between qualitative characteristics is often necessary in order to meet the objective of financial statements

ELEMENTS OF FINANCIAL STATEMENTS

Measurement of financial position
Assets Liabilities Equity

Measurement of financial performance

Income Expenses

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income statement that meets the definition of an element and satisfies the criteria of recognition.
It is probable that any future economic benefit associated with the item will flow to or from the enterprise. The item has a cost or value that can be measured with reliability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement.
Historical cost
Assets are recorded at the amount or cash equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS Liabilities are recorded at the amount of
proceeds received in exchange for the obligation, or in some circumstances, at the amount of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

Current cost
Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Realizable Value
Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling an asset in orderly disposal.

Settlement Value
Liabilities are carried at the undiscounted amounts of cash or cash equivalents expected t be paid to satisfy the liabilities in the normal course of business.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Present Value
Assets (Liabilities) are carried at the present discounted value of the future net cash inflows (outflows) that the item is expected to generate (to be required to settle the liabilities) in the normal course business.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Financial concept of capital

Capital is synonymous with the net assets or equity of the enterprise.

Physical concept of capital

Capital is regarded as the productive capacity of the enterprise.