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Chapter 1 Accounting in Action Key Notes

Accounting is the process of identifying, recording, and communicating economic events, involving internal and external users. Key components include ethical behavior, GAAP, measurement principles, and the accounting equation (Assets = Liabilities + Owner's Equity). Financial statements such as the income statement, balance sheet, and cash flow statement provide essential information about a business's financial health.

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86 views2 pages

Chapter 1 Accounting in Action Key Notes

Accounting is the process of identifying, recording, and communicating economic events, involving internal and external users. Key components include ethical behavior, GAAP, measurement principles, and the accounting equation (Assets = Liabilities + Owner's Equity). Financial statements such as the income statement, balance sheet, and cash flow statement provide essential information about a business's financial health.

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roychoudhuryhehe74
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Chapter 1: Accounting in Action - Key Points and Notes

1. Accounting Definition:

- Accounting is the process of identifying, recording, and communicating economic events of an

organization.

2. Three Basic Activities of Accounting:

- Identifying: Selecting economic events relevant to the business.

- Recording: Keeping a chronological record of events in monetary terms.

- Communicating: Preparing and analyzing accounting reports (financial statements).

3. Users of Accounting Information:

- Internal Users: Managers who plan, organize, and run the business.

- External Users: Investors, creditors, tax authorities, etc.

4. Building Blocks of Accounting:

a. Ethics in Financial Reporting:

- Sound ethical behavior is essential in accounting.

b. Generally Accepted Accounting Principles (GAAP):

- Common standards followed by accountants.

c. Measurement Principles:

- Cost Principle: Assets recorded at cost.

- Fair Value Principle: Assets and liabilities reported at fair value.

d. Basic Assumptions:

- Monetary Unit Assumption, Economic Entity Assumption, Time Period Assumption, Going

Concern Assumption.
5. The Accounting Equation:

- Assets = Liabilities + Owner's Equity

- Assets: Resources owned by a business.

- Liabilities: Creditors' claims on assets.

- Owner's Equity: Ownership claim on total assets.

6. Business Transactions:

- Must affect at least two items in the accounting equation.

- Transaction analysis shows how each transaction impacts the equation.

7. Financial Statements:

- Income Statement: Reports revenues and expenses.

- Owner's Equity Statement: Shows changes in owner's equity.

- Balance Sheet: Reports assets, liabilities, and equity at a point in time.

- Statement of Cash Flows: Reports cash inflows and outflows.

8. IFRS Overview:

- Global accounting standards developed by IASB.

- Focus on transparency and comparability across borders.

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