Financial Accounting

Priciples of Accounting

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 Chapter 1 Accounting in Action
Learning Objectives
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Explain accounting standards
4. General Accepting Accounting principles.

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 What is accounting?

Accounting is a branch of
science and is used for
economic transactions of
enterprises.

With accounting, economic

events happening in the
business are recorded.

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 What is accounting?

Accounting is a business
function.
So what are the other
functions of the business?

The branch of science that

accounting is most related to
is finance.

Because both regulate the

economic transactions of the
business.

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 Definition of Accounting
Difference Between Accounting and Finance

Accounting
 records,
 classifies,
 summaries and reports
economic events that have
happened in the past.

In order for an economic

transaction to be subject to
accounting, it must have
happened and be based on
documentation.

But finance is about the future.

Finance mostly deals with future
investments of the business.
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 What is Accounting?

Accounting is the process of

• recording,

• classifying,

• summarizing,

• analysing and interpreting of financial transactions.

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 What is Accounting?

Accounting consists of three basic activities - it

 identifies,

 records

 communicates

the economic events of an organization to interested users.

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 What is Accounting?
Illustration 1-1

Three Activities The activities of the

accounting process

The accounting process includes

the bookkeeping function.

1-9 LO 1 Explain what accounting is.

 ACCOUNTING

FINANCIAL COST MANAGERIAL

ACCOUNTING ACCOUNTING ACCOUNTING

AUDITING

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Differences between Financial Accounting and Cost and Managerial Accounting
Financial Accounting Cost and Managerial Accounting
The sole purpose of financial accounting is The aim is to provide information to the
to provide financial information to internal management (ie internal users) in areas such
Purpose and external users. as planning, production and sales.

In financial accounting, data is prepared on There is no specific time of period. The data is
a 3-month, 6-month, 9-month or annual prepared according to the needs of the
Period of Time basis. managers.

Information Data is financial only. There are financial and non-financial data.

Financial accounting practices are Cost and managerial accounting practices are
Obligation obligation. not obligation.
 Who Uses Accounting Data

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 Who Uses Accounting Data

External
Internal Users
Human Taxing
Users
Resources Authorities
Labor
Unions
Finance
Management Customers

Creditors
Marketing Regulatory
Agencies
Investors

1-13 LO 2 Identify the users and uses of accounting.

 Who Uses Accounting Data

Common Questions Asked User

1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Should any product lines be
eliminated? Management
4. Is cash sufficient to pay dividends
to shareholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to pay
its debts? Creditors
1-14 LO 2 Identify the users and uses of accounting.
 Indicate whether each of the following statements presented below
is true or false.

1. The three steps in the accounting process are

identification, recording, and communication.

2. The two most common types of external users are

investors and company officers.

True False

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 Ethics In Financial Reporting

Accounting has to provide highly reliable information

 Financial scandals Enron (USA), Parmalat (ITA),

Satyam Computer Services (IND), AIG (USA), and
others.

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 Accounting has to provide highly reliable information

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 Ethics in Financial Reporting

Question
Ethics are the standards of conduct by which one's actions are
judged as:

a. right or wrong.

b. honest or dishonest.

c. fair or not fair.

d. all of these options.

1-19 LO 3 Understand why ethics is a fundamental business concept.

 Worldwide Regulations in Accounting

 International Financial Reporting Standards (IFRS) by

IASB

(IFRS is global accounting system adopted by more

than 100 countries including EU, South America and
Asian Countries)

 General Accepted Accounting Principles (US GAAP) by

FASB , GAAP adopted by USA

1-20 LO 3 Understand why ethics is a fundamental business concept.

 Another Perspective

Key Points
 Most agree that there is a need for one set of international accounting
standards. Here is why:
► Multinational corporations. Today’s companies view the entire
world as their market.
► Mergers and acquisitions. The mergers between Fiat/Chrysler and
Vodafone/Mannesmann suggest that we will see even more such
business combinations in the future.
► Information technology. As communication barriers continue to
topple through advances in technology, companies and individuals
in different countries and markets are becoming more comfortable
buying and selling goods and services from one another.
► Financial markets. Financial markets are of international
significance today.
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 Another Perspective

Key Points
 In 2002, the U.S. Congress issued the Sarbanes-Oxley Act (SOX), which
mandated certain internal controls for large public companies listed on
U.S. exchanges. There is a continuing debate as to whether non-U.S.
companies should have to comply with this extra layer of regulation.
Debate about international companies (non-U.S.) adopting SOX-type
standards centers on whether the benefits exceed the costs. The
concern is that the higher costs of SOX compliance are making the U.S.
securities markets less competitive.
 Financial frauds have occurred at companies such as Satyam Computer
Services (IND), Parmalat (ITA), and Royal Ahold (NLD). They have also
occurred at large U.S. companies such as Enron, WorldCom, and AIG.

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 Another Perspective

Key Points
 IFRS tends to be less detailed in its accounting and disclosure
requirements than GAAP. This difference in approach has resulted in a
debate about the merits of “principles-based” (IFRS) versus “rules-
based” (GAAP) standards.
 U.S. regulators have recently eliminated the need for foreign companies
that trade shares in U.S. markets to reconcile their accounting with
GAAP.
 GAAP is based on a conceptual framework that is similar to that used to
develop IFRS.

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 Another Perspective

Key Points
 The three common forms of business organization that are presented in
the chapter, proprietorships, partnerships, and corporations, are also
found in the United States. Because the choice of business organization
is influenced by factors such as legal environment, tax rates and
regulations, and degree of entrepreneurism, the relative use of each
form will vary across countries.
 Transaction analysis is basically the same under IFRS and GAAP but,
as you will see in later chapters, the different standards may impact how
transactions are recorded.

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 Another Perspective

Looking to the Future

Both the IASB and the FASB are hard at work developing standards that will
lead to the elimination of major differences in the way certain transactions
are accounted for and reported. Consider, for example, that as a result of a
joint project on the conceptual framework, the definitions of the most
fundamental elements (assets, liabilities, equity, revenues, and expenses)
may actually change. However, whether the IASB adopts internal control
provisions similar to those in SOX remains to be seen.

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 Another Perspective

GAAP Self-Test Questions

Which of the following is not a reason why a single set of high-quality
international accounting standards would be beneficial?

a) Mergers and acquisition activity.

b) Financial markets.

c) Multinational corporations.

d) GAAP is widely considered to be a superior reporting system.

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 Another Perspective

GAAP Self-Test Questions

The Sarbanes-Oxley Act determines:

a) international tax regulations.

b) internal control standards as enforced by the IASB.

c) internal control standards of U.S. publicly traded companies.

d) U.S. tax regulations.

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 Another Perspective

GAAP Self-Test Questions

IFRS is considered to be more:

a) principles-based and less rules-based than GAAP.

b) rules-based and less principles-based than GAAP.

c) detailed than GAAP.

d) None of the above.

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 Regulations In Financial Reporting In Turkey

 General Communique On Accounting System Apllication

(Muhesebe Uygulamaları Genel Tebliği)

 Turkiye Financial Reporting Standards (Translate of IFRS)

 Tax Laws, Trade and other Laws

1-29 LO 3 Understand why ethics is a fundamental business concept.

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 Forms of Business Ownership

Proprietorship Partnership Corporation

 Generally owned  Owned by two or  Ownership

by one person more persons divided into
 Often small shares
 Often retail and
service-type service-type  Separate legal
businesses businesses entity organized
 Owner receives under corporation
 Generally
any profits, law
unlimited
suffers any personal liability  Limited liability
losses, and is
 Partnership
personally liable
agreement
for all debts

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 Indicate whether each of the following statements presented below
is true or false.

4. The primary accounting standard outside the United

States is International Financial Reporting Standards True
(IFRS).

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 Generally Accepted Accounting Principles
1. Social Responsibility Principle
2. Business Entity Principle
3. Going Concern Principle
4. Periodicity Principle (Matching Principle)
5. The Principle of Measuring in Money
6. Cost Basis Principle
7. Principle of Impartiality (Objectivity)
8. Consistency (Conservatism) Principle
9. Full Disclosure Principle
10. Precautionary Principle
11. Materiality Principle
12. Substance Over Form Principle

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 GAAP
1. Social Responsibility Principle:
This principle means that the interests of
the whole society are considered, not
specific individuals or groups, in
accounting practices.
Therefore, social responsibility principle
expresses the necessity of
• realistic,
• objective
• honestly
in producing information.
GAAP

2. Business Entity Principle:

It means that the business has a separate personality

from the
owners, shareholders,
employees
managers.
This personality is called a legal entity.
All transactions are made on behalf of the legal entity.
GAAP
3. Going Concern Principle:
It means that the business will continue its
activities regardless of a period of time.

Business’ life is not tied to the lifespan of

the owners or shareholders.

In other words, the life of the business is

unlimited and continuous.
 GAAP
4. Periodicity Principle (Matching Principle):
The life of the business, which is considered unlimited, is
divided into certain periods.

The operating results of each period are independent from

other periods.

The events taking place in the business should be recorded in

the relevant periods.
For example, a profit made in 2023 cannot be recorded in
2022 or 2024. Income for 2023 must be recorded only in
2023.
 GAAP
5. The Principle of Measuring in Money:
All transactions must be recorded in the accounting
records in local currency.

The currency of the country in which the business

operates is valid.

In financial accounting, only financial data is

recorded.
 GAAP

6. Cost Basis Principle:

What is added to the cost of a goods?

• purchase price
• customs expenses
• shipping cost

Exp.
Purchasing Inventory 1000 $
Shipping $200
Cost of inventory $ 200
GAAP
7. Principle of Impartiality (Objectivity):
It is necessary to be impartial when making
accounting records.

It shouldn’t be the interest of any individual.

GAAP
8. Consistency (Conservatism) Principle:
It means uniform approach in accounting
policies.
Once a company adopts a certain accounting
policy or method, it must be applied
consistently in the future as well.

Ex. Depreciation Method

Inventory Valuation
Revenue recognition
 GAAP
9. Full Disclosure Principle:
Accounting records must be
clear, understandable and
transparent.
 GAAP
10. Precautionary Principle:
It expresses the need to be deliberative in
accounting events and to take into
account the risks that the business may
face.
In short, it means being deliberative
(cautious).
GAAP
11. Materiality Principle:
If an economic transaction is not recorded in
the accounting records or is written
incorrectly and this affects the decisions of
individuals or businesses, the transaction is
important.
 GAAP
12. Substance Over Form Principle:
Transactions should be recorded according
to their substance, not their form.

For example, let's consider a business that

sells cars. The cars sold by the business are
its commercial goods. However, the
business may provide some cars to its
customers for trial purposes. In this case,
the cars used as trials are not commercial
goods. These are fixtures for the business.

Therefore, test cars should be registered for

their substance, not their form. The form
of these cars is like the others, but the
essence is different from them.
 The Building Blocks of Accounting

Question
Combining the activities of VESTEL is interested in

a. cost basis principle.

b. Business entity

c. Periodicity principle.

d. ethics principle.

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