1.

Accounting in Action
1.  Explain what accounting is.
Accounting is how our business records (business transactions, taxes) organizes and
understand its financial information. (tells you a story about the financial state of your
business). It tells you whatever you make the profit, your cash flow, and which parts of your
business are actually making money etc.
IT IDENTIFIES, RECORDS AND COMMUNICATES the economic events.

Whats the difference between accounting and bookkeeping?

Accounting and bookkeeping are both part of the same process: keeping your financial
records in order. However, bookkeeping is more concerned with recording everyday financial
transactions and operations, while accounting puts that financial data to good use through
analysis, strategy, and tax planning.

2. Identify the users and uses of accounting.

They are:

Internal users - individual who runs,

manages and operates the daily activities
of the inside area of an organization.

owners

directors

managers

employees of the company

External users - take interest in the

account information of an organization
but they are not part of the organization’s
administrative process.

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 Investors

Creditors

government

trading partners

etc.

The uses of accounting:

To record transactions daily

To help in proper planning and budgeting.

To help in decision-making for users.

To measure the performance of the business.

To know the financial position

3. Understand why ethics is a fundamental business concept.

Ethics help in running the business effectively and successfully and gives a good impression
of the business among society.
“Good ethics is good business.”

4. Explain accounting standards and measurement principles.

An accounting standard is a common set of principles, standards, and procedures that define the
basis of financial accounting policies and practices.
In the United States, the generally accepted accounting principles(GAAP) form the set of
accounting standards widely accepted for preparing financial statements.1 International
companies follow the International Financial Reporting Standards (IFRS), which are set by the

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 International Accounting Standards Board and serve as the guideline for non-U.S. GAAP
companies reporting financial statements.
There are four basic principles of financial accounting measurement: (1)
objectivity(obiektywność), (2) matching(dopasowanie), (3) revenue recognition (
rozpoznawanie przychodów) ,and (4) consistency(spójność)
you just have to be fair.

5. Explain the monetary unit assumption and the economic

entity
assumption.

Monetary unit assumption - its related to money or currency and it can only be expressed in
terms of money.

Economic entity assumption (podmiot gospodarczy) - businesses should be treated as

separate economic entities from other companies as well as their owners. (nie wrzucamy do
jednego wora)

6. State the accounting equation, and define its components.

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 ASSETS

business resources, provide future services/benefits

cash, inventory, equipment, etc.

LIABILITIES

debts and obligations

Accounts Payable (company received sth but it didn’t pay for it yet), Notes
Payable(bony dłużne, you promises to pay it money back with interest), Salaries and
Wages

EQUITY(kapitał, zasoby trwałe)

referred to as residual equity

share capital-ordinary and retained earnings (zysk zwyczajny i zatrzymany)

if the investments by shareholders increase (to equity) then dividends to shareholders decrease
(jeśli zwiększa się inwestycje w naszym kapitału to dywidenda się zmniejsza)

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 REVENUES - result from business activities, sales, fees, services, commissions, interest,
dividends, royalties and rent.

DIVIDENDS - aktywa (najczęściej pieniądze) wypłacane właścicielom (wspólnikom lub

akcjonariuszom w zależności od formy, they are NOT EXPENSES.

EXPENSES - cost of assets in the process of earning, salaries expense, rent expense, utilities
expense, proparty tax expense, etc.

classifications effect on equity

rent expense expense decrease

service revenue revenue increase

dividends expense decrease

salaries and wages expense expense decrease

7. Analyze the effects of business transactions on the

accounting equation.
Transactions are a business’s economic events recorded by accountants, may be internal or
external, NOT all activities represent transactions and EACH transaction has a dual effect on
accounting equation.

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 8. Understand the five financial statements and how they are
prepared.
Income statement
A business needs to keep a very close eye on profit and money coming in, and that’s
precisely what an income statement does. An income statement may also be known as a
profit and loss statement, showing your businesses income and outgoings over a set period.
The income statement takes revenue, losses, and expenses into account, so it can show
whether your company has turned a profit or has missed its mark.

retained earnings statement

The balance sheet
 displays three key things: your assets, your liabilities, and your equity. The balance sheet can
show the current value of a business for the period it covers. Looking at your balance sheet
can help you understand if you can meet your financial obligations.

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 statement of financial position
Note to Financial Statements is a requirement of the IFRS (International Financial
Reporting Standards) and gives greater context around the information contained in your
other financial statement documents. For example, your assets may be listed in the balance
sheet, but your note to financial statements document is where you will explain precisely
what those assets are. The information in this document is required to ensure you are
compliant with standards and regulations.

statement of cash flow

shows how money enters and leaves your business, so you can see what you have available
as working capital at a particular time. A cash flow statement is essential for showing you
how quickly you could source cash if you needed it, as it doesn’t take into account things like
raw materials or purchases made – but not yet paid for – on credit.

comprehensive income statement

Statement of change in equity document shows the changes made to your company’s
share capital, retained earnings, and accumulated reserves. For a sole trader, it shows changes
to the owners equity. For a partnership, it shows the changes between both partner’s equity.
In the case of a company, then the statement of change in equity shows how equity share has
changed among all the shareholders.

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