Foundations of Accounting Chapter 2

Liabilities Include:

- Accounts Payable - Long - term debt - other accrued liabilities

Assets include:

- Accounts Receivable - Cash -Merchandise Inventory - Equipment - Land

Assets

- Assets are probable future economic benefits to the firm. - Assets result from past transactions or events of the firm. - The economic benefits associated with assets must be obtained or controlled by the firm. - Assets represent the amount of resources controlled by the firm. - Assets can be tangible or intangible.

The four financial statements

- Balance Sheet - Income Statement - Statement of Cash Flows - Statement of Changes in Stockholders' Equity

Financial statements of an entity are required to show what for the reporting period

- Financial position at the end of the period - Earning for the period - Cash flows during the period - Investments by and distributions to owners (i.e., stockholders) during the period

Liabilities

- Liabilities are present obligations to transfer assets or provide services to other organizations. - Liabilities are amounts owed to other entities. - Liabilities are claims against the firm by its creditors. - Liabilities are probable future sacrifices of economic benefits.

Stockholders' Equity

- The stockholders' claim in the assets of the entity. - is the ownership right of the stockholders in the assets that remain after subtracting the liabilities of the corporation. - is sometimes referred to as net worth - is the equity in the assets that remain after subtracting the liabilities. - is sometimes referred to as owners' equity - is sometimes referred to as net assets.

Three Principal Forms of Business Organization:

1. Proprietorship 2. Partnership 3. Corporation

Accounts Payable

A liability representing an amount payable to another entity, usually because of the purchase of merchandise or services on credit. - Represent amounts owed to suppliers of merchandise inventory that was purchased on credit and will be paid within a specific period of time

Account

A record in which transactions affecting individual assets, liabilities, stockholders' equity, revenues, and expenses are recorded. - are used to organize transactions.

Cash

An asset on the balance sheet that represents the amount of cash on hand and balances in bank accounts maintained by the entity

Accounts Receivable

An asset representing a claim against another entity, usually arising from selling goods or services on credit. - Represents amounts due from customers who have purchased merchandise on credit and who have agreed to pay within a specified period or when billed.

Net Worth

Another term for net assets or stockholders' equity or owners' equity, but not as appropriate because the term "worth" may be misleading.

Accounting Equation

Assets = Liabilities + Stockholders' Equity ( A = L + SE )

Transactions

Economic interchanges between entities that are accounted for and reflected in financial statements. - "The bricks that build the financial statements"

Merchandise Inventory

Items held by an entity for sale to customers in the normal course of business. - Represents the cost, to an entity, of the merchandise that it has acquired but not yet sold.

Depreciation

The accounting process of recognizing the cost of an asset that is used up over its useful life to the entity. - Is the process of spreading the cost of an asset over its useful life to the entity

Net Assets

The difference between total assets and current liabilities. A - L = SE

Balance Sheet

The financial statement that is a listing of the entity's assets, liabilities, and stockholders' equity at a point in time. It is like a "snapshot of the organization's financial position, frozen at a specific point in time." - assets (resources) - liabilities (obligations) - stockholders' equity (owners' claim)

Accumulated Depreciation

The sum of the depreciation expense that has been recognized over time. Accumulated depreciation is contra asset - an amount that is subtracted from the cost of the related asset on the balance sheet. - Represents the portion of the cost of the equipment that is estimated to have been used up in the process of operating the business.

Equipment

represents the cost, to an entity, of the display cases, racks, shelving, and other store equipment purchased and installed in the rented building in which it operates.