Accounting 101: Chapter 1-3 Exam

Accounting Standards Codification

Effective July 1, 2009, the source of authoritative U.S. GAAP is the FASB Accounting Standards Codification, which are communicated through an Accounting Standards Update (Update). The Codification reorganizes U.S. GAAP pronouncements into approximately 90 accounting topics. It also includes relevant U.S. Securities and Exchange Commission guidance that follows the same topical structure in separate sections in the Codification.

Fair Market Value

Fair market value: The current worth of an asset or the price the asset would bring if sold on the open market is the current worth of an asset or the price the asset would bring if sold on the open market.

Occupation: Personal Financial Advisors

Personal financial advisors give financial advice to people. They help with investments, taxes, and insurance decisions. BA

Assets

Property owned by a business

Social Entities

Social entities are nonprofit organizations, such as cities, public schools, and public hospitals.

The classification and normal balance of the accounts receivable account is ? Salaries expense?

1) An asset with a debit balance 2) Expense with debit balance

To analyze the effect of a business transaction...

1) Describe the financial event. Identify the property. Identify who owns the property. Determine the amount of increase or decrease. 2) Make sure the equation is in balance.

Classification

Accounts are recognized by their classification as assets, liabilities, or owner's equity.

Occupation: Budget Analysts

Budget analysts help public and private institutions organize their finances. They prepare budget reports and monitor institutional spending. BA

When equipment is purchased on credit...

assets and liabilities increase

When the owner withdraws cash for personal use

assets decrease and owner's equity decreases

What does an accountant do?

establishes the records and procedures that make up the accounting system, supervises the operations of the system, interprets the resulting financial information.

The ending capital balance appears on which of the following statement(s)?

statement of owners equity and balance sheet

The income statement shows

the results of operations for a period of time

Sole Proprietorship

A sole proprietorship is a business entity owned by one person. The life of the business ends when the owner is no longer willing or able to keep the business going. Many small businesses are operated as sole proprietorships. Responsible for debt/taxes Owner is responsible for the firm's debt when the firm is unable to pay

The Accounting system / Debit and Credit

Accountants do not use the terms left side and right side when they talk about making entries in accounts. Instead, they use the term debit for an entry on the left side and credit for an entry on the right side. Figure 3.4 summarizes the rules for debits and credits. The accounting system is called the double-entry system. This is because each transaction has at least two entries—a debit and a credit.

Equity/Capital

An owner's financial interest in the business is called equity, or capital. For example. Eli put 100,000 into his businesses bank account. Eli has 100,000 in equity.

Which financial statement is a representation of the accounting equation?

Balance sheet

Occupation: Bookkeeping, Accounting, and Auditing Clerks

Bookkeeping, accounting, and auditing clerks produce financial records for organizations. They record financial transactions, update statements, and check financial records for accuracy. High school diploma or equivalent

Property =

Financial Interest

Occupation: Financial Analysts

Financial analysts provide guidance to businesses and individuals making investment decisions. They assess the performance of stocks, bonds, and other types of investments. BA

Governmental Accounting

Governmental accounting involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units. Governmental units do not earn profits. However, governmental units receive and pay out huge amounts of money and need procedures for recording and managing this money.

Occupation: Management Analysts

Management analysts, often called management consultants, propose ways to improve an organization's efficiency. They advise managers on how to make organizations more profitable through reduced costs and increased revenues. BA

Net Income

Net income results when revenue is greater than the expenses for the period.

Financial statements

Periodic reports of a firm's financial position or operating results

Revenue/Expenses in terms of Equity

Revenues increase owner's equity. Expenses decrease owner's equity.

AICPA

The AICPA is a national association for certified public accountants

The Accounting Process

The accounting process involves recording, classifying, summarizing, interpreting, and communicating financial information about an economic or social entity.

Owner's Equity

The owner's financial interest is called owner's equity. (Sometimes owner's equity is called proprietorship or net worth.

Separate Entity Assumption

The term separate entity assumption describes the concept of keeping the firm's financial records separate from the owner's personal financial records.

Public Accounting

They provide accounting services to other companies. Normally provide: Auditing, tax accounting, management advisory services

Occupation: Top Executives

Top executives devise strategies and policies to ensure that an organization meets its goals. They plan, direct, and coordinate operational activities of companies and public or private-sector organizations. BA

If a business issues a check for $100 to purchase office supplies, What is the effect on the accounting equation?

Total assets will remain the same

Normal balance

Usually account balances appear on the increase side of the account. The increase side of the account is the normal balance of the account.

Statement of owners equity, equity starts at 30,000, net income is 11,000, and drawing is 6000. What is the capital?

35,000

Stockholders/Shareholders

Corporate owners, called stockholders or shareholders, are not personally responsible for the debts or taxes of the corporation. If the corporation is unable to pay its bills, the most stockholders can lose is their investment in the corporation. In other words, the stockholders will not lose more than the cost of the shares of stock.

Occupation: Cost Estimators

Cost estimators collect and analyze data to estimate the time, money, resources, and labor required for product manufacturing, construction projects, or services. Some specialize in a particular industry or product type. BA

Many accounting firms offer management advisory services, which services do they provide?

Improve information systems, improve business performance

Break Even

In the rare case when revenue and expenses are equal, the firm is said to break even

Proper sequence for preparing financial statements?

Income statement, statement of owners equity, balance sheet

Amounts that a business must pay in the future are known as

Liabilities

Management advisory services

Management advisory services involve helping clients improve their information systems or their business performance.

Temporary Accounts

Revenue and expense accounts appear on the income statement. The drawing account appears on the statement of owner's equity. These accounts classify and summarize changes in owner's equity during the period. They are called temporary accounts or nominal accounts because the balances in these accounts are transferred to the capital account at the end of the accounting period. In the next period, these accounts start with zero balances.

Revenue or Income

Revenue, or income, is the inflow of money or other assets that results from the sales of goods or services or from the use of money or property. A sale on account does not increase money, but it does create a claim to money. When a sale occurs, the revenue increases assets and also increases owner's equity.

Permanent Accounts

The asset, liability, and owner's equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts.

Liabilities

The debts or obligations of the business

History of Accounting

The system of accounting we use is based upon the works of Luca Pacioli, a Franciscan monk in Italy. In 1494, Pacioli wrote about the bookkeeping techniques in practice during his time.

Economic Entity

The term economic entity usually refers to a business or organization whose major purpose is to produce a profit for its owners.

Net Loss

When expenses are greater than revenue, the result is a net loss

Withdrawals

Withdrawals: Funds taken from the business by the owner for personal use are funds taken from the business by the owner for personal use. Withdrawals are not a business expense but a decrease in the owner's equity. Withdraw from cash and equity

Auditing

is the review of financial statements to assess their fairness and adherence to generally accepted accounting principles. Accountants who are CPAs perform financial audits.

Accountants usually choose to practice in one of three areas:

public accounting managerial accounting governmental accounting

Business Transaction

A business transaction is any financial event that changes the resources of a firm. For example, purchases, sales, payments, and receipts of cash are all business transactions. The accountant analyzes each business transaction to decide what information to record and where to record it. When a business transaction occurs, it is analyzed to identify how it affects the equation property equals financial interest.

Chart of Accounts

A chart of accounts is a list of all the accounts used by a business. Figure 3.8 shows the chart of accounts for Eli's Consulting Services. Each account has a number and a name. The balance sheet accounts are listed first, followed by the income statement accounts. The account number is assigned based on the type of account. Balance Sheet Accounts: The amounts on the balance sheet are carried forward to the next accounting period. Income Statement Accounts: The amounts on the income statement are transferred to the capital account at the end of the accounting period.

Corporation

A corporation is a business entity that is separate from its owners. A corporation has a legal right to own property and do business in its own name. Corporations are very different from sole proprietorships and partnerships. Don't die when owner dies Can continue indefinitely; ends only when the business goes bankrupt or when the stockholders vote to liquidate Stockholders are not responsible for the firm's debts; they can lose only the amount they invested

A Partnership

A partnership is a business entity owned by two or more people. The partnership structure is common in businesses that offer professional services, such as law firms, accounting firms, architectural firms, medical practices, and dental practices. At the beginning of the partnership, two or more individuals enter into a contract that details the rights, obligations, and limitations of each partner, including: the amount each partner will contribute to the business, each partner's percentage of ownership, each partner's share of the profits, the duties each partner will perform, the responsibility each partner has for the amounts owed by the business to creditors and tax authorities. Ends when one or more partners withdraw, when a partner dies, or when the partners decide to close the firm Partners are responsible individually and jointly for the firm's debts when the firm is unable to pay

Creditor

A person to whom money is owed If the business is unable to pay its debts, the creditors (those people, companies, or government agencies to whom the business owes money) can turn to the owner for payment.

T Accounts

Accountants use T accounts to analyze transactions. A T account consists of a vertical line and a horizontal line that resemble the letter T. The name of the account is written on the horizontal (top) line. Increases and decreases in the account are entered on either side of the vertical line. Assets ( + / - ) = Liabilities/equity (-/+)

Accounting Defined

Accounting is the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

International Accounting

Accounting principles vary from country to country. International accounting is the study of the accounting principles used by different countries. In 1973, the International Accounting Standards Committee (IASC) was formed. Recently, the IASC's name was changed to the International Accounting Standards Board (IASB). The IASB deals with issues caused by the lack of uniform accounting principles. The IASB also makes recommendations to enhance comparability of reporting practices.

What is accounting

Accounting provides financial information about a business or a nonprofit organization. Owners, managers, investors, and other interested parties need financial information in order to make decisions. Because accounting is used to communicate financial information, it is often called the "language of business."

Managerial Accounting

Accounting work carried on by an accountant employed by a single business in industry. also referred to as private accounting, involves working for a single business in industry. Managerial accountants perform a wide range of activities, including: establishing accounting policies, managing the accounting system preparing financial statements, interpreting financial information, providing financial advice to management, preparing tax forms, performing tax planning services, preparing internal reports for management.

Financial Statements

After the trial balance is prepared, the financial statements are prepared. Figure 3.7 shows the financial statements for Eli's Consulting Services. The amounts are taken from the trial balance. As you study the financial statements, note that net income from the income statement is used on the statement of owner's equity. Also note that the ending balance of the Trayton Eli, Capital account, computed on the statement of owner's equity, is used on the balance sheet.

Accounts Payable

Amount a business must pay in the future.

Accounts Receivable

Amounts owed by these clients are known as accounts receivable. This is a new form of asset for the firm—claims for future collection from customers Would go under cash side as accounts receivable When paid, move account receivable into cash

Account Balance and Footing

An account balance is the difference between the amounts on the two sides of the account. First add the figures on each side of the account. If the column has more than one figure, enter the total in small pencil figures called a footing. Then subtract the smaller total from the larger total. The result is the account balance. If the total on the right side is larger than the total on the left side, the balance is recorded on the right side. If the total on the left side is larger, the balance is recorded on the left side. If an account shows only one amount, that amount is the balance. If an account contains entries on only one side, the total of those entries is the account balance.

Accounting System

An accounting system is designed to accumulate data about a firm's financial affairs, classify the data in a meaningful way, and summarize it in periodic reports called financial statements

Buying an Account

An arrangement that allows payment at a later date. Also called a charge-account or open-account credit

An Entity

An entity is recognized as having its own separate identity. An entity may be an individual, a town, a university, or a business.

Definition Expense

An expense is an outflow of cash, the use of other assets, or the incurring of a liability. Expenses decrease owner's equity. Decreases in owner's equity appear on the left side of the T account. Therefore, increases in expenses (which are decreases in owner's equity) are recorded on the left side of expense T accounts. Decreases in expenses are recorded on the right side of the T accounts. Decreases in expenses are rare but may result from corrections or transfers. Salary Expense? How is the decrease in owner's equity recorded? One way would be to record the $8,000 on the left side of the Trayton Eli, Capital account. However, the preferred way is to keep expenses separate from owner's investment. Therefore, Sanchez set up a Salaries Expense account.

Expense

An expense, on the other hand, involves the outflow of money, the use of other assets, or the incurring of a liability. Expenses include the costs of any materials, labor, supplies, and services used to produce revenue. Expenses cause a decrease in owner's equity. Example: Revenue increased by $36,000 (increases the cash), which results in a $36,000 increase in owner's equity. However keep it seperate on owner's equity side with label "Revenue" When paying employees, decreases owners equity and cash When paying utilities, decrease cash and equity

Certified Public Accountant (CPA)

An independent accountant who provides accounting services to the public for a fee. To become a CPA, an individual must have a certain number of college credits in accounting courses, demonstrate good personal character, pass the Uniform CPA Examination, and fulfill the experience requirements of the state of practice. CPAs must follow the professional code of ethics.

To Analyze Business Transactions

Analyze the financial event. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account. Apply the left-right rules for each account affected. Make the entry in T-account form.

Transaction

Any financial event that changes the resources firm

Asset Accounts

Asset accounts show items of value owned by a business. Trayton Eli invested $100,000 in the business. Sergio Sanchez, the office manager for Eli's Consulting Services, set up a Cash account. Cash is an asset. Assets appear on the left side of the accounting equation. Cash increases appear on the left side of the Cash T account. Decreases are shown on the right side. Sanchez entered the cash investment of $100,000 (a) on the left side of the Cash account.

The accounting equation is...

Assets = Liabilities + Owner's Equity

Statement of Financial Position or Balance Sheet

At regular intervals, a business owner can review the status of the firm's assets, liabilities, and owner's equity in a financial statement called a balance sheet. The balance sheet shows the firm's financial position on a given date The balance sheet is also called the statement of financial position. Caterpillar Inc. reported assets of $78.5 billion, liabilities of $63.6 billion, and owners' equity of $14.9 billion on its statement of financial position at December 31, 2015. Shows: -Assets—the types and amounts of property that the business owns, -Liabilities—the amounts owed to creditors, -Owner's Equity—the owner's equity on the reporting date. When preparing one: -The three-line heading gives the firm's name (who), the title of the report (what), and the date of the report (when). -Balance sheets prepared using the account form (as in Figure 2.5) show total assets on the same horizontal line as the total liabilities and owner's equity. -Dollar signs are omitted when financial statements are prepared on paper with ruled columns. Statements that are prepared on plain paper, not ruled forms, show dollar signs with the first amount in each column and with each total. -A single line shows that the amounts above it are being added or subtracted. Double lines indicate that the amount is the final amount in a column or section of a report

Occupation: Financial Managers

Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. BA

Financial Statements

Financial statements are reports that summarize a firm's financial affairs. To make one: First prepare income statement (check page 35) Prepare Statement of Owner's Equity Prepare the Balance Sheet

Separate Entity Assumption: Businesses

For accounting purposes, all forms of business are considered separate entities from their owners. However, the corporation is the only form of business that is a separate legal entity.

Accounting Equation Example

For example. Eli put 100,000 into his businesses bank account. Eli has 100,000 in equity. If he buys 5,000 dollars in equipment, his business has 95,000 dollars in cash and 5,000 dollars in equipment, still making his business worth 100,000 (financial interest) Buy 6,000 from Office Store but agree to do a Accounts Payable. Now we have 95,000 cash + 11,000 in equipment= 100,000 for owner + 6,000 for Office Store creditors Paid for supplies with 1,500 dollars. Now cash is 93,500 (cash) + 1,500 in supplies + 11,000 in equipment = 100,000 equity + 6,000 to Office Creditors Paid to the Office Creditors in 2,500 dollars cash. 91,000 (cash) + 1,500 in supplies + 11,000 in equipment = 100,000 equity + 3,500 to Office Creditors Then paid rent, 8,000 up front for two months. 83,000 (cash) + 1,500 in supplies + 11,000 in equipment + 8,000 in rent = 100,000 equity + 3,500 to Office Creditors Notice that when property values and financial interests increase or decrease, the total of the items on one side of the equation still equals the total on the other side.

How they developed Generally Accepted Accounting Principles

Generally accepted accounting principles are developed by the Financial Accounting Standards Board (FASB), which is composed of five full-time members. The SEC requires all publicly owned companies to follow generally accepted accounting principles. As new standards are developed or refined, accountants interpret the standards and adapt accounting practices to the new standards. Prior to 2009, the FASB issued 168 Statements of Financial Accounting Standards. The FASB developed these statements and, before issuing them, obtained feedback from interested people and organizations First, the FASB wrote a discussion memorandum to explain the topic being considered. Then public hearings were held where interested parties could express their opinions, either orally or in writing. The groups that consistently expressed opinions about proposed FASB statements were the SEC, the American Institute of Certified Public Accountants (AICPA), public accounting firms, the American Accounting Association (AAA), and businesses with a direct interest in a particular statement. After public hearings, the FASB released an exposure draft, which described the proposed statement. Then the FASB received and evaluated public comment about the exposure draft. Finally, FASB members voted on the statement. If at least four members approved, the statement was issued.

Fees income

Got 36,000 from customers in Cash Assets. How is the increase in owner's equity recorded? One way would be to record the $36,000 on the right side of the Trayton Eli, Capital account. However, the preferred way is to keep revenue separate from the owner's investment until the end of the accounting period. Therefore, Sanchez opened a revenue account for Fees Income. Sanchez entered $36,000 (g) on the right side of the Fees Income account. Revenues increase owner's equity. Increases in owner's equity appear on the right side of the T account. Therefore, increases in revenue appear on the right side of revenue T accounts. At this point, the firm needs just one revenue account. Most businesses have separate accounts for different types of revenue. For example, sales of goods such as clothes are recorded in the revenue account Sales.

Trial Balance Errors

If the totals of the Debit and Credit columns are equal, the financial records are in balance. If the totals of the Debit and Credit columns are not equal, there is an error. The error may be in the trial balance, or it may be in the financial records. Some common errors are: adding trial balance columns incorrectly; recording only half a transaction—for example, recording a debit but not recording a credit, or vice versa; recording both halves of a transaction as debits or credits rather than recording one debit and one credit; recording an amount incorrectly from a transaction; recording a debit for one amount and a credit for a different amount; making an error when calculating the account balances. If the trial balance does not balance, try the following procedures: Check the arithmetic. If the columns were originally added from top to bottom, verify the total by adding from bottom to top. Check that the correct account balances were transferred to the correct trial balance columns. Check the arithmetic used to compute the account balances. Check that each transaction was recorded correctly in the accounts by tracing the amounts to the analysis of the transaction.

The Drawing Account

In sole proprietorships and partnerships, the owners generally do not pay themselves salaries. To obtain funds for personal living expenses, owners make withdrawals of cash. The withdrawals are against previously earned profits that have become part of capital or against profits that are expected in the future. Since withdrawals decrease owner's equity, withdrawals could be recorded on the left side of the capital account. However, the preferred way is to keep withdrawals separate from the owner's capital account until the end of the accounting period. An owner's equity account called a drawing account is set up to record withdrawals. Increases in the drawing account (which are decreases in owner's equity) are recorded on the left side of the drawing T accounts. Increases to drawing accounts are recorded on the left side of the T account. Record $5,000 on the left side of the Trayton Eli, Drawing T account.

LEFT RIGHT RULES

LEFT Increases to asset accounts are recorded on the left side of the T account. Record $100,000 on the left side of the Cash T account. RIGHT Increases to owner's equity accounts are recorded on the right side of the T account. Record $100,000 on the right side of the Trayton Eli, Capital T account. LEFT Increases to asset accounts are recorded on the left side of the T account. Record $6,000 on the left side of the Equipment T account. RIGHT Increases to liability accounts are recorded on the right side of the T account. Record $6,000 on the right side of the Accounts Payable T account. LEFT Decreases to liability accounts are recorded on the left side of the T account. Record $2,500 on the left side of the Accounts Payable T account. RIGHT Decreases to asset accounts are recorded on the right side of the T account. Record $2,500 on the right side of the Cash T account.

Trial Balance

Once the account balances are computed, a trial balance is prepared. The trial balance is a statement that tests the accuracy of total debits and credits after transactions have been recorded. If total debits do not equal total credits, there is an error. Figure 3.6 shows the trial balance for Eli's Consulting Services. To prepare a trial balance, perform the following steps: Enter the trial balance heading showing the company name, report title, and closing date for the accounting period. List the account names in the same order as they appear on the financial statements. Assets Liabilities Owner's Equity Revenue Expenses Enter the ending balance of each account in the appropriate Debit or Credit column. Total the Debit column. Total the Credit column. Compare the total debits with the total credits.

Occupation: Postsecondary Teachers

Postsecondary teachers instruct students in a wide variety of academic and vocational subjects beyond the high school level. They also conduct research and publish scholarly papers and books. MA or DOC

Finding Trial Balance Errors

Sometimes you can determine the type of the error by the amount of the difference. Compute the difference between the debit total and the credit total. If the difference is divisible by 2, a debit might be recorded as a credit, or a credit recorded as a debit. If the difference is divisible by 9, there might be a transposition. A transposition occurs when the digits of a number are switched (357 for 375). The test for a transposition is: 375-357= 18, 18/9=2 Also check for slides. A slide occurs when the decimal point is misplaced (375 for 37.50). We can test for a slide in the following manner: 375-37.5=337.5, 337.5/9=37.5

Stock

Stock Certificates that represent ownership of a corporation Stock issued in the form of stock certificates, represents the ownership of the corporation. Corporations may be privately or publicly owned. Privately owned corporations are also called closely held corporations. The ownership of privately owned corporations is limited to specific individuals, usually family members. Stock of closely held corporations is not traded on an exchange. In contrast, stock of publicly owned corporations is bought and sold on stock exchanges and in over-the-counter markets. Most large corporations have issued (sold) thousands of shares of stock.

Subchapter S corporations

Subchapter S corporations, also known as S corporations, are entities formed as corporations that meet the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership so the corporation pays no income tax. Instead, shareholders include their share of corporate profits, and any items that require special tax treatment, on their individual income tax returns. Otherwise, S corporations have all of the characteristics of regular corporations. The advantage of the S corporation is that the owners have limited liability and avoid double taxation.

Tax Accounting

Tax accounting involves tax compliance and tax planning. Tax compliance deals with the preparation of tax returns and the audit of those returns. Tax planning involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability.

Occupation: Tax Examiners and Collectors, and Revenue Agents

Tax examiners and collectors, and revenue agents ensure that governments get their tax money from businesses and citizens. They review tax returns, conduct audits, identify taxes owed, and collect overdue tax payments. BA

The AAA

The AAA is a group of accounting educators. AAA members research possible effects of a proposed FASB statement and offer their opinions to the FASB.

Tax Authorities

The Internal Revenue Service (IRS) and other state and local tax authorities are interested in financial information about your firm. This information is used to determine the tax base: Income taxes are based on taxable income. Sales taxes are based on sales income. Property taxes are based on the assessed value of buildings, equipment, and inventory (the goods available for sale). The accounting process provides all of this information.

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act was passed in response to the wave of corporate accounting scandals starting with the demise of Enron Corporation in 2001, the arrest of top executives at WorldCom and Adelphia Communications Corporation, and ultimately the demise of Arthur Andersen, an international public accounting firm formerly a member of the "Big Five." Arthur Andersen was found guilty of an obstruction of justice charge after admitting that the firm destroyed thousands of documents and electronic files related to the Enron audit engagement. Although on May 31, 2008, the Supreme Court of the United States reversed the Andersen guilty verdict, Arthur Andersen has not returned as a viable business. As a result of the demise of Arthur Andersen, the "Big Five" are now the "Big Four." The Act significantly tightens regulation of financial reporting by publicly held companies and their accountants and auditors. The Sarbanes-Oxley Act created a five-member Public Company Accounting Oversight Board. The Board has investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors. The Securities and Exchange Commission oversees the Board. Two members of the Board are certified public accountants, to regulate the accountants who audit public companies, and the remaining three must not be and cannot have been CPAs. The chair of the Board may be held by one of the CPA members, provided that the individual has not been engaged as a practicing CPA for five years.

REGULATORY AGENCIES AND INVESTORS

The Securities and Exchange Commission (SEC) oversees the financial information provided by publicly owned corporations to their investors and potential investors. Publicly owned corporations trade their shares on stock exchanges and in over-the-counter markets. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 in order to protect those who invest in publicly owned corporations. The SEC is responsible for reviewing the accounting methods used by publicly owned corporations. The SEC has delegated this review to the accounting profession but still has the final say on any financial accounting issue faced by publicly owned corporations. If the SEC does not agree with the reporting that results from an accounting method, the SEC can suspend trading of a company's shares on the stock exchanges.

Generally Accepted Accounting Principles

The Securities and Exchange Commission has the final say on matters of financial reporting by publicly owned corporations. The SEC has delegated the job of determining proper accounting standards to the accounting profession. However, the SEC sometimes overrides decisions the accounting profession makes. To fulfill its responsibility, the accounting profession has developed, and continues to develop, generally accepted accounting principles (GAAP). Generally accepted accounting principles must be followed by publicly owned companies unless they can show that doing so would produce information that is misleading.

Accounts

The accounting equation is one tool for analyzing the effects of business transactions. However, businesses do not record transactions in equation form. Instead, businesses establish separate records, called accounts, for assets, liabilities, and owner's equity. Asset accounts show the property a business owns. Liability accounts show the debts of the business. Owner's equity accounts show the owner's financial interest in the business. Each account has a name that describes the type of property, the debt, or the financial interest.

The auditor's report

The auditor's report contains the auditor's opinion about the fair presentation of the operating results and financial position of the business. The auditor's report also confirms that the financial information is prepared in conformity with generally accepted accounting principles. The financial statements and the auditor's report are made available to the public, including existing and potential stockholders. An independent Accountant's review of a firm's financial statement

Balance Sheet vs The income Statement

The balance sheet is a snapshot of the firm's financial position on a specific date. The income statement, like a movie or video, shows the results of business operations over a period of time.

The Income Statement

The income statement shows the results of business operations for a specific period of time such as a month, a quarter, or a year. The income statement shows the revenue earned and the expenses of doing business. (The income statement is sometimes called a profit and loss statement or a statement of income and expenses. The most common term, income statement, is used throughout this text.) The three-line heading of the income statement shows who, what, and when. Who—the business name appears on the first line. What—the report title appears on the second line. When—the period covered appears on the third line. Note the use of single and double rules in amount columns. A single line is used to show that the amounts above it are being added or subtracted. Double lines are used under the final amount in a column or section of a report to show that the amount is complete. Nothing is added to or subtracted from an amount with a double line. Net income from the income statement is placed into owners equity

The Fundamental Accounting Equation

The relationship between assets and liabilities plus owner's equity is called the fundamental accounting equation. The entire accounting process of analyzing, recording, and reporting business transactions is based on the fundamental accounting equation. ? (Assets) =100 (liabilities) + 300(Owner's equity) Assets= 400

The statement of owner's equity

The statement of owner's equity reports the changes that occurred in the owner's financial interest during the reporting period. This statement is prepared before the balance sheet so that the amount of the ending capital balance is available for presentation on the balance sheet. The first line of the statement of owner's equity is the capital balance at the beginning of the period. Net income is an increase to owner's equity; net loss is a decrease to owner's equity. Withdrawals by the owner are a decrease to owner's equity. Additional investments by the owner are an increase to owner's equity. The total of changes in equity is reported on the line "Increase in Capital" (or "Decrease in Capital"). The last line of the statement of owner's equity is the capital balance at the end of the period.

Three Major Legal Forms of a Business Entity

The three major legal forms of business entity are the sole proprietorship, the partnership, and the corporation.

Limited Liability Partnership Act

Under the Limited Liability Partnership Act of most states, a Limited Liability Partnership (LLP) may be formed. An LLP is a general partnership that provides some limited liability for all partners. LLP partners are responsible and have liability for their own actions and the actions of those under their control or supervision. They are not liable for the actions or malfeasance of another partner. Except for the limited liability aspect, LLPs generally have the same characteristics, advantages, and disadvantages as any other partnership.

The balance sheet shows:

the financial position of a business at a given time