Principles of Accounting Chapter 1
Corporation
A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock
Proprietorship
A business owned and run by just one person. Usually only a relatively small amount of money (capital) is necessary to start in business as a proprietorship. The proprietor receives any profits, suffers any losses, and is personally liable for all debts of the business.
Partnership
A business owned by two or more persons as partners
Statement of Cash Flows
A financial statement that provides financial information about the cash inflows (receipts) and outflows (cash payments) of a business for a specific period of time.
Bookkeeping
A part of accounting that involves only the recording of economic events
Cost principle
A principle that acquired assets and services should be recorded at their actual cost.
Accounts payable
A short term liability that will be paid in the future.
Managerial Accounting
Accounting used to provide information and internal reports and analyses to managers inside the organization to assist them in decision making.
Securities and Exchange Commission (SEC)
Agency of the US Government that oversees the US financial markets and accounting standard setting bodies. Relies on FASB to develop accounting standards which public companies must follow.
Generally Accepted Accounting Principles (GAAP)
An accepted set of accounting standards that include broad principles, practices, as well as rules and procedures. These standards indicate how to report economic events. (p.8)
Monetary Unit Assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Economic Entity Assumption
An assumption that requires that the activities of the entity be kept separate and distinct from the activites of its owners and all other economic entities
Audit
An examination of a company's financial statements and records.
Analyze and Interpret
Analysis involves use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning and limitations of reported data.
Expenses
Are decreases in owners equity that result in operating the business. EX: utility expense, rent, supplies and taxes
Fair Value Principle
Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
Expanded Accounting Equation
Assets= Liabilities + Capital - Withdrawals + Revenue - Expenses.
The Basic Accounting Equation
Assets=Liabilities + Owner's Equity
Going concern assumption
Assumes that the entity will remain in operation for the foreseeable future.
International Accounting Standards Board (IASB)
Board. international financial reporting standards ( IFRS) Accounting standards and practices used in many countries outside the United States
Financial statements
Business documents that are used to communicate information needed to make business decisions.
Financing activities
Cash contributions by the owner and withdraws of cash by the owner.
Operating activities
Cash receipts for services and cash payments for expenses.
Liabilities
Claims against assets
Identifies
Economic events relevant to its business
accounting records
Equipment is purchased on account. A cash investment is made into the business. The owner withdraws cash for personal use.
Accounting three basic activities
Identifies, records and communicates
Convergence
In order to increase comparability, in recent years the two standard-setting bodies have made efforts to reduce the differences between U.S, GAAP, and IFRS.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards issued by the International Accounting Standards Board.
LLC
Limited liability company. Each member is only liable for his are her own actions.
Return on assets
Measures how profitably a company uses its assests. Net income/Average total assets.
Owners capital
Owner contributions to a business.
Owner's Equity
Ownership claim on total assets
Owners withdraws
Payment of equity to the owner.
Internal Users
Persons using accounting information who are directly involved in managing the organization. Those who plan, organize and run the business. Ex: Regulatory Authorities
External Users
Persons using accounting information who are not directly involved in running the organization. EX: IRS, Managers, Investors, Labor Unions, Creditors, SEC, Customers, individuals and organizations outside a company who want financial information about the company.
Historical Cost Principle
Principle that states that assets and services should be recorded at their actual cost.
Financial Accounting
Provides economic and financial information for investors, creditors, and other external users.
Investing activities
Purchase and sale of land and equipment for cash.
Sarbanes-Oxley Act (SOX)
Reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.
Assets
Resources a business owns
Communicates
Shares the collected information to interested users by means of accounting reports. EX: Financial Statements
In the aggregate
Simplifies a multitude of transactions and makes a series of activities understandable and meaningful
Basic Assumptions
The economic entity assumption states that there should be a particular unit of accountability
Relevance
The financial information is capable of making a difference in a decision
Balance Sheet
The financial statement that reports assets, liabilities, and owner's equity during a specific time
Financial Accounting Standards Board (FASB)
The organization primarily responsible for evaluating, setting, or modifying GAAP.
Faithful representation
The quality of information that means the numbers and descriptions match what really existed or happened-they are factual
Net loss
The result of operations that occurs when total expenses are greater than total revenues.
Net income
The result of operations that occurs when total revenues are greater than total expenses.
Accounts receivable
The right to receive cash in the future from customers for goods and services performed.
Ethics
The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair
Collect cash on account
To record an increase in cash and a decrease in accounts receivable.
Investors (Owners)
Use accounting information to decide whether to buy, hold, or sell ownership shares of a company.
Creditors (such as suppliers and bankers)
Use accounting information to evaluate the risks of granting credit or lending money.
Regulatory Agencies
Want to know whether the company is operating within prescribed rules. EX: Exchange Commission and Federal Trade Commission
Drawings
Withdraws of cash or other assets for the owners personal use. Decrease owner's equity.
Public accountant
auditing, taxation, and management consulting
basic accounting equation
increase assets and increase owner's equity
Customers
interested in whether a company will continue to honor product warranties and support its product lines.
Income Statement
presents the revenues and expenses and resulting net income or net loss for a specific period of time
three types of business entities
proprietorships, partnerships, and corporations
Net income
revenues exceed expenses
Owners Equity
statement summarizes the changes in owners equity for a specific period of time
Investments by Owner
the assets the owner puts into the business
Transactions
the economic events of an enterprise that are recorded
Revenues
the gross increase in owner's equity resulting from business activities entered into for the purpose of earning income
Records
to provide a history of its financial activities by keeping a systematic, chronological diary of events
Taxing Authorities
want to know whether the company complies with the tax laws EX: IRS
Labor Unions
want to know whether the owners have the ability to pay increased wages and benefits.