Principles of Accounting Chapters 1-2

liability

(n.) a debt; something disadvantageous

asset

(n.) something of value; a resource; an advantage

Order of Financial Statements

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

How to prepare an income statement

1. Write Revenue: on the first line at the left side of the form 2. Enter the revenue account names beginning on the second line, indented about a half inch 3. Enter the balance of each revenue account 4. Skip a line and then write Expenses: at the left side of the form 5. Enter the expense account names on the next line, indented about a half inch 6.Draw a single rule under the last expense account balance 7. Write Total Expenses on the line following the last expense account name indented about one inch 8. Add the balances for all expense accounts and draw one line under the amount 9. Subtract the total expenses from the total revenue to find net income. Enter the net income in the second amount column under the total expenses amount. Then write Net Income on the left side of it 10. If the amount of net income matches the amount on the worksheet, draw a double rule under the net income

Partnership

A business in which two or more persons combine their assets and skills

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

General Ledger

A ledger that contains all asset, liability, owner's equity, revenue, and expense accounts. Everything needed for financial statement.

Full Disclosure Principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

double-entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

revenue

An increase in owner's equity resulting from the operation of a business

Accounting Equation

Assets = Liabilities + Owner's Equity

Financial Statements

Financial reports that summarize the financial condition and operations of a business

Measurement Principle

Principle that prescribes financial statement information, and its underlying transactions and events, be based on relevant measures of valuation; also called the cost principle.

Accounting Cycle Steps

Record journal entries from transactions Post journal entries to the general ledger Prepare unadjusted trial balance Adjust the accounts Prepare an adjusted trial balance Prepare the financial statements Close the temporary accounts Prepare a post-closing trial balance

Public Accounting

The field of accounting where accountants and their staff provide services on a fee basis.

Private Accounting

The field of accounting whereby accountants are employed by a business firm or a not-for-profit organization.

Accounting Principles

The generally accepted rules which govern the way accounting information is recorded

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Propietorship

a business owned and run by just one person

expense

a decrease in owner's equity resulting from the operation of a business

Balance Sheet

a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Trial Balance

a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced

T account

a tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)

Generally Accepted Accounting Principles (GAAP)

accounting guidelines that govern the content and form of financial reports

Managerial Accounting

accounting used to provide information and analyses to managers inside the organization to assist them in decision making

journal

an accounting record in which transactions are initially recorded in chronological order

rules of debit and credit

for assets increases are recorded with debits and decreases with credits: for liabilities and owner's equity increases are recorded with credits and decreases with debits

The Chart of Accounts is:

list of account titles with corresponding reference numbers used by companies so that transaction items are consistently named

Matching Principle

recognize expenses in the same period as the revenues they help to generate

Forms of Business

sole proprietorship, partnership, corporation

Owner's Equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets

Financial Accounting

the branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders