Test 1

Balance Sheet

(also called the statement of financial position) reports the financial position of a company (assets, liabilities and equity) at a specific date. The assets are listed first, then the liabilities and equity. In keeping with the accounting equation, the total balance of assets must equal the total balance of liabilities plus equity. The left side of the statement shows each asset account and the total asset amount. The right side of the statement shows each liability account, the equity account balance and the sum of these two components. The ending balance of equity from the statement of changes in owner's equity is the same as the balance shown on the balance sheet.

Accounting Equation

Assets = Liabilities + Equity

Partnership

Business is owned by two or more people. Each partner has unlimited personal liability for the debts of the business. Other types of partnerships may limit the partners' liability.

Sole Proprietorship

Business owned by a single owner. The owner receives any profits, suffers any losses, and is personally liable for all debts incurred by the business. It is not a separate legal entity from its owner. The owner has unlimited liability for the debts.

Principles of Accounting

General principles are the basic assumptions, concepts and guidelines developed for preparing financial statements. Specific principles are the detailed rules used in reporting transactions and events

Going-Concern Principle

The going concern principle assumes that a business will continue to operate long enough to carry out its objectives.

Income Statement

The Income Statement presents revenues, expenses and resulting net income or net loss for a specific period of time (i.e., month, quarter, or year). Net income results when revenues are greater than expenses; conversely, net loss results when revenues are less than expenses. Each type of revenue and expense is listed in the income statement with revenues being listed first, then expenses. The date line is always "For the Month, Quarter or Year Ended [DATE]" for income statements.

Business Entity Principle

The business entity principle states that the activities of the company must be kept separate from the activities of the owner and other companies in order to make good decisions.

Cost Principle

The cost principle dictates that assets be recorded at cost or equal-to-cash basis. This principle emphasizes relevance and reliability, and is consistent with the objectivity principle.

Monetary Unit Principle

The monetary unit principle states that only transactions that can be expressed in terms of money can be included in the accounting records. For example, human assets cannot be recorded in the accounting records.

Objectivity Principle

The objectivity principle means that financial statement information is supported by independent, unbiased evidence.

Revenue Recognition Principle

The revenue recognition principle states that revenue is recognized (or recorded) when it is earned, which helps us determine when revenue should be included on an income statement. Note that revenue is recorded in the accounting system when earned, not when the cash is received. The revenue recognition principle states that revenue is recognized (or recorded) when it is earned, which helps us determine when revenue should be included on an income statement. Note that revenue is recorded in the accounting system when earned, not when the cash is received.

Liabilities

are debts and obligations; claims on assets held by creditors. Examples include notes payable to a bank, accounts payable to vendors, and taxes payable owed to the government.

Revenues

are inflows of assets (like cash) in exchange for products and services provided to customers as part of a company's operations.

Expenses

are outflows or the using up of assets in providing products and services to customers.

Assets

are resources owned by a business and are expected to possess current or future benefits. Examples include cash, supplies, land, and equipment.

Generally Accepted Accounting Principles (GAAP)

are the standards practiced by accountants in recording and reporting economic events. These standards were developed using certain basic assumptions.

Equity

is the ownership claim on total assets; it equals the difference between assets less liabilities.

Securities and Exchange Commission (SEC)

monitors companies that issue stock.

Statement of Retained Earnings

summarizes the changes in the balance of retained earnings (R/E) over a specific period of time (month, quarter, year). This statement uses the same date line wording as that found on the Income Statement. This statement shows the changes from the beginning balance of R/E at June 1 to the ending balance of R/E at June 30.