Chapter 1: Intro to Accounting and Business

Prepaid expenses

(assets) items such as supplies that will be used in the business in the future.

International Accounting Standards Board (IASB)

(countries outside the US) use generally accepted accounting principles adopted by the IASB. Also issues International Financial Reporting Standards (IFRSs).

Financial Accounting Standards Board (FASB)

(within the US) has the primary responsibility for developing accounting principles. Publishes Statements of Financial Accounting Standards as well as Interpretations of these Standards.

Limited Liability Company

-combines the attributes of a partnership and a corporation -10% of business organizations in the US (combined with partnerships) -Provides tax and liability advantages to the owners.

Corporation

-organized under state or federal statutes as a separate legal taxable entity -20% of the business organizations in the US; generates 90% of business revenues.

Proprietorship

-owned by one individual -70% of business entities in the US.

Partnership

-owned by two or more individuals -10% of business organizations in the US (combined with limited liability companies).

Accounting equation

Assets = Liabilities + Owner's Equity (liabilities usually are shown before owner's equity in this because creditors have first rights to the assets.)

Generally accepted accounting principles (GAAP)

Financial accountants follow these in preparing reports. These allow investors and other users to compare one company to another.

External users

Investors, creditors, customers, the government

Account receivable

a claim against the customer; an asset, and the revenue is earned and recorded as if cash had been received.

Account form

a form of balance sheet; it resembles the basic format of the accounting equation, with assets on the left side and the liabilities and owner's equity sections on the right side.

Balance sheet

a list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a month or a year.

Statement of cash flows

a summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

Statement of Owner's Equity

a summary of the changes in the owner's equity that have occurred during a specific period of time, such as a month or a year.

Income statement

a summary of the revenue and expenses for a specific period of time, such as a month or a year.

Public accounting

accountants and their staff who provide services on a fee basis are said to be employed in this.

Public Company Accounting Oversight Board (PCAOB)

accounting profession that SOX is an oversight body for.

Financial statements

accounting reports that provide information after transactions have been recorded and summarized.

Securities and Exchange Commission (SEC)

an agency of the US government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

Business transaction

an economic event or condition that directly changes an entity's financial condition or its results of operations.

Accounting

an information system that provides reports to users about the economic activities and condition of a business.

Business

an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Interest revenue

another example of a type of revenue.

Rent revenue

another example of a type of revenue.

Matching concept

applied by matching the expenses incurred during a period with the revenue that those expenses generated.

Financial accounting

area of accounting that provides external users with information.

Managerial accounting

area of accounting that provides internal users with information. (also known as Management accounting)

Expenses

assets used in the process of earning revenue.

Manufacturing businesses

change basic inputs into products that are sold to customers. (ex: Ford Motor Co., Dell Inc.)

Sarbanes-Oxley Act of 2002 (SOX)

established a new oversight body for the accounting profession called the PCAOB. It also established standards for independence, corporate responsibility, and disclosure.

Net loss

if the expenses exceed the revenue, the excess is this.

Business entity concept

limits the economic data in an accounting system to data related directly to the activities of the business.

Private accounting

managerial accountants employed by a business are employed in this.

Internal users

managers and employees

Revenue

money a business earns by selling goods or services to its customers.

Ethics

moral principles that guide the conduct of individuals.

General-purpose financial statements

one type of financial accounting report that is distributed to external users.

Service businesses

provide services rather than products to customers. (ex: Delta Air Lines, Walt Disney Company)

Certified Public Accountants (CPAs)

public accountants who have met a state's education, experience, and examination requirements may become these. Typically perform general accounting, audit, or tax services. Slightly better starting salaries than private accountants.

Unit of measure concept

requires that economic data be recorded in dollars.

Objectivity concept

requires that the amounts recorded in the accounting records be based on objective evidence.

Fees earned

revenue from providing services is recorded as this.

Sales

revenue from the sale of merchandise is recorded as this.

Merchandising businesses

sell products they purchase from other businesses to customers. (ex: Walmart, Amazon)

Profit

the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

Net income (net profit, or earnings)

the excess of the revenue over the expenses.

Account payable

the liability created by a purchase on account.

Ratio of liabilities to owner's equity

the relationship between liabilities and owner's equity is expressed as this. this = total liabilities/total owner's equity (or total stockholder's equity)

Assets

the resources owned by a business (ex: cash, land, buildings, equipment)

Liabilities

the rights of creditors are the debts of the business and are called this.

Owner's equity

the rights of the owners are called this.

Cost concept

under this, amounts are initially recorded in the accounting records at their cost or purchase price.