Chapter 14 - Accounting

purposes of accounting

help managers make well-informed decisions and report financial information about the firm to interested stakeholders, such as employees, owners, creditors, suppliers, unions, community activists, investors, and the government (for tax purposes)

fixed assets

long-term assets that are relatively permanent

intangible assets

long-term assets that have no physical form but do have value

bonds payable

long-term liabilities; money lent to the firm by bondholders that it must pay back

balance sheet

reports the firm's financial condition on a specific date

inputs (accounting documents)

sales documents purchasing documents shipping documents payroll records bank records travel records entertainment records

notes payable

short or long term liabilities (like loans) that a business promises to repay by a certain date

income statement

summarizes revenue, cost of goods sold, and expenses (including taxes) for a specific period and highlight the total profit or loss the firm experienced during that period

fundamental accounting equation

Assets = Liabilities + Owner's Equity

financial statements indicate

a firm's financial health and stability, key factors in management decision making

journal

a record book where the financial data from the original transaction documents is put (can be a book or computer program) "where the day's transactions are kept"

the accounting cycle

a six-step procedure that results in the preparation and analysis of the major financial statements

trial balance

a summary of all the financial data - must be correct this is used to prepare the firm's financial statements (balance sheet, income statement, and statement of cash flows)

financial statement

a summary of all the financial transactions that have occurred over a particular period

statement of cash flows

a summary of money coming into and going out of the firm. tracks companies cash receipts and payments

current liabilities

debts due in one year or less

long-term liabilities

debts not due for a year or more

liabilities

debts, what the business owes to others

liquidity

the ease with which something can be converted to cash

accounting system

the method we use to record and summarize accounting data into reports

double-entry bookkeeping

the practice of writing every transaction in two places to avoid making a mistake

bookkeeping

the recording of business transactions

accounting

the recording, classifying, summarizing, and interpreting of financial events and transaction in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation

goodwill

the value attached to factors such as reputation & location

outputs (financial statements)

balance sheet income statement statement of cash flows other reports (e.g., annual reports)

financial transactions include

buying and selling goods and services, acquiring insurance. paying employees, and using supplies

accounts payable

current liabilities or bills the company owes others for merchandise or services purchased on credit but has not yet paid for

bookkeeper's first task

divide firm's transactions into categories 1. sales documents 2. purchasing receipts 3. shipping documents

assets

economic resources (things of value) owned by a firm

basis for the balance sheet

fundamental accounting equation

steps in the accounting cycle

1. Analyze source documents 2. Record transactions in journals 3. Transfer journal entries to ledger 4. Take a trial balance 5. Prepare financial statements - balance sheet - income statement - statement of cash flows 6. Analyze financial statements

processing

1. entries are made into journals: recording 2. the effects of these journal entries are transferred or posted into ledgers: classifying 3. all accounts are summarized

the accounting system

1. inputs 2. processing 3. outputs

current assets

items that can be converted into cash within one year

Sarbanes-Oxley Act

Federal legislation passed in 2002 that sets higher ethical standards for public corporations and accounting firms. Key provisions limit conflict-of-interest issues and require financial officers and CEOs to certify the validity of their financial statements.

FASB

Financial Accounting Standards Board

GAAP

Generally Accepted Accounting Principles

the accounting cycle relies on the work of both...

a bookkeeper and an accountant

accountants vs. bookkeepers

accountants" - classify and summarize financial data provided by bookkeepers, -interpret the data -report the information to management. -suggest strategies for improving the firm's financial condition - prepare financial analyses & income tax returns

the language of business

accounting

ledger

accounting book or computer program where they transfer (post) info from journals into specific categories so managers can find all the info about a single account (like supplies or cash) in one place

what reveals a business's health

accounting reports and financial statements

fiscal year

can start at any date designated by the business

Dodd-Frank Wall Street Reform and Consumer Protection Act

increased financial regulation affecting accounting by increasing the power of the PCAOB to oversee auditors of brokers and dealers in securities markets

accounting is for both

profit-seeking and non-profit businesses