Unit 1 Notes PDF

Preview

Summary

Accounting Notes...

Description

Chapter 1 1.9.20 

 

  

      

Accounting is an information system that: o Measures business activities o Processes the information into reports o Communicates the results to decision makers Main reason for financial reporting is to provide useful accounting information Financial Accounting Standards Board (FASB): oversees creation and governance of accounting standards o Privately funded o Writes the Generally Accepted Accounting Principles (GAAP)  The US accounting rule book Securities and Exchange Commission (SEC): oversees US financial markets o Government agency IASB: creates international financial reporting standards Users of financial accounting o External decision makers  Ex: investors, creditors, taxing authorities Users of managerial accounting: internal decision makers  Ex: managers, employees Going concern assumption: assumes entity will remain in operation in the future Cost principle: states that assets should be recorded at their actual cost o Ex: furniture not recorded at market price Faithful representation: information is complete, neutral and error free Economic entity assumption: requires an entity to be a separate economic unit o Ex: assets not recorded on balance she Monetary entity assumption: assumes items on financial statements are recorded in monetary unit Accounting Equation Assets = Liabilities + Equity

 



Asset: economic resource expected to benefit the business o Ex: Cash, furniture, land, accounts receivable, prepaid insurance Liability: debts owed to creditors o Many liabilities have the name payable in them o Ex: Accounts payable, notes payable, salaries payable, unearned revenue Equity: owner’s claim to the assets of the business o Increases in equity result from  Contributed capital (owner contributions)  Revenues: amounts earned from delivering goods/services o Decreases in equity result from  Dividends (owner distributions)





   

 

 Expenses: cost of selling goods/services Debit and Credit o Debit: lef o Credit Right o Assets: Up with debit/Down with credit o Liabilities and Equity: Dow with debit/Up with credit Normal Balance: balance that appears on the increase side of an account o All elephants do love rowdy children  Assets, expenses and dividends: NB on lefs  Liabilities, revenues, and common stock: NB on right  Assets = liabilities + [common stock/capital – (dividends + revenues – expenses)]  (retained earnings) [equity] Income Statement o Revenues – Expenses = Net Income Statement of Retained Earnings o New RE = Old RE + Net Income – Dividends Balance Sheet o Assets = Liabilities + Stockholder Equity (Common Stock and New RE) Trial Balance: a list of all ledger accounts and their balance at a point in time o Provide accuracy check on if credits and debits are even o Summarize account balances over period of time o Organized in the order assets, liabilities and equity Debt ratio o Total liabilities/total assets Trial Balance o Assets, (order of liquidity) liabilities, equity,...