Accounting Basics Flashcards
3 main financial statements (B.I.C)
- Balance sheet
- Income statement
- Cash flow statement
Income statement
- shows how profitable biz is for rhe time interval
- DOES NOT show cash coming in—-> reports revenues earned duting the period and expenses incurred during rhe period
- temporary/nominal accounts- closed to retained earnings at end of year
Acceual basis accounting
Revenues recognized when EARNED , not when cash received
Cash basis of accounting
Revenues recognized when cash received , expenses recognized when paid
Revenue recognition principle
- accounting guidelines requiring revienues to be shpwn on inc stmt in period earned not when cash collected
- part of accrual base accounting
Matching principle
- Requires company to match expense w related revenues
- show expenses when inccured, not when paid
- i.e: hire someone to help w december work, pay them in jan, still counted as DECEMBER expenses bc INCURRED in December
Interest expense (incl formula)
- interest on borrowed money
- if paid as lump sum,need to breakdown
- formula: loan amt x % / 12 = monthly interest expense
INCOME STMT shows 1 mth of interest every month
Balance sheet
- reports amount of assets, liabilities, equity at specific point in time
- assets not reported at their worth (FMV) :
*long term assets : i.e bldgs, equipment, etc… - reported at cost - amounts already sent to I/S AS deprecistion exp - so fmv may have increased, but amount on b.s consistently reduced (as its moved ro depreciation expense)
Assets
- Things company owns (resources)
- i.e: vehicle, cash in bank, accounts receivable, prepaid expenses
Accounts receivable
Money owed to biz
Asset
Prepaids/ prepaid expenses
UNexpired portion of prepaid expenses
- i.e prepaid insurance, the premiums NOT paid yet
- expired amount = insurance expense (on inc stmt
Cost principle
Assets recorded @ original cost even if value went up
Even if FMV goes up, will not increase recorded amount on balance sheet
Conservatism
- Decreasing value Of asset bc of net realizable value (?)
- SALE Price of item decreased and is less that original cost
- i.e: purchased item for $1, price in store cut by 40%, item now costs 0.60, record lower amount as assets vakues on b.s
Depreciation
Allocation of the cost of asset to depreciation expense over its usedul life
NOT a valuation process, juet allocstion
For assets whose life not indefinite, wears out (i.e car, bike, etc..)
I.e car, depreciates annually, if car was $20,000 useful for 5 years
20,000/5= $4000 to depreciation expense each year
Carrying amount
Book value reported on balance sheet
Cost of item - total depreciation since acquired
Each year, carrying amount reduced by depreciation expense (?)
Long teem assets
Reported at COST - depreciation expenses (on I/S)?
Even if asset increasd in market value, still decreases (matching principle)
Note: land not depreciates, appesrs at original cost
Liabilities
Obligations of the company
Amounts owed to others as of balance sheet date
I.e a loan, amounts owed for supplies, amounts owed to employees
Unearned revenue
Liability
Money received in advance of actually esrning the money (doing the work)
Stockholders Equity
- 3rd section of balance sheet
- corporarion= stockholders equity
- sole prop: = owners equity
- amount of equity is difference btwn assets and liabilities
- this is NOT the value of the company
Accounts in stockholders equity (RCPPAAI)
Retained earnings
Common stock
Paid in capital in excess
Preferred stock
Accumulated other comprehensive income
Retained earnings (?)
Revenues
Recorded when EARNED, not when cach received
Once received: decrease A/R AND SALES
Expenses
Show expenses when INCURRED
NOT WHEN PAID
Interest expense formula
Loan amount x %
/ 12
= monthly interest expense (on balance sheet)
