Accounting Basics Flashcards
What are the three basic accounting activities??
- Identify
- Record
- Communicate
Who are the users of accounting?
Internal and external
What is the GAAP?
Generally accepted accounting principles
- Universally practiced
What 2 measurements does GAAP use?
- Historical cost principle
- Fair value principle
What does it mean when something is financially Revelance?
Financial information that is capable of making a difference in decision
What does it mean when something is faithful representation?
The numbers and descriptions match what really existed or happened
- Factual
Historical Cost Principle
Dictates the companies record their assets a cost
True at the time the asset is purchased but also true over the time the asset is held
Fair Value Principle
Assets and liabilities should be reported at the price received to sell an asset or settle a liability
What are the two main accounting assumptions?
- Monetary Unit Assumptions
- Economic Entity Assumptions
Monetary Unit Assumption
Requires that companies include in the accounting records only transaction data that can be expressed in money terms.
For example, the health of a company’s owner, the quality of service, and the morale of employees are not included.
Economic Unity Assumption
Requires that the activities of the entity be kept separate and distinct from those of its owner and other economic entities
- Brian hill must keep his personal expenses separate from his company expenses
The Basic Accounting Equation
Assets = Liabilities + Stockholder’s Equity
Assets
Assets are the resources the business owns
- The capacity to provide future services or benefits
- Service potential or future economic benefit results in cash inflows (receipts)
Liabilities
Are claims against assets, existing debts and obligations
Accounts payable
Notes Payable
Salaries and wages payable
Sales and real estate taxes payable
Stockholder’s Equity
The ownership claim on a company’s total assets in stockholders equity
1. Common Stock
2. Retained Earnings
Common Stock
The total amount paid in by stockholders for the shares they purchase
Retained Earnings
Determined by revenues, expenses and dividends
Revenues
Are the increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business:
result of an increase in an asset
- Sales, fees, services, commissions, interest, dividends, royalties, and rent
The effect of revenues is positive, an increase in stockholders equity coupled with an increase in assets or decrease in liabilities
Expenses
The cost of assets consumed or services used in the process of generating revenue
They are decreases in stockholders equity that result from operating the business
- The effect of expenses is negative, a decrease in stockholders equity paired with a decrease in assets or an increase in liabilities
Dividends
Net income represents an increase in net assets which are available to give to stockholders
- The distribution of cash to stockholders is called a dividend
- Dividends reduce retained earnings
- Dividends are NOT an expense
Income Statement
Presents the revenues and expenses and resulting net income or net loss for a specific period of time
Retained Earnings Statements
Summarizes the changes in retained earnings for a specific time period
Balance Sheet
Reports assets, liabilities, and stockholders equity of a company at a specific date
Statement of Cash Flows
Summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time
