Accounting Chapter 1 Flashcards
Accounting
an information system that reports on the economic activities and financial condition of a business or other organization
Purpose of Accounting
identify, measure, record and communicate financial information
GAAP
Generally Accepted Accounting Principles
FASB
Financial Accounting Standard Board
SEC
Securities and Exchange Commission
Business Entity Concept
A business is separate from its owner(s) (transactions must be recorded separately to accurately reflect the business’ financial status
Reporting Entities (Different things you can report for)
businesses, individuals, organizations
Reliability Concept
Accounting records must be based on verifiable data
Historical Cost Concept
Accounting records show assets at their original cost
Time periods
span of time that covers certain accounting functions (calendar or fiscal year)
Fiscal year
12 month accounting year (generally Jan 1st to Dec. 31st but can be anything as long as it stays consistant)
The Accounting Equation
composed of three elements: assets, liabilities and stockholders’ equity. (Assets=Liabilities + Stockholders’ Equity)
Assets
Claims
Liabilities
things you owe back (need to find actual definition)
Stockholders’ Equity
Subdivided into two additional elements called common stock and retained earnings.
Claims
Claims come from three sources, creditors (liabilities), investors(stockholders’ equity), and operations (profits increase assets)
Common Stock
commitments made to investors described in certificates (money contributed to the company)
Retained Earnings
increases to stockholders’ equity from earnings (earning still in the company that will have to be paid back)
Accounting Transaction
a transaction is an economic event that can affect items in the financial statements
Accounting Event
an economic occurrence that changes an entity’s assets, liabilities, or stockholders’ equity
Transaction
a particular kind of event that involves transferring something of value between two entities
What to record?
In order to be recorded, a transaction must have an impact on the financial statements AND be measurable
Double-Entry Accounting
the system used to record the effects of transactions on the accounting equation (each transaction affects at least two accounts)
Financial Statements
reports for a specific period in time (Income Statement, Statement of Changes in Stockholders’ Equity, Balance Sheet, Statement of Cash Flows)
Income Statement Elements
Two major elements: revenues and expenses
Revenues
increase in assets that result from sales
Expenses
cost of resources used to earn revenues during the period
Net Income *
revenues - expenses = net income
Matching Concept
Revenues are matched to expenses
Net Gain
Revenues exceed expenses
Net loss
Expenses exceed revenues
Statements of Stockholders’ Equity
Owners contribute capitol in two ways: directly, through purchases of common stock OR indirectly, by the company retaining net income
Retained Earnings
Net income earned but not paid out in the form of dividends (so money earned that is kept in the company)
Ending SE
Beginning SE +/- Stock Changes +/- Net Income(Loss) - Dividends = Ending SE
Balance Sheet
reports what resources a company has and how it obtained those recourses (Assets = Liabilities + Stockholders’ Equity)
Statement of Cash Flows
shows where a business gets its cash and spends its cash (Three categories: Operating Activities, Investing Activities, Financing Activities)
Operating Activities
generating revenue and incurring expenses (things like paying employees and bills)
Investing Activities
Acquiring assets to operate (things you buy not to sell but to build the company
Financing Activities
issuing stock, borrowing money, paying dividends, repaying loan (how you generate the money in order to use it for the business)
Annual Report
Consists of: Financial Statements, Notes, Auditors’ Report, Management’s Discussion and Analysis (MD&A)
