Chapter 1: Accounting in Business Flashcards
Two principles and Assumptions of Accounting
1. general [basic assumptions, concepts and guidelines for preparing financial statements; stem from long used accounting practices]. #2. specific [detailed rules used in reporting transactions; from rulings of authoritative].
Cost Principle [measurement principle]
info based on actual cost. Actual cost is considered objective. Cost is measured on a cash or equal-to-cash basis. Emphasizes reliability and verifiability [objective].
Revenue recognition principle
revenue is recognized [recorded] when earned. proceeds don’t have to be cash
expense recognition principle [matching principle]
a company records expenses incurred to generate revenues it reported
Full disclosure principle
reporting the details behind the financial statements that would impact users’ decisions
The 4 assumptions
going concern assumption, monetary unit assumption, time period assumption, business entity assumption
going-concern assumption
accounting information reflects the assumption that the business will continue operating instead of being closed or sold
monetary unit assumption
transactions and events are expressed in monetary, or money units. Generally this is the currency of the country in which it operates but today some companies express reports in more than one monetary unit
time period assumption
the life of the company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods
business entity assumption
a business is accounted for separate from other business entities and separate from its owner.
sole proprietorship
a business owned by one person that has unlimited liability. Business not subject to an income tax but the owner is responsible for personal income tax on the net income of entity
partnership
a business owned by two or more people, subject to unlimited liability. The business is not subject to an income tax, but the owners are responsible for personal income tax on their individual share of the net income of entity.
three special partnership forms that limit liability
1. Limited partnership [LP] #2. Limited liability partnership [LLP] #3. Limited liability company [LLC]
Limited partnership
[LP] has general partners with unlimited liability & a limited partner with limited liability restricted to the amount invested
Limited liability partnership
restricts partners liabilities to their own acts and the acts of individuals under their control.
Limited liability Company LLC
Offers the limited liability of a corporation and the tax treatment of partnership note most proprietorships and partnerships are now LLC
Corporation
A business that is separate legal entity whose owners are called shareholders or stockholders. These owners have limited liability. The entity is responsible for a business income tax and the owners are responsible for personal income tax on profits that are distributed to them informant dividends.
Transactions analysis and the accounting equation
Accounting equation (assests=liabilities+equity)
Assets
Resources the company owns or controls that are expected to carry future benefits. i.e. cash supplies equipment and land
Equity
Owners claim on assets: assets minus liabilities. Also called net assets or residual equity
Transaction analysis
Each transaction in the van always leaves the equation and balance. Assets equal liabilities plus equity
The four financial statements and their purposes are:
Income statement, statement of owners equity, balance sheet, statement of cash flow’s
Income statement
Describes the company’s revenues and expenses along with the resulting net income or loss over. Of time. And come occurs when revenue exceeds expenses. That loss occurs when expenses exceed revenues.
Statement of owners equity
Explain changes in equity from net income or loss and from owner investment in withdraws over a period of time
Balance sheet
Describes a company’s financial position, types and amounts of assets liabilities equity. At a point in time
Statement of cash flow’s
Identifies cash inflows, receipts, and cash outflows, payments, over. Time
Three activities of a business and statement of cash flow’s
In order to capture all-cash activity must understand operating costs investing and financing. The purpose is to show how you get the money and how it was spent
Decision analysis-return on assets ROA
The return on assets is calculated by dividing net income for a period of average total assets. Average show I said to determine by adding the beginning and ending assets and dividing by two. This is useful in evaluating management, and analyzing and forecasting profits. Expressed as a percentage
Return
How much is made on the investment
Risk
Uncertainty on how much return you will make on investment “ more risk equals more money “
ROA
Return on assets equals net income over average total assets
Financing activities
Activities that provide the means organizations use to pay for resources such as land buildings and equipment to carry out plans. two types of financing are owner financing and non-owner
Owner financing
Refers to resources contributed by owner including income left in the organization
Non-owner or creditor
Refers to resources contributed by creditors
Investing activities
Are the acquiring and disposing of resources, assets, that are in organization uses to acquire and sells products or services
Operating activities
Involve using resources to research, develop, purchase, produce, distribute, and market products and services. Day-to-day business activities
Investing assets
Is bound by financing, liabilities and equity. Operating activities is a result of investing and financing
