Chapter 1 - Accounting In Business Flashcards
Assets
- What a company owns or controls
- Future benefits
Ex:
- Cash
- Supplies
- Equipment
- Land
Liabilities
- What the company owes in FUTURE payments, products, or services.
- Must be paid before Equity (claim of owners)
Equity
- What the company owes to it’s owners
- Or what the owners can claim as theirs.
Receivable
An ASSET that promises a FUTURE INFLOW of resources
Payable
A LIABILITY that promises a FUTURE OUTFLOW of resources.
Return
Monies received from an investment; often in percent form.
Risk
Uncertainty about an expected return
Return on assets =
Net income / Average total assets
Accounting
Identify, record, and communicate information about a businesses’ activities.
What are the three accounting functions?
Identifying - Select transactions and events
Recording - Input, measure, and log
Communicating - Prepare, analyze, and interpret
External users
Do not directly run the organization, have limited access to accounting information
Examples:
- Lenders
- Shareholders
- Directors
- Non-executive employees
- Suppliers
- Customers
Internal Users
Directly manage and operate the organization
Example:
- CEO
- Managers
Ethics
Beliefs that distinguish right from wrong. Accepted standards of good and bad behavior.
GAAP
Generally Accepted Accounting Principles
Fraud Triangle
Opportunity, rationalization, pressure
Accounting Principles
- Cost principle (aka Measurement)
- Revenue recognition
- Expense recognition (aka Matching)
- Full disclosure
Cost Principle
An accounting principle that states that accounting information is based on actual cost.
Revenue Recognition
An accounting principle that states that revenue is earned when goods or services are provided.
Expense recognition
An accounting principle that’s states a company record the expenses it incurs.
Full disclosure
An accounting principle that states a company must report details from financial statements that impact user decisions.
Accounting Assumptions
- Going concern
- Monetary unit
- Time period
- Business entity
Going concern
An accounting assumption that assumes the business will continue operating.
Monetary unit
An accounting assumption that assumes transactions and events are expressed in money units.
Time period
An accounting assumption that assumes company lifespan can be divided into periods such as months and years.
Business entity
An accounting assumption that assumes a business is accounted for separately from other entities, including owner.
3 legal forms of Business Entity
- Proprietorship aka sole proprietor
- Partnership
- Corporation
Accounting equation
Assets = Liabilities + Equity
4 elements of Equity
- Common stock
- Dividends
- Revenues
- Expenses
Common stock
An INFLOW of resources from stockholders in exchange for stock.
Dividends
An OUTFLOW of resources to stockholders. REDUCES Equity.
Revenue
INCREASES Equity from SALES of products or services.
Expenses
DECREASES Equity from COSTS of providing products and services.
Income Statement
- Report of the company’s revenue and expenses
- Results are Net income or loss
- Over a period of time
Statement of Retained Earnings
- Explains changes in retained earnings from net income and dividends
- Over a period of time
Balance Sheet
- Describes the company’s financial position
- Includes assets, liabilities, and equity
- At a specific date in time
Statement of Cash Flows
- Identifies cash inflows (receipts) and outflows (payments)
- Over a period of time
