Exam 1 Flashcards
recording system + measuring economic transactions
ACCOUNTING
efficient allocation of scare resources
ECONOMICS
FINANCIAL ACCOUNTING
External + Have incentive to inflate numbers
MANAGERIAL ACCOUNTING
Internal + Accurate data used (Usually)
INTERNAL DECISION MAKERS
Management, employees
EXTERNAL DECISION MAKERS
Stockholders, creditors, suppliers, regulators, IRS (tax)
FASB
Financial Accounting Standards Board
WHAT IS FASB?
- Privately funded
- GAAP (information must be relevant and useful)
SEC
Securities + Exchange Commission
WHAT IS SEC?
- Oversees US financial markets
- Sarbanes-Oxley (SOX) increased regulatory oversight
ACCOUNTING ASSUMPTIONS
Economic Entity, Cost Principle, Monetary Unit, Going Concern
ECONOMIC ENTITY ASSUMPTION
Business stands apart as a separate economic unit from its owners
TYPES OF ECONOMIC ENTITIES
- Sole Proprietorship (Owner fully liable, individ. tax)
- Partnership (Owners fully liable, individ. tax)
- Corporation (Limited liability, pay corporate + personal tax)
COST PRINCIPLE
Acquired assets should be recorded at their actual / historical cost (reliable & conservative)
MONETARY UNIT ASSUMPTION
- Items measured in financial statements are measured in terms of a monetary unit
- Potential issues with inflation + exchange rates
GOING CONCERN ASSUMPTION
Assumes that the entity will remain in operation for the foreseeable future
ACCOUNTING EQUATION
Asset = Liabilities + Equity
ASSETS
Economic resources that are expected to benefit the business in the future (i.e. land, inventory, furniture, cash)
LIABILITIES
Debts owed to creditors (i.e. accounts payable, notes payable, salaries payable)
EQUITY
Equity is the owner’s residual claim against the assets of the company
EQUITY EXPANDED
+Owner’s Capital
-Owner’s Withdrawal
+Revenues
-Expenses
REVENUES
Economic resources that have been earned by delivering products or services to customers
INCOME STATEMENT
Reports success | failure of company’s operations for a period of time (profitability)
STATEMENT OF OWNER’S EQUITY
Shows amounts + causes of changes in owner’s capital during the period
BALANCE SHEET
Reports assets + claims to those assets at a specific point in time
STATEMENT OF CASH FLOWS
Reports cash receipts + cash payments for a period of time
ACCOUNT
The detailed record of all increases and decreases that have occurred in an individual asset, liability, equity, revenue or expense during a specific period
ASSETS (CHART OF ACCOUNTS)
- Cash
- Accounts Receivable
- Notes Receivable
- Office Supplies
- Furniture
- Building
- Land
LIABILITIES (CHART OF ACCOUNTS)
- Accounts Payable
- Salaries Payable
- Interest Payable
- Unearned Revenue
- Notes Payable
EQUITY (CHART OF ACCOUNTS)
- Capital, Withdrawals
- Expenses (Rent, Salaries, Utilities, Advertising)
- Revenues (Service, Interest)
DEBITS / CREDITS
Assets (Left Debit Inc, Right Credit Dec)
Liabilities + Equity (Left Debit Dec, Right Credit Inc)
STEPS TO RECORDING TRANSACTIONS
- Determine DR and CR accounts affected.
- Journalize transaction
- Post to T-Accounts
TRIAL BALANCE STEPS
- Prepare Income Statement → Net Income
- Statement of Owner’s Equity
- Balance Sheet → Assets, Liabilities, Equity
CASH BASIS ACCOUNTING
- Revenue is recorded when cash is received
- Expenses are recorded when cash is paid
- Not allowed under GAAP
ACCRUAL BASIS ACCOUNTING
- Revenue is recorded when it is earned
- Expenses are recorded when incurred
- Generally used by larger businesses
TIME PERIOD CONCEPT
- Business’s activities can be prepared for specific time periods (ex. month, quarter)
- Any 12 month period is a fiscal year
REVENUE RECOGNITION PRINCIPLE
- Must be actual selling price
- Revenue should be recorded when EARNED
MATCHING PRINCIPLE
- Expenses are recorded when incurred
- Expenses and revenues are matched for same end of period
PLANT ASSETS
- Paid for when acquired
- Used up over time
- Used to produce revenues
DEPRECIATION
The process of systematically recording the periodic usage of plant assets to generate revenues (land is never depreciated)
