Basic Accounting Concepts & Procedures (Ch. 1)

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Accounting

= a system that measures the business's activities in financial terms, provides written reports & financial statements about those activities, & communicates these reports to decision makers & others

Types of Business Organizations

1) Sole Proprietorship
2) Partnership
3) Corporation
4) Liability Corporation (LLC)

Sole Proprietorship

= a type of business organization that has 1 owner, who is personally liable for paying the business' debts
- easy to form b/c no filing or agreement necessary

Partnership

= a form of business organization that has at least 2 owners (partners), who are usually personally liable for the partnership's debts
- requires partnership agreement to define terms of partnership

Corporation

= a type of business organization that is owned by stockholders, who usually are not personally liable for the corporation's debts & do not have input into business decisions
- more difficult to form than sole proprietorships or partnerships b/c requires filing to be recognized

Limited Liability Corporation (LLC)

= a type of business owned by a limited # of stockholders, who are liable only to the extent of their investment in the firm & who do have input in business decisions
- requires filing articles of incorporation

Business Organization Classifications

1) Service Company
2) Merchandise Company
3) Manufacturer

Service Company

= a business that provides a service
- ex: limo service

Merchandise Company

= a business that buys a product from a manufacturing company to sell to its customers
- ex: Target

Manufacturer

= a business that makes a product & sells it to its customer
- ex: Intel, Ford

Functions of the Accounting Process

1) Analyzing: looking at what happened & how the business was affected
2) Recording: putting info into the accounting system
3) Classifying: grouping all the same activities (e.g., purchases) together
4) Summarizing: totaling the results
5) Reporting: issuing the statements that tell the results of the previous functions
6) Interpreting: examining the statements to determine how the various pieces of info they contain relate to each other
7) Communication: providing reports & financial statements to people who are interested in the info

Generally Accepted Accounting Principles (GAAP)

= the procedures & guidelines that must be followed during the accounting process

International Financial Reporting Standards (IFRS)

= a group of accounting standards & procedures that, if adopted by the US, could replace GAAP

Bookkeeping

= the recording (record keeping) function of the accounting process

Assets

= properties (resources) of value owned by a business (e.g., cash, land, supplies, equipment)

Equities

= the rights or financial claim of creditors (liabilities) & owners (owner's equity) who supply the assets to a firm

Relationship b/w Assets & Equity

Assets = Equities
→ total value of items owned by business = total claims against the assets

Liabilities

= obligations that come due in the future; the financial rights or claims of creditors to assets
- ex: by computer on account from Dell to be paid in 10 days ⇒ liability

Creditor

= someone who has a claim to assets
- ex: by computer on account from Dell to be paid in 10 days → Dell = creditor

Basic Accounting Equation

Assets = Liabilities + Owner's Equity
→ total value of all a firm's assets = combined total value of the financial claims of creditors (liabilities) & of owners (owner's equity)

Owner's Equity

= rights or financial claims to assets of a business by business' owner(s)
→ Owner's Equity = Assets - Liabilities
- creditors have 1st claim to assets

Capital

= the owner's current investment, or equity, in the company

Shift in Assets

= a shift that occurs when the composition of the assets has changed but the total of the assets remains the same

Supplies

= a type of asset acquired by a firm; have much shorter life than equipment

Accounts Payable

= amounts owed to creditors that result from the purchase of goods or services on account
→ a liability

Balance Sheet

aka Statement of Financial Position
= a statement, as of a particular date, that shows the amount of assets owned by a business & the amount of claims (liabilities & owner's equity) against these assets
- last financial statement to be prepared

Revenue

= an amount earned by performing services for customers or selling goods to customers
- can be in the form of cash or accounts receivable
- subdivision of owner's equity → as revenue ↑, owner's equity↑

Accounts Receivable

= an asset that indicates amounts owed by customers

Expense

= a cost incurred in running a business by consuming goods or services in producing revenue
- subdivision of owner's equity → as expenses ↑, ↓ owner's equity

Net Income

= when revenue > expenses ⇒ net income

Net Loss

= when revenue < expenses ⇒ net loss

Withdrawals

= a subdivision of owner's equity that records money or other assets an owner withdraws from a business for personal use

Expanded Accounting Equation

Assets = Liabilities + Capital - Withdrawals + Revenue - Expenses

Subdivisions of Owner's Equity

1) Capital
2) Withdrawals
3) Revenue
4) Expenses

Income Statement

= an accounting statement that details the performance of a firm (revenue - expense ⇒ net income/loss) for a specific period of time
- usually 1, 3, 6, or 12 mths.; cannot cover > 1 yr.
- 1st financial statement to be prepared

Statement of Owner's Equity

= a financial statement that reveals changes in capital by summarizing effects of all subdivisions of owner's equity (capital, withdrawals, revenue, expenses) on beginning capital
- beginning capital + additional investments - withdrawals +/- net income/loss = ending capital
- ending capital figure placed on balance sheet

Ending Capital

= Beginning Capital + Additional Investments + Net Income - Withdrawals OR
= Beginning Capital + Additional Investments - Net Loss - Withdrawals

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