Accounting Chapter 01 Concepts

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business

organization that converts inputs to outputs

inputs of a business

basic resources, e.g. materials and labor

outputs of a business

goods, services

three types of profit businesses

service, merchandising, manufacturing

role of accounting in business

provide info for users (e.g. for manager to use in operating business, for users who want to know about the economic performance of the business)

accounting as an info system - process

1) identify users, 2) assess their info needs, 3) design accounting system to meet their needs, 4) record economic data about business activities and events, 5) prepare accounting reports for users

internal users of accounting info

managers, employees

managerial accounting

area of accounting that provides internal users with info

private accounting

managerial accountants employed by a business

external users of accounting info

investors, creditors, customers, government

financial accounting

area of accounting that provides external users with info

generally accepted accounting principles

guidelines for preparing financial statements

Financial Accounting Standards Board

has primary responsibility for developing accounting standards

Securities and Exchange Commission

regulates public companies, accepts FASB principles

International Accounting Standards Board

accounting standards outside of United States

business entity concept

accounting data is based on the business transactions only, not transactions of owner, creditors, etc.

types of business entities (ownership)

proprietorship, partnership, corporation, limited liability corporation

cost concept

recorded amount = purchase price

objectivity concept

recorded amount based on objective evidence

unit of measure concept

recorded amount = $$

accounting equation

A = L + E

accounting equation: A

assets; stuff the business owns (cash, land, buildings, equipment, etc)

accounting equation: L

liabilities; rights of creditors/debts of business

accounting equation: E

owner's equity; A-L, rights of owners

business transaction

event or condition that changes financial condition of business

transaction: owner deposits money into business bank account

+A (cash), +E (owner, capital)

transaction: business bought land

+A (land), -A (cash)

transaction: business bought supplies, agreed to pay supplier in future"

+A (supplies), +L (accounts payable)

transaction: business received cash for providing services

+A (cash), +E (fees earned)

some types of revenue

fees earned, sales, rent revenue, interest revenue

revenue from providing services

fees earned

revenues from selling merchandise

sales

transaction: business paid expenses

-A (cash), -E (expenses: wages expense, rent expense, utilities expense, miscellaneous expense, etc.)

transaction: business paid creditors on account

-A (cash), -L (accounts payable)

transaction: business determines cost of supplies

-A (supplies), -E (supplies expense)

transaction: owner withdraws cash

-A (cash), -E (owner, drawing)

transactions affected owner's equity

owner's investments (+), owner's withdrawals (-), revenues (+), expenses (-)

net income/loss

revenues - expenses

types of financial statements

income statement, statement of owner's equity, balance sheet, statement of cash flows

income statement

summary of revenue/expenses for specific period

statement of owner's equity

summary of OE changes for a specific period

balance sheet

list of A, L, and E as of a specific date

statement of cash flows

not focused on in this class, summary of cash receipts/payments for specific period

financial statements are identified by ...

name of business, title of statement, date/time period

matching concept

a periods expenses are matched to revenues

account form

appears on balance sheet, resembles accounting equation

order of assets on balance sheet

order they will be converted into cash; cash, receivables, supplies, prepaid insurance ... land, buildings, equipment

three sections of statement of cash flows

operating activities, investing activities, financing activities

financial statement interrelationships

IS --net income--> OE --owner's capital--> Bal --cash--> CF

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