A probable future economic benefit owned by the entity as a result of past transactions.
an asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell the inventory.
a probable debt or obligation of the entity as a result of a past transaction, which will be paid with assets or services.
a liability that will be paid in cash (or other current assets) or satisfied by providing service within the coming year.
the financing provided to the business by owners; usually owners provide cash and sometimes other assets such as equipment and buildings.
the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.
requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business.
requires information to be reported in the national monetary unit. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia.
continuity or going-concern assumption
businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate.
historical cost principle
requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations
Assets equation =
= Liabilities + Stockholders' Equity
The equalities in accounting
Assets = Liabilities + Stockholders' Equity
Debits = Credits
The two steps in transaction analysis
1) identify and classify accounts and the direction and amount of the effects.
2) determine that the accounting equation (A = L + SE) remains in balance.
The two principles underlying the transaction analysis process are:
1) every transaction affects at least two accounts.
2) the accounting equation must remain in balance after each transaction.
a simplified representation of a ledger account with a debit column on the left and a credit column on the right
method for expressing the effects of a transaction on accounts in a debits-equal-credits format
Left hand side
Right hand side
Total dollar value of all debits =
= total dollar value of all credits
information that can influence a decision; it is timely and has predictive and/or feedback value
Information is accurate and verifiable
exception suggests that small amounts that are not likely to influence a users decision can be accounted for in the most cost-beneficial manner
exception suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses
a standardized format that organizations use to accumulate the $ effect of transactions on each financial statement item