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Accounting Equation lecture

Terms in this set (31)

accounting
an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.
Identifying accounting information
observing transactions and activities within a business
Recording
generating records related to observations
communicating
preparing, presenting and analyzing results and reports
External Information Users
Do not directly run the organization and have limited access to its accounting information. They include shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press
Financial accounting
the area of accounting aimed at serving external users by providing them with general-purpose financial statements
1. the balance sheet
2. income statement
3. statement of retained earnings
4. statement of cash flows.
Internal Information Users
Directly manage and operate the organization such as the chief executive officer (CEO), chief financial officer (CFO), chief audit executive (CAE), treasurer, and other executive or managerial-level employees
Managerial accounting
the area of accounting that serves the decision-making needs of internal users
Accounting has four broad areas of opportunities
financial, managerial, taxation, and accounting-related
measurement principle (cost or historical cost principle)
prescribes that accounting information is based on actual cost. Cost is measured on a cash or equal-to-cash basis. This means if cash is given for a service, its cost is measured by the cash paid
revenue recognition principle
provides guidance on when a company must record revenue. (1) Revenue is recognized when goods or services are provided to customers and (2) is based on the amount expected to be received from the customer
expense recognition principle (matching principle)
prescribes that a company record the expenses required to generate revenue
full disclosure principle
prescribes that a company report the details behind financial statements that would impact users' decisions
going-concern assumption
accounting information reflects a presumption that the business will continue operating instead of being closed or sold.
monetary unit assumption
we can express transactions and events in dollars for the US or the monetary unit monetary where the company operates
time period assumption
the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods
business entity assumption
a business is accounted for separately from other business entities, including its owner
proprietorship
a business owned by one person.
partnership
a business owned by two or more people, called partners, who are jointly liable for tax and other obligations
corporation
a business legally separate from its owner or owners, meaning it is responsible for its own acts and its own debts
materiality constraint
prescribes that only information that would influence the decisions of a reasonable person need be disclosed
Cost-benefit constraint
prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed
Conservatism
Accounting by its nature is conservative and will seek to record a lower value
Industry practices
Accounting generally tends to follow the industry practices of peers
Assets
represent resources a company has that will provide future services or benefits, i.e. usually more than a month or so
Liabilities
represent what a company owes. The obligations can be short term such as accounts payable or salaries payable or long-term such as a lease or a loan.
Shareholder Equity
represents accumulation of shareholders' wealth. There are four (4) different types of shareholders' equity accounts that affect equity. Common stock, dividends, revenue/income, and expenses
Income Statement
Statement of income and expenses from company operations which yields either net income or a net loss. Net income/loss is then recorded in the Statement of Retained Earnings
Statement of Retained Earnings
Starts with beginning retained earnings and then adds net income from the income statement minus dividends, yielding the ending balance in retained earnings
Balance Sheet
Listing of Assets, Liabilities, Common Stock and the ending balance of Retained Earnings
Statement of Cash Flows
How cash was obtained and spent
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