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37 terms

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 againstt* 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