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accounting
an information system designed by an organization to capture (analyze, record, adn summarize) the activities affecting its financial condition and performance and then report the results to decision makers
accounts
a standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement
balance sheet
reports the amount of assets, liabilities, and stockholdersâ equity of an accounting entity at a point in time
basic accounting equation
assets = liabilities + stockholdersâ equity
financial statements
reports that summarize the financial results of business activities
generally accepted accounting principles (GAAP)
the rules used in the US to calculate and report information in the financial statements
income statement
reports the revenues less the expenses of the accounting period
international financial reporting standards (IFRS)
the rules used internationally to calculate and report information in the financial statements
sarbanes-oxley act (SOX)
a set of laws established to strengthen corporate reporting in the US
separate entity assumption
states that business transactions are separate from and should exclude the personal transactions of the owners
asset
a resource the company controls and expects to benefit from in the future
liability
measurable amount the company expects to give up in the future to settle what it presently owes to stockholders
stockholdersâ equity
represents the ownersâ claims on assets of the business after creditorsâ claims have been fulfilled
common stock
equity paid in by stockholders
retained earnings
equity earned by the company
statement of cash flows
reports inflows and outflows of cash during the accounting period in categories of operating, investing, and financing
operating activities
cash flows that arise from running the business to earn profit
investing activities
cash flow arise directly from buying and selling productive resources with long lives (buildings, land)
financing activities
cash flows include borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends
statement of retained earnings
reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period
unit of measure assumption
the financial results of a companyâs worldwide business activities should be measured and reported using a single monetary unity, such as the US dollar
financial statements in order
income statement
statement of retained earnings
balance sheet
statement of cash flows
debit
left
credit
right
assets have a normal _____ balance
debit
liabilities and stockholdersâ equity have normal _____ balances
credit
classified balance sheet
categorizes assets and liabilities as current or noncurrent
current assets
will be used up/turned into cash within 12 months of the balance sheet date
current liabilities
debts/other obligations will be paid/fulfilled within 12 months of the balance sheet date
current ratio
current assets/current liabilities
what does a higher current ratio mean?
better ability to pay (1 or higher)
what is recorded on the balance sheet?
measurable exchanges
cost principle
assets and liabilities are recorded at cost, increases in value are not recorded, decreases in value are recorded
income statement accounts
revenues, expenses, net income
revenues
prices charged to customers when providing goods/services
expenses
costs of operating the business
net income
revenue - expense
time period assumption
assumption that allows the long life of a company to be reported in shorter time periods
cash basis accounting
records revenues when cash is received expenses when cash is paid
accrual basis accounting
recording revenues when generated and expenses when incurred, regardless of timing of cash payments
revenue recognition principle
seller should report revenue when it provides goods/services to customer, in the amount the seller expects to be entitled to receive
âwhenâ
a point in time
âasâ
over a period of time
expense recognition principle
under accrual basis accounting, expenses are recognized in the same period as the revenues to which they relate
expenses ___ net income and retained earnings
decrease
revenues _____ net income and retained earnings
increase
unadjusted trial balance
internal report, prepared before end-of-period adjustments, listing unadjusted balances of each account to check the equality of total debits and credits
net profit margin
net income/revenues
what does net profit revenue tell us?
amount earned from each dollar of revenue, a higher ratio = better performance
adjustments
entries necessary at the end of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts
deferral adjustments
decrease balance sheet accounts and increase corresponding income statement accounts; involves one asset and one expense account, or one liability and one revenue account
accrual adjustments
record revenue and expenses when they occur prior to receiving or paying cash and to adjust corresponding balance sheet accounts; involves one asset and one revenue account, or one liability and one expense account
carrying value
the amount at which an asset or liability is reported after deducting any contra accounts
depreciation
the process of allocating costs of buildings, equipment, and other similar long-lived âproductiveâ assets over their productive lives using a systematic and rational method of allocation
depreciation expense
reports cost of equipment use in the current period
contra account (x)
an account to offset, a reduction, of another account
accumulated depreciation
negative asset account, subtracted from equipment account on balance sheet
amortization
using up long-term assets that lack physical substance and have a limited period of usefulness (i.e. software)
permanent account
ending balance from year one becomes beginning balance for following year (i.e. Retained Earnings)
temporary account
only track the current yearâs results, closed before next yearâs activities are reported
post closing trial balance
checks that debits = credits and that all temporary accounts have been closed