Book 1: The Basics

accounting cycle, ethics, businesses, equations, accounts

accounting

the process of recording a business’s financial transactions

provides a way of expressing individual business events and the cumulative impact of those events

business

a legal organization that attempts to create value by exchanging products for money

the accounting cycle

analyze business transactions

record journal entries

post journal entries

unadjusted trial balance

adjusitng entries/adjusted trial balance

financial statements

closing entries/post-closing trial balance

business entity principle

the financial affairs of a business organization must be kept separate from the personal financial affairs of the business owners

reliability (objectivity) principle

financial information must be trustworthy, objective, and verifiable with evidence

cost principle

when businesses acquire assets, they should be recorded at their actual/historical cost

actual/historical cost

the original purchase price of an asset, recorded at the time of transaction

generally accepted accounting principles (gaap)

a set of standards and rules governing the accounting profession

organizations that influence gaap

sec, fasb, aicpa, gasb, pcaob

securities and exchange commission (sec)

has statutory authority over accounting standards used by publicly trades companies traded on us exchanges

protects investors, maintains fair markets, and facilitates capital formation by enforcing federal securities laws

financial accounting standards board (fasb)

the most important body for developing rules on accounting practice

for all non-governmental entities

an independent body designated by the sec to issue the statements of financial accounting standards

primary purpose is to establish and improve gaap within the us in the public’s interest

american institute of certified public accountants (aicpa)

the professional association of certified public accountants

influences accounting practice through the activities of its senior technical committees

governmental accounting standards board (gasb)

established in 1984 under the same governing body as fasb, which is the financial accounting foundation (faf)

responsible for issuing accounting standards for state and local governments

public company accounting oversight board (pcoab)

a private-sector, nonprofit corporation created by the sarbarnes-oxley act

oversees the audits of public companies and sec-registered brokers and dealers

audit

an examination of a company’s financial statements and the accounting systems, controls, and records that produced them

the purpose of an audit is to ascertain that the financial statements have been prepared in accordance with gaap

sarbanes-oxley act (2002)

regulates financial reporting and the accounting profession

the ceos and cfos for publicly traded us companies must swear based on their knowledge that the financial reports filed with the sec are accurate and complete

enacted as a reaction to a number of major corporate and accounting scandals, including enron and worldcom

due care

carrying out professional responsibilities with competence and diligence

cash accounting

accounting that recognizes business transction only when cash is received/disbursed

accrual accounting

accounting that recognizes a business transaction when it occurs, whether or not cash is recieved/disbursed

2 major goals of all businesses

profitability and liquidity

profitbaility

the ability to earn enough income to attract and hold investment capital

liquidability

the ability to have enough cash to pay debts when they are due

sole proprietorship

a business owned by one individual

sole proprietorship legal status

business and owner are considered to be the same entity

tax status of a sole proprietorship

business income is allocated to the owner and taxed at the owner’s personal tax rate

benefits of a sole proprietorship

ease of formation

no double taxation

drawbacks of a sole proprietorship

unlimited liability of owner

difficult to raise capital

limited life

partnership

a business owned by two or more individuals

legal status of a partnership

business and owners are considered to be the same entity

tax status of a partnership

business income is allocated to the owners and taxed at owners’ personal tax rates

benefits of a partnership

ease of formation

no double taxation

shared investment/knowledge

drawbacks of a partnership

unlimited liability of owners

disagreements between partners

limited life

corporation

a business that issues shares of stock to owners

legal status of a corporation

business and owners are considered to be separate entities

tax status of a c-corporation

business income is taxed at corporate rates

any income distributed to the owners is also taxed at owners’ personal tax rates

tax status of an s-corporation

business income is allocated to the owners and taxed at owners’ personal tax rates

benefits of a c-corporation

limited liability of owners

easier to raise capital

unlimited life

benefits of an s-corporation

limited liability of owners

no double taxation

easier to raise capital

unlimited life

drawbacks of a c-corporation

more difficult and costly to form

double taxation

more paperwork

more regulations

drawbacks of an s-corporation

more difficult and costly to form

more paperwork

more regulations

limited liability company (llc)

a business structure that separates the owner’s personal assets from the business’s liabilities

legal status of an llc

business and owners are considered to be separate entities

tax status of an llc

business income is allocated to the owners and taxed at owners’ personal tax rates

benefits of an llc

limited liability of owners

no double taxation

more flexibility than with s-corp

drawbacks of an llc

more difficult and costly to form

limited life

assets =

liabilities + owner’s equity

liabilities + common stock + revenue - expenses - dividends

assets

an economic resource that a business owns and can be used to operate the business

liabilities

the portion of assets that are owed to entities outside of the business

owner’s (stockholder’s) equity

the remaining value of a business’s assets after all liabilities have been paid

represents the owner’s stake in the company

owner’s equity =

common stock + retained earnings

retained earnings

the profits of the company that are retained in the business (not paid out in dividends)

retained earnings =

net income - dividends

net income =

revenue - expenses

accounts

the basic summary device of accounting

the detailed record of all changes in a specific asset, liability, or stockholder’s equity item as a result of a transaction

chart of accounts

a list of all the accounts and the numbers assigned to those accounts

5 account types

asset

liability

stockholder’s equity other than revenues/expenses (common stock, dividends)

revenue

expense

common asset accounts

cash, accounts receivable, supplies, prepaid insurance, merchandise inventory, equipment, buildings, land

common liability accounts

accounts payable, notes payable, salaries payable, unearned revenue, mortgage payable