Accounting Chapter 1

GAAP

Rules for preparing financial statements

Measurement Principle

Aqquired assets should be recorded at their actual costs

Revenue Recognition Principle

Revenues are recorded when earned

Expense Recognition Principle

Expenses are recorded in the same time period as the revenue to which they relate

Full Disclosure Principle

Companies must disclose information that could impact stakeholders’ decisions

Business Entity Assumption

A business is accounted separately from owners and other businesses (only one business at a time, on its own)

Going Concern Assumption

Assumes the business will continue into the foreseeable future (not worried about stopping)

Monetary Unit Assumption

Economic data must be recorded in money/currency

Time Period Assumption

The life of a company will be broken down into clear, finite periods of time

Service Business

Provides services to customers

Merchandiser Business

Provides goods (purchased from other companies) to customers

Manufacturer Business

Provides its own goods to customers

Sole Proprietorship

• 1 Owner

• Doesn’t pay tax

• Unlimited liability

• Not a separate legal entity

Partnership

• At least one owner

• Doesn’t pay tax

• Unlimited liability

• Not a separate legal entity

Corporation

• At least one owner

• Pays tax

• Limited liability

• Separate legal entity

Limited Liability Co (LLC)

• At least one owner

• Doesn’t pay tax

• Limited liability

• Separate legal entity

Income statement

Indicates profitability of business over a period of time

Revenues

Earnings generated

Expenses

Costs of generating revenues

Retained Earnings Statement

Depicts changes in retained earnings over a period of time

Retained Earnings

Earnings generated from operations KEPT in the business

Net Income

Revenue - Expenses

Dividends

Distribution of assets to owners

Ending Retained Earnings

Net income generated since inception of business not paid out in dividends

Balance Sheet

Indicates the financial position of the business at one point in time

Assets (Owned)

Resources owned by a business; expected to provide future benefit

Liabilities (Owed)

Amounts owned to creditors in the form of debts and other obligations

Equity

The owner’s claim to the assets

Accounting Equation

Assets = Liabilities + Equity

Statement of cash flow

Indicates the sources and uses of cash over a period of time

Operating Activities

Cash flows from process of generating revenue and incurring expenses

Investing Activities

Cash flows from sale/purchase of long term assets

Financing Activities

cash flows from borrowing/repaying debt and stock issuance including paying dividends

(BS) Cash ($)

Assets

(BS) Notes Recieveable (Loan)

Assets

(BS) Inventory (Target Shelves)

Assets

(BS) Prepaids (Pay Upfront)

Assets

(BS) Supplies (Printers, etc)

Assets

(BS) Equipment (helps make product)

Assets

(BS) Building

Assets

(BS) Land

Assets

(BS) Accounts Receivable (pay me soon)

Assets

Receivable

Expecting money

(BS) Payables (pay someone soon)

Liabilities

(BS) Unearned Revenue

Liabilities

(BS) Accrued Liabilities

Liabilities

(BS) Common Stock

Equity

(BS) Retained Earnings

Equity

(IS) Sales

Revenue

(IS) Any Expenses

Expenses