Financial Accounting & Key Concepts: Assets, Liabilities, Equity, and Reporting Principles

Financial accounting

Process of identifying, measuring, and recording information about the resources of a business, the claims against those resources, and how efficiently and effectively the resources are used.

Asset

(economic) resources the company owns or has a right to that provide benefit in the future.

Liability

An obligation the company must satisfy in the future, usually an amount owed by the company.

Stockholders' Equity

Owners' residual claim on the resources of the company, calculated as Assets - Liabilities.

Stock

Amounts invested into the company in exchange for share(s) of ownership.

Retained Earnings

The amount of net income since the company began that has been kept inside the company.

Beginning Retained Earnings

Retained earnings from all prior periods.

Net Income

Revenues minus expenses, earnings.

Dividends

Distribution of earnings to stockholders, representing a distribution of retained earnings.

Revenues

Increase in assets from the sale of goods or services to a customer.

Earned

Product or service provided.

Expenses

Cost of assets consumed or liabilities created in the operation of a business.

Incurred

Resource used.

Financial reporting concepts

Qualities of useful information, assumptions, and principles.

Revenue recognition principle

Revenue is recorded when earned, regardless of when cash is received.

Expense recognition (matching) principle

Expenses are recorded when incurred, regardless of when cash is received.

Time period assumption

The life of the business can be divided into artificial time periods.

Economic entity assumption

Activities of the business entity be kept separate from the activities of the owner(s) and other economic entities.

Qualities of Useful Information

Fundamental characteristics are relevance and faithful representation.

Relevance

Make a difference in a decision.

Faithful Representation

Reflects what really existed or happened, accurately portraying the activities of the company.

Accounting Equation

A = L + SE, assets = creditors' claims + owners' claims.

Assets =

Liability + equity

Stockholders Equity =

+ stock + Retained earnings

Retained earnings =

beginning retained earnings + Net income - dividens

Net income

Revenue - expenses

Assets =

Liabilities + Stock + Beginning Retained Earnings + Revenues – Expenses – Dividends