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Definition of Accounting

An information and measurement system that identifies, records, and communicates an organization’s business activities.

Three Key Activities in Accounting

Identifying, Recording, and Communicating.

Identifying

Selecting transactions and events, such as Apple selling iPhones.

Recording

Inputting, measuring, and logging transactions in dollars.

Communicating

Preparing, analyzing, and interpreting reports.

External Users

People outside the business who use financial information, such as lenders and shareholders.

Internal Users

People inside the business who manage and run it, such as executives and managers.

Private Accounting

Accounting working for a single business.

Public Accounting

Accounting involving auditing, taxation, and advisory services.

Ethics in Accounting

Beliefs that distinguish right from wrong and help build trust in accounting information.

Fraud Triangle

Three factors that must exist for someone to commit fraud: Opportunity, Pressure, and Rationalization.

GAAP

Generally Accepted Accounting Principles that govern financial accounting.

FASB

Financial Accounting Standards Board, the private group that sets GAAP.

IASB & IFRS

International Accounting Standards Board issues International Financial Reporting Standards for global comparability.

Measurement Principle (Cost Principle)

Accounting information is based on actual, objective cost.

Revenue Recognition Principle

Record revenue when goods or services are provided to customers at the expected amount.

Expense Recognition Principle (Matching Principle)

Record expenses incurred to generate the revenues reported in the same period.

Full Disclosure Principle

Report details behind financial statements that impact users' decisions.

Monetary Unit Assumption

Transactions and events are expressed in monetary units.

Business Entity Assumption

A business is accounted for separately from its owner and other businesses.

Time Period Assumption

A company’s life can be divided into artificial time periods like months and years.

Going-Concern Assumption

The business is presumed to continue operating.

Cost-Benefit Constraint

Only disclose information if the benefit of providing it is greater than the cost.

Materiality Constraint

Only disclose information that would influence a reasonable person's decision.

Sole Proprietorship

1 owner, easy to set up, with unlimited liability.

Partnership

2+ owners, easy to set up, with unlimited liability.

Corporation

1+ owners, limited liability, and has an indefinite life.

Limited Liability Company (LLC)

1+ owners, limited liability, and has an indefinite life.

Basic Accounting Equation

Assets = Liabilities + Equity.

Expanded Accounting Equation

Assets = Liabilities + Owner, Capital - Owner, Withdrawals + Revenues - Expenses.

Assets

Resources owned or controlled by a company.

Liabilities

Creditors' claims on assets or debts owed.

Equity

Owner's claim on assets.

Owner, Capital

Investments by the owner that increase equity.

Owner, Withdrawals

Cash/assets taken out by the owner for personal use, decreasing equity.

Revenues

Earnings from selling goods/services that increase equity.

Expenses

Costs incurred to run the business, decreasing equity.

Income Statement

Reports revenues minus expenses to show net income or loss over a period.

Statement of Owner’s Equity

Explains changes in equity from owner investments, net income, and withdrawals.

Balance Sheet

Describes financial position at a specific point in time.

Statement of Cash Flows

Identifies cash inflows and outflows over a period of time.

Return on Assets (ROA)

Measures profitability relative to total assets owned.

ROA Formula

Return on Assets = Net Income / Average Total Assets.