FABM

Assets

Things you OWN

Liabilities

Things you OWE

Equity

Owner's claim

Income/Revenue

Money you EARN

Expenses

Costs you PAY

Current Assets

Expected to be converted into cash or used within one year, including cash, accounts receivable, and inventory

Non-Current Assets

long-term investments that will provide value for more than one year, such as land, buildings, and equipment

Current Liabilities

Due within 1 year including accounts payable and accrued expenses.

Non-Current Liabilities

Due after 1 year such as long-term loans and mortgages.

Equity: Owner's Equity

the owner's stake in the business and is affected by capital contributions and withdrawals.

Income & Expenses Overview

crucial for assessing profitability.

Income

includes service revenue, sales, and interest income, reflecting the inflow of resources.

Capital

Owner's investment + profits

Drawing

Owner's withdrawals (reduces equity)

Service Revenue

Income from services provided

Sales

Income from selling goods

Accrued Income

Earned but not yet collected

Accrued Expense

Incurred but not yet paid

Deferred Income/Unearned

Received but not yet earned

Prepaid Expense

Paid but not yet incurred

Going Concern

Business will continue forever

Separate Entity

Business is separate from owner

Time Period

Life divided into periods (months, years)

Accrual Basis

Record when EARNED, not when paid

Historical Cost

Record at original cost

Matching

Match expense with revenue

Materiality

Ignore small, unimportant items

Prudence/Conservatism

Don't overstate assets/income

Objectivity

Use evidence, not opinion

Stable Monetary Unit

Ignore inflation

Full Disclosure

Tell everything important

Consistency

Same method each period

Cost-Benefit

Benefit must exceed cost

Revenue Recognition

Record revenue when EARNED

Service Businesses

Provide services rather than goods, earning revenue through service fees (e.g., salons, banks).

Merchandising Businesses

Buy and sell finished goods, generating revenue through sales (e.g., grocery stores).

Manufacturing Businesses

Produce goods from raw materials, earning revenue from the sale of finished products (e.g., furniture factories).

Service

Cash → Perform service → Collect cash.

Merchandising

Cash → Buy goods → Sell goods → Collect cash.

Manufacturing

Cash → Buy materials → Make goods → Sell → Collect

Forms of Business-Sole Proprietorship

Owned by one individual, with unlimited liability and full control over profits.

Forms of Business-Partnership

Owned by two or more individuals, sharing skills and capital but facing potential disagreements.

Forms of Business-Corporation

A separate legal entity owned by shareholders, offering limited liability but facing double taxation.

forms of business-Cooperative

Owned by members who share profits and have equal voting rights.

Internal Users

Include owners, managers, and employees who need information for daily operations and strategic planning.

External Users

Include investors, creditors, and government agencies who assess the business's financial health.

Investors

Investors: Seek information on risk and return to make investment decisions.

Creditors

Need assurance of the business's ability to repay loans.

Branches of Accounting-Financial Accounting

Focuses on external reporting and compliance with GAAP.

Branches of Accounting-Management Accounting

Aids internal decision-making through budgeting and forecasting.

Branches of Accounting-Forensic Accounting

Involves investigating financial discrepancies for legal purposes.

Accounting

defined in various ways, emphasizing its role in financial reporting and decision-making.

AICPA Definition

Accounting as the art of recording, classifying, and summarizing financial transactions.

ASC Definition

Accounting as a service activity providing quantitative financial information.

Accounting Cycle

outlines the steps involved in processing financial transactions

Accounting Cycle-Identifying

Recognizing transactions that need to be recorded.

Accounting Cycle-Recording

Documenting transactions in chronological order.

Financial statements

provide a summary of a business's financial performance and position.

Income Statement

Shows revenue and expenses to determine net income or loss.

Balance Sheet

Displays assets, liabilities, and equity at a specific point in time.