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

The information provided would 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.

Service company

Provides services to its customers, example is accountant, no inventory.

Merchandising

Has an inventory, purchases stuff from another company to sell.

Wholesalers

Sell bulk quantity to other companies.

Retailers

Sell smaller quantities to consumers.

Manufacturing companies

Use raw materials to make a finished product.

Assets

Resources owned by a company.

Cash

Money.

Accounts Receivable

Amounts a company has a right to receive from customers in the future.

Inventory

Product held for resale to customers.

Supplies

Small products held for use inside the company, not sold to consumers.

Prepaid Expenses

Services paid for in advance, like renting a building.

Land

Land used in operating the business.

Buildings

Structures used in operating the business.

Equipment

Tangible property used in operating the business, long term.

Contra

Opposite.

Contra accounts

Attached to another account but going the opposite direction, offsets balance in related account.

Accumulated Depreciation

Contra asset account that offsets the buildings or equipment account.

Patents

Right to an invention, intangible asset.

Intangible asset

Asset you can't physically touch.

Copyright

Right to an original work, intangible asset.

Liabilities

Amounts owed by a company.

Accounts Payable

Amounts that must be paid to suppliers in the future.

Interest Payable

Amounts that must be paid in the future for using someone else's money.

Salaries Payable

Amounts that must be paid to salaried employees in the future.

Unearned Revenue

Amounts received from customers for products or services that must be provided in the future.