Ch.1 acct notes -FC- (W1)

Assets

What you own.

Liabilities

What you owe.

Revenue

What you earned.

Expenses

What is spent to generate or earn revenue.

Net Worth

Assets minus Liabilities.

Accounting

A system to identify, measure, and communicate financial activities.

Personal Accounting

Tracks individual wealth and worth.

Transactions

Financial activities that involve a trade or exchange to receive value.

Surplus

When revenue exceeds expenses.

Deficit

When expenses exceed revenue.

Income Statement

A record showing revenue and expenses to determine the change in net worth.

Balance Sheet

A document recording assets, liabilities, and net worth on a specific date.

Capital

Amounts that increase net worth but are not earned.

Accrual-Based Accounting

Records revenue and expenses in the period they occur, regardless of cash payment timing.

Cash Flow

Relates to cash flowing into and out of the bank account.

T-Account

A tool to record transactions and keep the accounting equation balanced.

Net Worth Calculation

Net Worth = Assets - Liabilities.

Imbalance Example

Occurs when entries in T-Accounts are not balanced.

Opening Balance

The money carried over from the last period.

Closing Balance

Amount remaining in an account at the end of the period.

Cash-based Accounting

Revenue and expenses reported only when cash is received or paid.

Accruals

Accumulation of amounts owed or due but not yet paid or received.

Personal Balance Sheet

A record of assets, liabilities, and net worth at a specific time.

Deductions from Net Worth

Expenses decrease net worth.

Increasing Revenue Impact

When revenue exceeds expenses, net worth increases.

Decreasing Revenue Impact

When expenses exceed revenue, net worth decreases.

Financial Activities

Include all transactions that impact a person's or business's net worth.

Obligations

Also referred to as debt or liabilities.

Definition of Revenue

Income earned through providing goods or services.

Purpose of Income Statement

To determine the change in net worth over a specific period.

Main Components of Balance Sheet

Assets, Liabilities, and Net Worth.

Account Tracking

Allows for detailed information on individual item values.

Journal Entries

Documents initial transaction details before posting to accounts.

Benefits of Monthly Accounting Period

Tracks regular expenses and maintains realistic expectations.

Net Worth Significance

Indicates an individual's or business's financial health.

Liability Examples

Unpaid accounts like credit card bills.

Future Benefits of Assets

Assets benefit you now and in the future.

Personal Finance Accounting Method

Cash-based accounting is often preferred for simplicity.

Revenue Recognition

Recognizing earnings at the time they are realized.

Expense types

Operational costs, rent, insurance, food, etc.

Purchasing Assets Effect on Net Worth

Buying an asset does not impact net worth.

Definition of Surplus

Surplus is added to net worth.

Accrual Definition

Accruals relate to various amounts owed or due.

Monthly Expense Tracking

Helps in estimating future surplus or deficit.

Types of Accounting Periods

Monthly, quarterly, annually, etc.

Capital Increases

Includes gifts and lottery winnings.

Potential consequences of deficits

Reducing net worth.

Analytical Approach

Maintaining balance through double entry accounting.

Revenue T-Account Side

Increases on the right side and decreases on the left.

Expense T-Account Side

Increases on the left side and decreases on the right.

Net Worth Monitors

Essential for managing personal finances effectively.

Documentation of Transactions

Initial recording before posting to T-Accounts.

Definition of Personal Accounting Purpose

To manage expenses and save for retirement.

Comparing Net Worth Scenarios

Higher assets do not guarantee higher net worth.

Understanding Liabilities Importance

Crucial for assessing financial obligations.

Types of non-earned Capital

Gifts, lottery winnings, and other non-revenue increases.

Implications of Deficits

Indicates a reduction in overall net worth.

Purpose of Financial Records

To maintain accurate tracking of assets and liabilities.

Financial Behavior Monitoring

Evaluate changes in net worth effectively.

Expenses Impact on Financial Position

Directly affects net worth calculations.

Purpose of T-Accounts

To maintain accounting equation balance.

Dynamics of Revenue and Expenses

Interaction between these elements dictates net worth.

Double Entry Accounting Logic

Every transaction impacts at least two accounts.

Indicators of Personal Wealth

Tracking personal assets and liabilities over time.

Definition of Cash Flow vs. Accruals

Differentiation between immediate cash movement and overall net worth.

End of Period Balancing

Calculation of closing balance after transactions.

Financial Health Indicator

Net worth reflects personal financial wellbeing.

Reporting Revenue in Personal Finance

Cash received triggers income recognition.

Variation in Net Worth Calculations

Based on changing assets and liabilities.

Understanding Tax Implications

Liabilities may derive from tax obligations.

Impacts of Asset Purchase

Asset exchanges do not alter net worth.

Effects of Debt Payments

Repaying loans impacts cash flow, not net worth.

Account Management

Maintaining knowledge of individual accounts for financial clarity.

Role of Accounting in Business

Essential for tracking and reporting financial performance.

Financial Transactions Recording

Necessary for accurate financial statement preparation.

Measurement of Financial Performance

Use of income statements and balance sheets for assessment.

Understanding Financial Metrics

Critical for evaluating personal and business finances.