accounting unit 1 (chapters 1-3)

service business

provides services rather than products to customers

merchandising (aka retail) business

sell products they purchase from other businesses

manufacturing business

change basic inputs into products that are sold to customers

proprietorship

owned by one individual, financial resources limited to individual owner’s resources, unlimited liability

partnership

like a proprietorship but with 2 or more owners

corporation

separate legal entity, ownership of corporation divided into shares of stock, access to lots of capital, limited liability for owners

limited liability company (LLC)

like a partnership but offers limited liability for owners

maximize profits

primary objective of most business is to _________ ________

stakeholders

a person or entity with an interest in the economic performance and well being of the company (anyone who has a “stake” in the business)

examples of stakeholders

anyone who has a stake in the business: banks, owners, stockholders, customers and suppliers, governments and taxing authoritites, employees

financing activities

to obtain the necessary funds to begin and operate a business

investing activities

to obtain assets such as buildings and equipment to begin and operate the company

operating activities

to earn revenues and profits

examples of financing activities

taking out a loan from the bank (borrowing money) and paying back that loan, selling shares of the company’s stock (issuing shares) and buying back those shares, paying dividends to shareholders

examples of investing activities

purchasing a building or equipment, selling a building or equipment

examples of operating activities

earning revenue from the sales of products or services, expenses like rent, insurance, salaries, and utilities

accounting

the language of business, the primary way a business can communicate information to its stakeholders about the economic activities and condition of a business (ie the financial performance)

financial accounting

associated with preparing reports for external stakeholders

managerial accounting

used to guide management in making decisions for a company (internal stakeholders)

balance sheet

reports the financial condition as of a point in time

income statement

reports the revenues and expenses for a period

statement of cash flows

reports the cash inflows and outflows during a period

statement of stockholder’s equity

reports the changes in stockholders equity for a period

cash balance; balance of cash

the ____ __________ on the balance sheet should be the SAME as the _________ __ ____ on the statement of cash flows

equity balances; balances

the _______ _________ (capital stock, retained earnings) on the balance should should be the SAME as the _________ on the statement of stockholder’s equity

net income; net income

____ __________ on the income statement should be the SAME as the ____ _________ reported on the statement of stockholders’ equity

assets = liability + stockholders’ equity (A = L + E)

accounting equation

assets

what we have or are owed

liabilities

what we owe to others

equity

the stockholders’ rights to the net assets (or the company’s worth)

examples of assets

cash, accounts receivable, inventory, prepaid insurance, equipment, accumulated depreciation

2 types of assets

current and non current (fixed)

current asset examples

cash, accounts receivable, inventory, prepaid insurance

examples of fixed assets

office equipment, accumulated depreciation, land

examples of liabilities

accounts payable, wages payable, unearned revenue, notes payable

2 types of stockholders’ equity

common stock and retained earnings

common stock

represents the amount that the stockholders of the company have invested in that company by buying the company stock

retained earnings

represents company’s cumulative net income it has earned since the company began and is still retained in the business (earnings that gave not been distributed as a dividend)

revenues; expenses; dividends

retained earnings are impacted by + ________ and - __________ which are recorded on the income statement and - __________ which is reported on the statement of stockholders’ equity

liquidity

refers to how easily an asset can be converted to cash, oftentimes by selling the asset

current assets

assets that are expected to be converted to cash, sold or used up in normal operations within one year

non current assets (fixed assets)

assets that are not expected to be converted to cash, sold or used up in normal operations within one year

current liabilities

liabilities due within one year

noncurrent liabilities

liabilities not due within one year

accrual method of accounting

requires a company to recognize revenue when it is earned and when expenses are incurred; revenue is earned when the service is provided of good is delivered

deferrals

cash first, then revenue/expense; “pay upfront”, “prepaid”; examples: the company receives cash before the revenue is earned, the company pays cash before the expense is incurred

accruals

revenue/expense first, then cash; “pay later”, “bill me”, “send an invoice”; examples": the company earns revenue before it receives cash, the company incurs expense before it pays cash

unearned revenues

a company receives cash from a customer before it has provided the service/product; balance sheet account used: unearned revenue liability

prepaid expenses

a company pays cash to a supplier before it has received the service/product; balance sheet account used: prepaid expense asset

accrued revenues

a company provides a service/product before it receives cash from the customer; balance sheet account used: accounts receivable asset → waiting to receive the money

accrued expenses

a company receives a service/product or incurs an expense before it pays cash to the supplier; balance sheet account used: accounts payable liability → waiting to pay the money

1). company receives cash from customer↑↓

BS: ↑ cash, ↑ unearned revenue (liability)

IS: nothing yet

CF: operating

2) company provides services/goods to customer (activity has happened!!)

BS: ↓ unearned revenue (liability), ↑ retained earnings (revenue)

IS: revenue

CF: nothing

unearned revenue steps

1). company pays cash for something it has not yet received↑↓

BS: ↓ cash, ↑ prepaid expense (asset)

IS: nothing yet

CF: operating

2). company receives what it paid for (activity has happened!!)

BS: ↓ prepaid expense (asset), ↓ retained earnings (bc of expense)

IS: expense
CF: nothing

prepaid expense steps

1). company provides goods/services to the customer (activity has happened!!)↑↓

BS: ↑ accounts receivable (asset), ↑ retained earnings (bc of revenue)
IS: revenue
CF: nothing yet

2). company receives payment from customer

BS: ↑ cash, ↓ accounts receivable (asset)
IS: nothing
CF: operating

accrued revenue steps

1). company receives services/goods from a supplier (activity has happened!!!) ↑↓

BS: ↑ accounts payable (liability), ↓ retained earnings (bc of expense)
IS: expense
CF: nothing yet

2). company makes payment to supplier

BS: ↓ cash, ↓ accounts payable (liability)
IS: nothing
CF: operating

accrued expense steps

depreciation expense

the fixed assets lose their value over time as they are used and this loss in value is an expense to the business and recorded as this

not

land is ___ depreciated

asset

the _____ will continue to be depreciated until it is sold, disposed of, or fully depreciated

accumulated depreciation

an account on the balance sheet that is a contra asset and holds a negative balance (as depreciation expense is recorded, the balance becomes increasingly negative)

net book value formula

original cost + (accumulated depreciation) = net book value