accounting chapter 1

sole proprietorship

a business owned by one individual

partnership

similar to a sole proprietorship, except its owned by two people

corporation

separate from it’s owners, provides limited liability to its shareholders and can raise capital through the sale of stock.

accounting

A system of analyzing, recording, and summarizing the results of a business’s operating, investing, and financing activities and then reporting them to decision makers.

creditors

suppliers, banks, and anyone to whom money is owed

investors

existing and potential stockholders, who look at accounting information to assess the strength of a business and estimate its value

directors

use financial statements to ensure that a company’s managers make decisions that are in the best financial interests of its stockholders

government agencies

look closely at companies financial statements, this includes ensuring that the stock market is functioning and that taxes are correctly computed

basic accounting equation

assets = liabilities + stockholders’ equity

separate entity assumption

business transaction are separate from and should exclude the personal transactions of the owners

asset

a company’s present right to an economic benefit (a company’s economic resources)

liabilities

a company’s present obligation to transfer an economic benefit

stockholders equity

the excess of assets over liabilities

pais-in capital

equity paid in by stockholders

earned capital

equity earned by the company

revenue

what a company earns

expenses

costs of doing business which is necessary to earn revenue

net income

profit

dividend

money from retained earnings which is distributed to stockholders

operating

cash flow that comes from running a business to earn profit, like selling stuff and services, along with cash paid for wages, advertising, rent, insurance, supplies, etc

investing

cash flows that come from buying and selling productive resources with long lives (buildings, land, equipment, and software

financing

cash flows that include borrowing from banks, repaying bank loans, receiving cash from stockholders for copany stock, or paaying dividends to stockholders