Financial Accounting

Assets

Resources belonging to a business, such as cash, equipment, inventory.

Assts = Liabilities + Owner’s Equity

To be considered an asset, an item must:

1. Be purchased at a cost that is measurable
2. Produce probable economic benefit in the future
3. Result from a past event
4. Be owned or controlled by the entity

Liabilitiy

An obligation that a company has incurred to pay another entity, such as amounts owed to banks, vendors, the government, or employees, or the obligation to provide goods or services in the future.

A liability must satisfy the following:

1. It must impose a probable economic obligation on economic resources in the future.
2. The obligation has to be to another entity
3. The event that created the obligation must have occurred in the past.

Owners’ Equity

The residual that belongs to the owners of the business. If you add up all the resources of the business (assets) and subtract all the claims that third parties (such as lenders and suppliers) have against those assets, the residual (what is left over) is Owner’s Equity. Owner's Equity includes two elements; first, money contributed to (invested in) a business in exchange for some degree of ownership and second, earning that the business generates over time and retains in the business. Also commonly known as shareholders’ equity, stockholders’ equity, or equity.

Owners’ Equity = Assets - Liabilities.

Intangible Assets

Not all assets are tangible goods like inventory or large physical objects. Many assets are “intangible” - they are not monetary and do not have physical form, but they still represent value to the company. Examples: computer software, registered trademarks, copyrights etc.

Transaction

An event or circumstance that impacts the financial position of a business and needs to be recorded in the financial accounts.

Revenue

The money that a business brings in from its customers for providing goods or services related to its normal operations.

Realization

An amount is realized when the cash (or claim to cash) is received, and an amount is realizable when receipt of payment (or claim to cash) is reasonably certain. The realization principle is important because revenue can only be recognized once the revenue is both earned and realized or realizable.

Matching principle

One of the principles behind Accrual Accounting which states that expenses should be recognized in the same period in which the related revenue is recognized rather than when the related cash is paid.

Prepaid Expense

A prepaid expense is an asset that represents the right to receive goods or services in the future. Some common examples are prepaid rent or prepaid insurance, where a company pays for rent or insurance in advance of the coming month or year. At the time of the payment, the transaction is recorded as an asset, and as time passes, the asset is reduced and the expense recognized. Remember that prepaid expenses are NOT expenses.

Financial Accounting Standards Board (FASB)

Generally Accepted Accounting Principles (GAAP)

International Accounting Standards Board (IASB)

International Financial Reporting Standards (IFRS)

Conservatism

The principle recognizes that there are some estimates involved in accounting and says that accounting should reflect the more cautious estimated valuation rather than the more optimistic one. For assets it means recording the lower valuation while for liabilities if means recording the higher possible valuation. For revenues and gains it means recording them when they are reasonably certain but for expenses and losses it means recording them when they are reasonably possible.

Conservatism requires that you record expenses or losses when they are probable but only record gains or revenue when they are realized (turned into cash or cash equivalents or good receivables).

Relevance

Relevance means that the information is useful and capable of influencing the decision of the users of the financial statements.

Reliability

Reliability means that the information faithfully represents the underlying economics. The 3 dimensions of reliability are validity, verifiability, and unbiasedness.

Historical Cost

The historical cost principle refers to the fact that transactions are recorded at the cost that existed at the time the transaction occurred. In the case of assets, it means that their value in the financial records is shown at historical cost, rather than current market value. When combine with the principle of Conservatism, it means that an asset’s value may be reduced if it is deemed to have permanently lost value, but it cannot be increased if it is deemed to have gained value.

Consistency

Depreciation

Accrual Accounting Method

Entity Concept

Materiality

Something is considered to be material if it is reasonably likely to impact the decision-making of those who are using the accounting data or financial reports. Businesses are only required to do detailed record-keeping and reporting for items that are material.

Money measurement

Going concern