Accounting Unit one

What is accounting

information and measurement system

what does accounting do

record, identifies, and communicates business activities

known as…

known as language of business

shareholders

external user

lenders

external user

external auditors

external users

regulators

external users

internal users

what is an external user

do not directly run the organization

have limited access to accounting info

what is internal users

directly manage the organization

purchasing managers

internal user

HR managers

internal user

production manager

internal user

R and D managers

internal users

marketing managers

internal users

what is ethics

beliefs about right and wrong

ethical decision process

identify → analyze → decide

three factors of fraud triangle

opportunity

pressure

rationalization

what is opportunity of fraud triangle

change to commit fraud with low risk

what is pressure in the fraud triangle

financial or personal stress

what is rationalization in the fraud triangle

justifying the dishonest behavior

GAAP

Generally

Accepted

Accounting

Principles

what is gaap

rules that guide financial reporting

goal of gaap

relevance and faithful representation

FASB

Financial

Accounting

Standards

Board

what is fasb

sets accounting rules for gaap

what is financial accounting

focuses on needs of external users

what is managerial accounting

focuses on needs of internal users

IFRS

International

Financial

Reporting

Standard

what is ifrs

accounting standards explaining how types of transactions and events are reported in financial statements

IASB

International

Accounting

Standards

Board

what is iasb

practices and encourages global acceptance in accounting principles

four areas of oppurtunites

Financial

Managerial

Taxation

Accounting related

what is conceptual framework

basic concepts that underlie the preparation and presentation of financial statements for external users

what does conceptual framework include

objectives

qualitative characteristics

elements

Recognition & measurement

what are general principles

assumptions, concepts, and guidelines for preparing financial statements

what are specific principles

detailed rules used in reported business transactions and events

Measurement Principle

record at actual cost

Revenue Recognition Principle

record revenue when earned

Expense Recognition Principle (Matching)

match expenses with revenue

Full Disclosure Principle

report all relevant info in notes

Going Concern

business will continue

Monetary Unit

transactions recorded in money

Time Period

business divided into reporting periods

Business Entity

business is separate from owner

sole proprietorship

1 owner

partnership

2 or more owners

corpration

1 or more, can get many investors

LLC limited liability company

1 or more, called members

cost benefit contraint

notion that the benefit of a disclosure exceeds the cost of that disclosure.

assets

Resources a business owns or controls that are expected to provide current and future benefits to the business.

materiality

the ability of info to influence decisions

accounting equation 1

assets = liabilities + OE

accounting equation 2

net income = revenues - expenses

equity accounting equation

Beginning Capital + Investments + Net Income – Withdrawals = Ending Capital

liabilities

involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

Equity

Owner’s claim on the assets of a business

Owner investments

Assets put into the business by the owner. (cash or other net assets)

Owner, Withdrawals

Account used to record asset distributions to the owner (sole proprietor or partner)

Revenues

Gross increase in equity from a company’s business activities that earn income

Expenses

Outflows or using up of assets as part of operations of a business to generate sales.

income statement

revenues, expenses, net income; over period of time

Statement of Owner’s Equity

changes in owner’s capital

balance sheet

assets, liabilities, equity at a point in time

statement of cash flows

cash inflows and outflows

Return on assets (ROA)

Measures how efficiently assets generate profit.

ROA equation

net income / average total assets = ROA

step 1 in accounting cycle

Identify transactions

step 2 in accounting cycle

Analyze using accounting equation

step 3 in accounting cycle

Record in journal

step 4 in accounting cycle

Post to ledger

step 5 in accounting cycle

Prepare trial balance

step 6 in accounting cycle

Prepare financial statements

what is a general ledger

collection of all accounts

what is an account

record of increases and decreases in an item

Source documents

Source of information for accounting entries that can be in either paper or electronic form

account receivable

held by seller and are promises of payment from customers to sellers

accounts receive: debit or credit

increases credit, decreases by customer payments

notes receicable

promissory note

prepaid accounts

assets from prepayments of future expenses

supplies

assets until they are used

when used, reported as expenses

equipment

asset, allocated over time to expense

buildings

stores, offices, warehouses; assets

allocated over time to expense

accounts payable

promises to pay later on account of supplies and services

credit

Unearned revenue

Liability created when customers pay in advance for products or services

accured liabilites

amounts owed that are not yet paid

T-account

Tool used to show the effects of transactions and events on individual accounts

debit

increases an asset or expense

decreases liability, revenue or equity

credit

decreases an asset or expense account

increases a liability, revenue, or equity account

double entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

equity incresaes from…

revenues and owner investments

equity decreases from…

expenses and owner withdrawals

assets increase;

debit

liabilites increase:

credit

equity increases:

credit

revenues increase:

credit

expenses increase:

debit

Journal

Record in which transactions are entered before they are posted to ledger accounts