Accrual vs - Accrual vs cash basis of accounting o Accrual...

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Accrual vs. cash basis of accounting o Accrual: recognizes cash when earned, when a company does something and then gets paid o Cash: records and recognizes expense when cash is paid. When/how to recognize and record revenues and expenses under accrual accounting. o Revenues: a company must record revenue in the period in which it was earned regardless of when payment is received. o Expenses: a cost of business. Revenues are not free, there is a cost associated with them and these costs must be matched with its revenue. o By matching the revenue and expense, the user of the financial statements can see the true Net Income of a company. GAAP vs. SEC vs. FASB vs. AICPA o GAAP: Generally accepted accounting principles. These are the rules and standards. o SEC: Securities and Exchange Commission. Federal Agency developed as a result of the Great Depression. Enforces the standards developed by FASB for public companies. o FASB: Financial Accounting Standards Board. Establishes and improves standards. They created GAAP! o AICPA: American Institute of Certifies Public Accountants. National professional organization, helps develop GAAP in a very limited role, helps promote the profession and creates the CPA exam. Accounting Equation o Assets = Liabilities + Owners Equity o Assets= Liabilities + (common stock + preferred stock + revenue – expenses – dividends) o Assets + expenses + dividends = Liabilities + common stock + preferred stock + revenue o Left of = are Debit accounts, Right of = are Credit accounts. Accounting Assumptions and Principles o Economic Entity Assumption: economic activity of an entity can be identified and measured. It must be kept separate from its owners. o Periodicity Assumption: as asset it worth what someone is willing to pay for it. If we don’t know the true value performance of a company, we should wait until it is sold so we can determine its value. This assumption implies that one can measure the value and performance of a company over artificial time periods. Ending Retained Earnings o Reconciles balance of RE account from beginning of the year to the end of the year. o Ending RE = Beginning RE + Net Income – Dividends o Lives on BS in OE, Real, Credit Income Statement o Summarizes the revenues and expenses of a company for a period of time. o Net Income = Revenue – Expenses o Because the Income Statement measures performance, we wipe it out to Retained Earnings at the end of every year so we begin the net cycle with 0. o Income statement accounts are nominal. Balance Sheet o Summarizes the assets, liabilities, and equity of a company o It is a snapshot of the company at a certain time o Because it is a snap shot, and represents what a company has, it is a running total that does not get wiped out at the end of the year.
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