Accounting Outline - Principles of Accounting Business...

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Principles of Accounting Business Activities Operating Investing Financing Accounting Standards Legislative Bodies Regulators (SEC, etc.) Standard Setters (FASB, IASB) Auditing Firms Industry Practice Assets and Expenses Every time an accounting entity spends money, it must classify it as an asset or an expense Asset: capitalize on the balance sheet Expense: show an expense on the income statement RE Assets Provide expected future benefits to the company Benefits must be reasonably certain Conceptual issues Are there reasonably certain future benefits? What is the exit prince? What will it bring if sold? Is it internally developed resource? If so, generally not an asset.
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Is there an accounting standard that must be followed (as for R&D)? Expenses Provide expected current but not future benefits Current is usually a quarter but can be a month Conceptual Issues Double Entry Recording System: T Accounts Debit means left side, credit means right side Assets: debit is +, credit is – Liabilities: debit is –, credit is + PIC: debit is –, credit is + RE: debit is –, credit is + Expense: debit is +, credit is – Revenue: debit is –, credit is + Normal and Adjusting Entries Normal Entries: made throughout a period as business activities take place Adjusting Entries: made at the end of a period to apply accrual principles “Top-side entries” Authorized and made by senior corporate executives Generally affect only income measurement; should not affect cash Recognize current period accrual events (e.g., rent expiration, interest accrual, depreciation accrual, cost of sales recognition) Recognize future commitments or events related to current period events (e.g., allowance for uncollectible assets, warranty expense, return expense on faulty merchandise)
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Balance Sheet Definition Snapshot of a company’s assets & liabilities at a given date Assets: economic resources Liabilities: claims against the assets by outsiders Shareholders’ Equity: residual claims by owners Book value differs from market value Market value for public companies Share price * outstanding shares Other appraised value Why is it different? Some assets are reported at historical cost Internally developed assets and R&D are not reported as assets Other non-reported assets: value of employees, goodwill from customers, branding and advertising Similar issues with liabilities Market value – Book Value = Net Present Value of future “excess” earnings Consists of PIC + RE Equation: Assets = Liabilities + Shareholders’ Equity Assets
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Current Assets Noncurrent Assets Liabilities Current Liabilities Noncurrent Liabilities Shareholders’ Equity Paid in Capital Retained Earnings Income Statement Definition A firm’s performance report for a given period Income = Revenue – Expenses Income is measured on an accrual basis, not a cash basis Revenues are recognized when service is provided and expenses are recognized when related costs are incurred, not when cash is received or paid Net income differs from cash flow from operations RE Ending = RE Beginning
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