Unformatted text preview: Chapter 1 Chapter Definition of Accounting Definition The information system that provides The reports to users about the economic activities and condition of business activities The language of business The means by which businesses’ financial The info is communicated info Two main users: internal and external Ethics Ethics Plays an extremely important role in Plays business business Many reasons for recent failures that have Many occurred in businesses occurred Business people have a special ethical Business duty duty Accounting Standards Accounting Businesses need a standardized set of Businesses principles to use when formulating financial statements otherwise the results would be meaningless to users would In US, these standards are GAAP Many countries outside of the US have Many adopted some form of IFRS adopted The US is working to bridge the gap The between the standards between Business entity concept Business Business is viewed as an entity separate Business from its owners, creditors, or other businesses businesses Forms of businesses Proprietorship Partnership Corporation Corporation LLC (limited liability company) Accounting Equation Accounting A=L+OE Assets are the resources owned by a Assets business (examples include: cash, buildings, inventory) buildings, 2 claims to the assets Liabilities – rights of the creditor (debts of biz) Rights of the owner(s) is called owners equity Always True! Definitions Definitions Accounts payable- liability created by a Accounts purchase on account purchase Prepaid expenses-items such as supplies Prepaid that will be used in the biz in the future that Revenue- businesses earn money by Revenueselling goods or providing services (book often refers to this as fees earned) often Interest revenue, rent revenue, sales Definitions (continued) Definitions Accounts Receivable – when a business Accounts generate revenue but agrees to collect payment from costumer at a later date (asset) (asset) Expenses – assets spent or used up in Expenses order to generate revenues Revenues less expenses is net income Owner’s equity Owner’s Increased by owner’s investment and Increased revenues revenues Decreased by withdrawals by owner and Decreased expenses expenses Financial Statements Financial Income statement Statement of owner’s equity Balance sheet Statement of cash flows Must be familiar with these four Must statements. We spend the rest of the semester looking at each of these statements more closely statements Things you MUST know Things Income statement A summary of revenues and expenses for a specific summary period of time. Example: 2010 or January of 2010 period Example: (month or year) (month
• When asked to put together an income statement on the When exam, you must appropriately identify this period of time (write, for the year ended…X) (write, • Revenues less expenses is net income • Using the matching principle (matches the expense with the Using corresponding revenue generated) corresponding • Income statement is prepared first!!!! Statement of Owner’s Equity Statement Prepared after the income statement
• Must know what the net income for the period in Must order to complete this statement order • Prepared before the balance sheet Reports the change in owner’s equity for a Reports period of time period
• “for the year ended….X” Investment by owners, net income, Investment withdrawals by owners will be reflected in this statement statement Balance Sheet Balance Shows assets, liabilities, and owner’s equity What equation have we learned that will help us with What this…. this…. Assets on the left, liabilities and OE on right of the Assets form form Assets are listed in the order that they will be Assets converted to cash or used in the business converted As of a very specific date. Example: Dec 31, 2010 Snapshot in time Statement of Cash Flows Statement Completed last Has three sections Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities ...
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