Corporate Formation and Operations for Two Sample Months
Prepared by Dixon Cooper
When students begin studying accounting they are often confused by the what/why/and when of
the process. In the following handout, I briefly discuss the composition and functions of the
different financial statements that are used, the
process of accounting, and the
mechanics of adjusting and closing the books at the end of the accounting period (for example,
at the end-of-the-month).
It is important for the student to remember that there is a certain perverse logic to the
accounting process. It is also important to remember that the purpose of requiring that students
study accounting is not to make their life a nightmare, this is just one of the additional little
perks or joys of teaching accounting (not really, this was just a feeble attempt at accounting
humor). Everything that you will learn has a specific purpose in evaluating the performance of a
company. We usually say that the goal of the accountant is to measure the success of the
organization. If you are talking about a for-profit company, the accountant will typically do so
by measuring the income generated.
I will begin our discussion by defining some basic terms that are used in accounting. While I
would like to keep the definitions to a minimum, to understand the accounting process, it is
necessary to understand the unique accounting vocabulary.
is a resource that will be used in the operations of an
. An entity can take several
formats, such as for-profit companies, such as Home Depot, non-profit organizations, such as the
Salvation Army, or governmental agencies, such as Montana. However, in this handout we will
concentrate on a for-profit entity. An asset can be either tangible, like a delivery truck, or
intangible, like a copyright on a book, and it can be classified as long-term (non-current) or
short-term (current). Whether an asset is long-term or short-term is dependent upon its expected
life. Typically, one year or less is short-term and more than one year is long-term.
is an obligation that is owed to another party. Liabilities are subjected to the same
distinction between long-term and short-term, with obligations that will be paid within one year
classified as short-term, and those that will be paid after more than one year classified as long-
represents the ownership or residual interest of the owners or