Updated_Financial_Accounting_Handout

Updated_Financial_Accounting_Handout - Financial Accounting...

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Financial Accounting Corporate Formation and Operations for Two Sample Months Prepared by Dixon Cooper Introduction 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 double entry 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. An asset is a resource that will be used in the operations of an entity . 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. A liability 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- term. Owner’s equity or capital represents the ownership or residual interest of the owners or 1
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stockholders. Common stock is the initial investment (plus any additional contributions of funds)in the entity by the owners. Retained earnings represent the cumulative earnings of the entity over its life, less any dividends paid to the stock holders, or less any cumulative losses in income. A dividend represents a distribution of the entity’s profits. Revenue is money earned, while expenses are costs of earning the money. Net income(net loss) is the difference between revenues and expenses. If the total revenue is greater than the total expenses, then the entity
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This note was uploaded on 03/12/2011 for the course ACCT 2013 taught by Professor Staff during the Spring '11 term at Arkansas.

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Updated_Financial_Accounting_Handout - Financial Accounting...

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