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| means by which we measure and describe economic activities of a business AND communicate these results to interested users |
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| used by "outsiders", those independent from company, to make decisions |
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| Examples of Outside Users |
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Investors (owners, stockholders)
Creditors (lenders, bankers) |
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| set of accounting reports that convey info to outside users such as creditors and investors |
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| GAAP (Generally Accepted Accounting Principles) |
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| concepts, standards, guidelines, and conventions companies are supposed to follow when preparing financial statements |
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| 2 Organizations Responsible for the Development of GAAP |
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1. FASB (Financial Accounting Standards Board
2. SEC (Securities Exchange Commission) |
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| FASB (Financial Accounting Standards Board) |
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private (non gov't controlled) sector organization that develops most of the accounting rules (<--GAAP)
creates accounting rules that SEC enforces |
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| SEC (Securities Exchange Commission) |
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public (gov't controlled) sector organization that has express authority to develop GAAP
enforces accounting rules that FASB creates |
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financial statement that portrays:
1. the economic resources owned by a business (Assets)
2. the debts owed by a business (Liabilities)
3. the amount of the owners' investment in the business (Equity)
*at a specific point in time (snapshot) |
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| the economic resources owned by a business |
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the debts owed by a business
represents creditor claims against the company's assets |
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| the amount of the owners' investment in the business |
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| expected to be either converted into cash or expire (be used up) within 1 year |
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| Examples of Current Assets |
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1. Cash
2. Accounts Receivable
3. Inventory
4. Supplies |
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| represent amounts owed to the company by its customers (ex. cutting grass) |
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| product the company sells to its customers |
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| items used in the normal course of business |
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| expected to be used in business operations for longer than one year |
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| Categories of Long-Term Assets |
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1. P-P-E (Property-Plant-Equipment)
2. Intangible Assets |
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| P-P-E (Property-Plant-Equipment) |
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long-term assets that have a physical substance
land, buildings, equipment (machinery, vehicles, tools) |
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long-term assets that lack a physical substance
trademark, patent, copyright |
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generally accepted accounting principle (GAAP) that states:
assets are to be shown on the balance sheet at their cost (the amount which the company paid to acquire them) |
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| liabilities expected to be paid within 1 year of the balance sheet |
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| Examples of Current Liabilities |
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1. Accounts Payable
2. Short-Term Notes Payable
3. Salaries Payable
4. Income Taxes Payable
5. Utilities Payable |
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| we, the customer, owe the money to the company |
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paying employees
(accrued liability) |
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paying gov't
(accrued liability) |
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| debts that will be paid in longer than 1 year from the date of the balance sheet |
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| Examples of Long-Term Liabilities |
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1. Long-Term Notes Payable
2. Mortgage Payable |
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1. Contributed Capital (capital stock)
2. Retained Earnings |
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| Contributed Capital (Capital Stock) |
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represents investments made by owners into the business
represents the shares of ownership investors receive when they invest money into a company |
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represents net income earned by the company that is kept within the company for expansion (rather than given to owners in the form of a dividend)
income that company earns and reinvests back into business for growth and expansion |
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financial statement that shows the profitability of the company for a period of time
includes:
revenues & expenses |
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represent amounts earned during the accounting period
may result from sale of merchandise, services, rental of property, or lending money |
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1. Sales Revenue (result from sales of inventory)
2. Service Revenue (provide service)
3. Rental Revenue (rent some space out)
4. Interest Revenue (from bank account)
5. Dividend Revenue (owning stock of another company) |
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| costs incurred in the process of earning revenue |
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1. Cost of Goods Sold (cost of inventory sold)
2. Salaries Expense
3. Rent Expense
4. Utilities Expense
5. Interest Expense
6. Advertising Expense
7. Income Tax Expense |
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not considered an expense-->don't effect company's net income.
treated as a reduction of owners' equity (specifically a reduction of retained earnings)
classifies as a Contra Equity (reduces equity/opp. of equity) on journal entry |
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shows the changes in cash for a period of time (the same period of time as that covered by the income statement)
provides info about:
cash receipts (inflows)
cash payments (outflows) |
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measures the amount of net income (income earned by company) associated with each share of common stock
tells us how much of the income belongs to each share of common stock |
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| measures the amount of profit earned per dollar of invested capital |
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| Return on Investment (ROI) |
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measures the rate of return generated on available assets
(higher the better) |
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expansion of the basic ROI calculation
this model reasons that profitability from sales (margin) and utilization of assets to generate sales revenue (turnover) were both important factors to be considered when evaluating profitability
(higher the better) |
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| represents the % of your sales dollars that end up in net income |
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| relates to the efficiency with which the firm's assets are used in the revenue-generating process |
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| measure the short-term ability of the company to pay its debts as they come due |
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| Examples of Liquidity Ratios |
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1. Working Capital
2. Current Ratios
3. Acid-Test Ratio (Quick Ratio) |
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based on GAAP
1. realization principle
2. matching concept |
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record revenues in the period they are earned (in the period the good is sold or the service is performed) without regard as to the receipt of cash (not same thing as revenue).
the determining factor is the earnings process, not the receipt of cash |
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record expenses in the period they help to generate revenues without regard as to the payment of cash.
the determining factor is when does the incurrence of an expense help to generate revenues, not the payment of cash |
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place where all increases and decreases in financial statement items are recorded.
analyze these accounts using T-account |
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| all accounts of the company taken together (all the T-accounts of the company) |
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| the place where all transactions are initially recorded |
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the means used to record transactions in the journal
debit (left side)
credit (indented to the right)
debits=credits |
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| every transaction must be recorded with at least 1 debit and at least 1 credit with the total dollar debits always equaling the total dollar credits |
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process of transferring debit and credit amounts from the journal to the ledger (transferring the amounts in the journal entires to the T-accounts).
allows us to determine the ending balance in each account (something that would be very difficult to do by just looking at journal entries) |
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recorded when you sell an asset other than inventory for MORE than its cost
classified as a revenue account |
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recorded when you sell an asset other than inventory for LESS than its cost
classified as an expense account |
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journal entries made at the end of an accounting period (end of year/end of month) to update account balances
2 main categories:
1. Deferrals
2. Accruals |
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| transactions for which cash has been received or paid while the related revenue or expense has not been recorded (*exchange of cash has occurred before the action) |
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transactions for which cash has NOT yet been received or paid, but the related revenue or expense has been earned or incurred and this must be recorded
(*action has occurred before the exchange of cash) |
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revenues earned but not yet received in cash or recorded
ex. sales of merchandise on account |
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expenses incurred but not yet paid in cash or recorded
ex. salaries incurred but not yet paid |
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| Accrued Revenues on Adjusting Entries |
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debit an asset account
credit a revenue account |
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| Accrued Expense on Adjusting Entries |
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debit an expense account
credit a liability account |
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| when a company borrows money and must repay it with interest |
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| when a company lends money to someone and is to be repaid with interest |
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company pays for an expense item in advance
recorded as an ASSET.
only becomes an expense when the asset is "used up"
ex. supplies |
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| Deferred Expense on Adjusting Entries |
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debit an expense account
credit an asset account |
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| Deferred Revenue (Unearned Revenue) |
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company receives cash in advance for services to be performed or goods to be delivered later.
this cash received is recorded as a LIABILITY
becomes a revenue when it is earned (when company actually performs the service or delivers the good) |
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| Deferred Revenue on Adjusting Entries |
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debit a liability account
credit a revenue account |
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