What is accounting?
is an information system that reports on the
economic activities and financial condition of a business or other organization.
A. It is the language of business
B. It is much broader than bookkeeping
Taxes paid by owner on individual return
Easy to start
Hard to raise capital
Sole proprietorships (characteristics)
2 or more owners
Owner pays taxes
Easy to start
Easier to raise capital
Many owners unlimited life
Tax are paid by corporation
Easy to raise capital
Managerial accounting who uses this information?
Internal Management and employes
What is GAAP?
The measurement rules established by the FASB are
called generally accepted accounting principles ( GAAP) .
What is the historical cost concept?
requires that most assets be reported at the
amount paid for them ( their historical cost) regardless of increases in market
What is the reliability concept?
Information is reliable if it can be
Assets: what is the definition of an asset?
The resources that a business uses to produce
Liabilities: what is the definition of a liability?
Creditor claims are called liabilities future
obligations of the enterprise
Equity: what is equity?
Is the investors clams
There are two sources of Owners equity
by invested by owners
by profitable transaction
Decreased by distribution
of profits in the form of dividends
What is the accounting equation?
Assets = Claims
How is equity "earned" through operations?
Is earned through the profits a business shows
What are the four financial statements?
The balance sheet
The income statement
The statement of changes in stockholders’ equity
Interrelationships among the statements.
What is on the income statement?
Matches the expenses with the revenues that
occur when operating a business.
What is on the statement of changes in equity?
explains the effects of transactions on
stockholders’ equity during the accounting period.
What increases equity?
What decrease equity?
Expenses when expenses exceed earnings
What is on the statement of cash flows?
explains how a company obtained and used cash
during the accounting period. Receipts of cash are called cash inflows , and
payments are cash out-flows. The statement classifies cash receipts ( inflows)
and payments ( outflows) into
What is articulation?
Is the interrelationships among the various
elements of the financial statements.
Determining the effect of a business event on
the financial statements
What is a transaction?
A business event that can be measured and recorded. Is
a particular kind of event that involves transferring something of value
between two entities of transactions include acquiring assets from
owners, borrowing money from creditors, and purchasing or selling goods and
How is equity earned through operations?
Through net Income (revenue – expenses = net income)
Contributed capital/common stock
inflow of assets from providing goods and services
of assets from producing goods and services
are the financial Statements?
about the business
These reports are distributed to external decision makers
(Assets= liabilities + owners Equity)
(revenue – expenses = net income)
(Beg balance + investments ( contributions) + net income – Dividends =
of changes in equity
Inflow – Outflows= Net cash flow
of Cash Flow
Chapter one definitions and concepts