Principles of Accounting

  1. Profitability
    Is the ability to earn enough income to attract and hold investment capital.
  2. Liquidity
    is the ability to have enough cash to pay debts when they are due.
  3. Operating Activities
    include selling goods and services to customers, employing managers and workers, buying and producing goods and services, and paying taxes.
  4. Investing Activities
    involve spending the capital a company receives in productive ways that will help it achieve its objectives. These activities include buying land, buildings, equipment, and other resources that are needed to operate the business and selling them when they are no longer needed.
  5. Financing Activities
    involve obtaining adequate funds, or capital, to begin operations and to continue operating.
  6. Users with a Direct Financial Interest
    • Investors: helps potential investors judge the prospects for a profitable investment; they must continually review their commitment.
    • Creditors: those who lend money or deliver goods and services before being paid, are interested mainly in whether a company will have the cash to pay interest charges, and to repay the debt at the appropriate time.
  7. Users with an Indirect Financial Interest
    • Tax Authorities
    • Regulatory Agencies: most companies must report to one or more regulatory agencies; Securities and Exchange Commission.
    • Other Groups: labor unions, financial analysts, brokers, underwriters, lawyers, economists, and financial press.
  8. Business Transactions
    are economic events that affect a business's financial position; businesses can have hundreds or even thousands of transactions every day; these transactions are the raw material of accounting reports.
  9. Money Measure
    All business transactions are recorded in terms of money. It is through the recording of monetary amounts that a business's transactions and activities are measured. Money is the only factor common to all business transactions, and thus it is the only unit of measure capable of producing financial data that can be compared.
  10. Separate Entity
    A business is distinct not only from its creditors and customers but also from its owners. It should have its own set of financial records, and its records and reports should refer only to its own affairs.
  11. Sole Proprietorship
    is a business owned by one person. The owner takes all the profits or losses of the business and is liable for all its obligations.
  12. Partnership
    is like a sole proprietorship in most ways, but it has two or more owners. The partners share the profits and losses of the business according to a prearranged formula.
  13. Corporation
    is a business unit chartered by the state and legally separate from its owners (the stockholders). The stockholders, whose ownership is represented by shares of stock, do not directly control the corporation's operations. Instead, they elect a board of directors to run the corporation for their benefit. In exchange for their limited involvement in the corporation's operations, stockholders enjoy limited liability; that is, their risk of loss is limited to the amount they paid for their shares.
  14. Financial Position
    • refers to a company's economic resources, such as cash, inventory, and buildings, and the claims against those resources at a particular time. Another term for claims in equities. Every company has two types of equities: creditors' equities, such as bank loans, and owner's equity. The sum of these equities equals a company's resources:
    • Economic Resources = Creditors' Equities + Owner's Equity
  15. Accounting Equation
    Assets = Liabilities + Owner's Equity. The two sides of the equation must always be equal or "in balance."
  16. Assets
    are the economic resources of a company that are expected to benefit the company's future operations.
Card Set
Principles of Accounting
Chapters 1-5