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Accounting
- A system that identifies (selecting transactions and events), records (input, measure, and classify) and communicates (prepare, analyze, and interpret) info about an organization's business activities
- Requires making financial statements and learning how to analyze them
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2 types of users of accounting info.
- External users: not involved in running the organization (shareholders, investors, govts, consumer groups)- use financial accounting (making financial statements)
- Internal users: involved in operating the organization (managers, directors, sales staff, budget officers)- uses managerial accounting
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Ethics
- Beliefs that distinguish right from wrong
- 1. ID ethical concerns
- 2. Analyze options
- 3. Make ethical decision
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GAAP
- Generally Accepted Accounting Principles
- Financial accounting is governed by these concepts
- 1. Relevant info ->affects decision of users
- 2. Reliable info.->trusted by users
- 3. Comparable info. -> to contrast organizations
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Revenue Recognition Principle
- 1. Recognize revenue when it is earned
- 2. Proceeds need not be in cash
- 3. Measure revenue by cash received+cash value of items received
- Did we perform the service? When exactly we earn the money
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Matching Principle
A company must record its expenses incurred to generate the revenue reported
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Cost Principle
- Accounting info. is based on actual cost. Actual cost is considered objective
- What the price says is what something actually costs
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Full Disclosure Principle
- A company is required to report the details behind financial statements that would impact users' decisions
- Explains how they do things
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Going-Concern Assumption
Reflects assumption that the business will continue operating instead of being closed or sold
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Monetary Unit Assumption
Express transactions and events in money units
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Business Entity Assumption
A business is accounted for separately from other business entities, including its owner (double entry book keeping)
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Time Period Assumption
Presumes that the life of a company can be divided into time periods, such as months or years
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Forms of Business
- 1. Sole Propriertorship: business owned by one individual
- 2. Partnership: owned by 2 or more individuals
- 3. Corporation: owned by individuals who are not normally active in the business
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Expanded Accounting Equation
- Assets=Liabilities+Equity
- What we have=What we owe
- The accounting equation MUST remain in balance after each transaction
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Assets- Account Type
- Resources owned or controlled by a company
- Ex. Cash, notes receivable, land, buildings, accounts receivable, vehicles, store supplies
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Accounts receivable
When customers buy something, and receive money in the future
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Notes Receivable
Customers assign promisary notes and there's interest associated with it
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Liabilities- Account Type
- Creditors claim on assets
- What we oew to someone
- Debt/loans
- Usually end in "payable"
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Equity- Account Type
- Owner's claim on assets
- What we owe to the owner-value of the owner's investment
- Involves owner capital (owner's investment) and owner withdrawl (Anytime owner takes money out of business for personal use)
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Revenue- Account Type
- When we do a service, and we are owed money
- Sales
- Loans given to us to start a business
- Doesn't matter if we got paid
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Expenses- Account Type
- Costs of the company
- Usually ends in "expense"
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Income Statement-
- First financial statement
- Revenue-expenses=net income (AKA profit)
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Statement of Owner's Equity
- Second financial statement
- Capital balance=new investments+net incomes (from income statement)-owner withdrawl=ending capital balance
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Balance Sheet
- Third financial statement
- Assets=Liabilities=equity (ending capital balance)
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Financial Statements
- 1. Income statement
- 2. Statement of owner's equity
- 3. Balance sheet
- 4. Statement of cashflows
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Account type order
- Asset
- Liabilities
- Equity
- Revenue
- Expense
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Financial Statement label order
- Company
- Which financial statement
- Time
- If more than one thing, make a total
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Ledger
a record containing all accounts used by a company
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Prepaid account
assets that represent prepayments of future expenses
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Unearned revenue
A liability that is settled in the firite when a company delivers its products or services
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Owner, Capital
When an owner incests ina compant, the invested amount is recorded in this account
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Owner, withdrawals
When the owner takes out money from the company for personal use
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T account
Represents a ledger account and is a tool used to understand the effects of one or more transactions
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Debit
- The left side of the account
- Increases when you have
- Assets
- Withdrawals
- Expenses
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Credit
- The right side of the account
- Increases when you have:
- Revenue
- Capital
- Liabilities
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Reequires that each transaction be recorded in at least two accounts
The sum of debits and credits will equal
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Journal entries
- It gives a complete record of each transaction in one place
- Shows the debit and credit of each transaction- must have at least one of both
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Trial Balance
- A list of accounts and their balances at a point in time
- Must balance
- Take the totals from the T accounts
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Fiscal year
A year that is consisting of any 12 consecutive months
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Natural business year
The year ends when the sales activities are at their lowest level for the year
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