ACCOUNTING
CHAPTER 1: ACCOUNTING & BUSINESS ENVIRONMENT
− accounting = the information system that measures business activities, processes the information
into reports, and communicates the results to decision makers
− financial accounting: external decisions, investors, competitors, current or future suppliers, whether
a business is profitable, deciding on whether to lend money to a business
− managerial accounting: internal decisions, middle and top management
− FASB:
o Financial Accounting Standards Board
o privately funded
o creates and publishes accounting standards that govern financial accounting
o IASB = International Accounting Standards Board, FASB in Europe
o National GAAP → for each country
− SEC:
o Securities & Exchange Commission
o overseeing US financial market
o ESMA = European Securities & Market Authority
o National Authorities
− GAAP:
o Generally Accepted Accounting Principles
o guidelines governing accounting
o rules followed by accountants in order to write reports
o the reports should be relevant and faithfully representative
− accounting assumptions:
o economic entity assumption = each corporation stands apart from the other, making
boundaries between corporations
o cost principle = recording the real cost
o monetary unit assumption = assuming inflation is not present and that there is a stable
purchasing power
o going concern assumption = assuming the company will continue to operate for the
foreseeable future
ACCOUNTING EQUATION
− ASSETS = LIABILITIES + EQUITY
− must always be in balance
− assets:
o economic resources expected to benefit a corporation/business in the future
o e.g., land, furniture, inventory, cash
o accounts receivable = money owed by the suppliers
o notes receivable = money owed by the suppliers over a longer period of time
,− liabilities:
o debts owed to creditors
o accounts payable = money owed to suppliers
o notes payable = money owed to suppliers over a longer period
o salaries payable = money owed to the employees
o tax payable = money owed to the tax authorities
o credit balance = an amount that a business owes to a customer
− equity:
o capital invested by the owner when the business started
o owner’s capital & owner’s withdrawals
o capital – withdrawals + profit
o revenues = all the money generated by selling services/products
o expenses = all the money paid for products/services consumed
o profit = revenues – expenses
− () = –
− transaction = involves exchange of economic resources, its economic impact must be measurable in
monetary units
FINANCIAL STATEMENTS
− same 4 basic financial statements
− used by all companies as the primary means of
communicating to stakeholders
− income statement:
o reports the success or failure of the company’s
operations for a period of time
o how well was the company doing over a certain
period
o net income = revenues – expenses
− statement of owner’s equity:
o shows amounts and causes of changes in
owner’s capital during the same period
o capital – withdrawal + net income
− balance sheet:
o reports all the assets and all the liabilities of the
company and the owner’s equity
o follows the accounting equation
, − statement of cash flows:
o looking where the cash was generated
o determines whether the business
generates enough cash to pay its bills
o calculated by looking at the cash flow
from operating, investing, and financing
activities
− ROA:
o Return On Assets
o net income/average total assets
o shows how well the company did
o expressed in percentages
CHAPTER 2: RECORDING BUSINESS TRANSACTIONS
ACCOUNTS
− smaller elements contained in the 3 elements of the Accounting Equation
− the detailed record of all increases and decreases that have occurred in an individual asset, liability,
equity, revenue, or expense during a specified period
− e.g., land, cash
− transactions always have at least 2 impacts on the accounting equation
− T-account:
o a shortened visual form of the more formal general ledger account format
o debits are on the left, credits are on the right
o balanced at the end of each period
o any time a debit is put into one account, an equal credit must be put into another account
o debit balance = an account with more debits than credits
o credit balance = an account with more credits than debits
o the balancing impact of transactions can be explained using T-accounts and debits and
credits
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ninajunakovi. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.48. You're not tied to anything after your purchase.