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Summary The Accounting Cycle
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Summary The Accounting CycleLarry M. Walther; Christopher J. Skousen
CH1: Accounting Information
Accounting: a set of concepts and techniques that are used to measure
and report financial information about an economic unit, which is
considered to be a separate enterprise.
Enterprise parties:
- Creditors are concerned about the entity’s ability to repay its
obligations.
- Governmental units need info to tax and regulate.
- Analysts use accounting data to form their opinions on which they
base their investment recommendations.
- Employees want to work for successful companies to further their
individual careers, and have bonuses or options tied to enterprise
performance.
Financial accounting: concerned with external reporting of information to
parties outside the firm.
Managerial accounting: concerned with providing information for internal
management.
Historical cost principle: principle that holds that it is better to maintain
accountability over certain financial statement elements at amounts that
are objective and verifiable, rather than opening the door to random
adjustments for value changes that may not be supportable.
CH2: The Accounting Profession and Careers
Auditing: involves the examination of transactions and systems that
underlie an organization’s financial reports, with the ultimate goal of
providing an independent report on the appropriateness of financial
statements.
Tax services: relate to the providing of help in the preparation and filing of
tax returns and the rendering of advice on the tax consequences of
alternative actions.
, CH3: The Fundamental Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets: the economic resources of the entity, including items like cash,
accounts receivable, inventories, land, building, equipment, intangible
assets like patents and other legal rights and claims. Are presumed to
entail probable future economic benefits to the owner.
Liabilities: amounts owed to others relating to loans, extensions of credit,
and other obligations.
Owners’ Equity: the owner’s ‘interest’ in the business. Sometimes called
net assets, because it is equivalent to assets minus liabilities for a
particular business. Consists of several amounts, corresponding to the
owner investments in the capital stock (by shareholders) and additional
amounts generated through earnings that have not been paid out to
shareholders as dividends (distributions to shareholders as a return on
their investment). Earnings give rise to increases in ‘retained earnings’,
while dividends (and losses) cause decreases.
CH4: How Transactions Impact the
Accounting Equation
If the company collected $10.000 from a customer on an existing account
receivable. Cash (an asset) increased from $25.000 to $35.000, and
accounts receivable (an asset) decreased from $50.000 to $40.000.
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