Accounting 211: Week 1 Notes
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This 3 page Class Notes was uploaded by Alicia Polcha on Friday January 15, 2016. The Class Notes belongs to 211 at a university taught by Prof. Herrick in Spring 2016. Since its upload, it has received 15 views.
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Date Created: 01/15/16
Chapter One – Accounting in Action 1) Accounting – identify, record and communicate the economic events of an organization a) Three Activities: i) Identification – select economic events (transactions) ii) Recording – classifying and summarizing iii) Communication – preparation of accounting events b) Internal Users – inside the company i) Management, human resources, finance, marketing c) External – outside of the company i) Investors. IRS, labor unions, creditors, customers, SEC (Securities in Exchange Commission) 2) The building blocks of accounting a) Ethics in Financial Reporting – standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics i) Recent financial scandals: Enron, WorldCom, HealthSouth, AIG ii) Effective financial reporting depends on sound ethical behavior b) Steps to Analyzing Ethics Cases and Situations (1) Recognize an ethical situation and the ethical issues involved (2) Identify and analyze the principal elements in the situation (3) Identify the alternatives, and weigh the impact of each alternative on various stockholders c) The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced – Generally Accepted Accounting Principles (GAAP) d) Financial Statements i) Balance Sheet ii) Income Statement iii) Statement of Owner’s Equity iv) Statement of Cash Flows v) Note Disclosure – add details to financial statements to clarify uncertainties e) Generally Accepted Accounting Principles (GAAP) – a set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial purposes i) Standardsetting bodies determine these guidelines: (1) SEC, FASB, IASB f) Historical Cost Principle – companies record assets at their cost: (a) Reported at cost when purchased and also over the time the asset is held, cost easily verified (whereas market value is often subjective), market value information may be more useful depending on the circumstances g) Fair Value Principle – states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) transaction data that can be expressed in terms of money h) Assumptions i) Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the other ii) Monetary Unit Assumption – include in the accounting records only 3) Forms of Business Ownership a) Proprietorship i) One owner ii) Owner often manages/operates iii) Owner receives any profit, suffers any losses and is personally liable for all debts b) Partnership i) Owned by two or more persons ii) often retail and servicetype businesses iii) generally unlimited personal liability iv) partnership agreement c) Corporation i) Ownership divided into shares of stock ii) separate legal entity organized under state corporation law iii) limited liability iv) required to pay income tax (negativity of corporation) 4) The basic accounting equation – provides the underlying framework for recording and summarizing economic events a) Liabilities + Owner’s Equity = Assets i) Assets (1) resources a business owns (2) Provide future services or benefits (3) Ex. Cash, supplies, equipment, etc ii) Liabilities (1) Claims against assets (debts and obligations) (2) creditors – party to whom money is owed (3) Ex. Accounts “payable” informal (4) Notes payable – formal agreement to repay money, signature, interest iii) Owner’s Equity (1) ownership claim on total assets (2) referred to as residual equity (3) investments by owners (capital) and revenues (+) (a) Increases owner’s equity (4) Drawings and expenses decrease equity 5) Expanded Accounting Equation a) Assets = Liabilities + Owner’s Capital – Owner’s Capital + Revenues – Expenses b) Increases in Owner’s Equity i) Investments by owner – assets the owner puts into the business ii) Revenues – earns business income c) Common sources of revenue i) Sales ii) Fees iii) Services iv) Commissions v) Interest vi) Dividends vii) Royalites viii) Rent d) Decreases in Owner’s Equity i) Drawings Owner withdraws cash or other assets for personal use ii) Expenses costs of assets consumed or services used in process of earning revenue (1) Include: salary expenses, rent expenses, utilities expense, tax expenses, ect. 6) Using the BAE a) Transaction Analysis b) Summary of Transactions 7) Financial Statements a) Income Statement – Revenues & Expenses i) Reports the revenues and expenses for a specific period of time (“For the month ended”) ii) Net Income – revenues exceed expenses (aka Profit) iii) Net Loss – expenses exceed revenues (Negative Net Income) (1) Top of every column should include dollar sign as well as net income/loss (2) Net income is double underlined b) Owner’s Equity Statement i) Owner’s Capital & Drawings & Revenue & Expenses ii) Includes all calculations from income statement iii) Statement indicated the reasons why owner’s equity has increased or decreased during the period iv) Beginning number of every statement is the previous balance of previous statements (1) Adds investments and net income (from income statement) (2) Subtracts drawings form investment and net income c) Balance Sheet Includes: i) Assets (1) Cash (2) Accounts receivable (3) Supplies (4) Equipment (a) Total assets ii) Liabilities (1) Accoutns Payable d) Owner’s Equity i) Capital (1) Total liabilities and owner’s equity ii) Arranged in liquidity – what will turn into cash e) Statement of Cash Flow – everything that happened in the cash account
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