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Accounting Week 1

by: Ellen Feringa

Accounting Week 1 ACC 203

Ellen Feringa
C of C
GPA 3.9
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About this Document

Accounting Chapter 1 In-Class Notes plus notes from the textbook
Financial Accounting
Class Notes
Accounting, Income, Statements, reports, assets, liabilities




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This 5 page Class Notes was uploaded by Ellen Feringa on Friday August 26, 2016. The Class Notes belongs to ACC 203 at College of Charleston taught by Spade in Fall 2016. Since its upload, it has received 4 views. For similar materials see Financial Accounting in Business at College of Charleston.


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Date Created: 08/26/16
ACCOUNTING 103 8/24/16 ACCOUNTING • gives us the overall financial health of the business • “paints a picture” of the business • analyze, record, and summarize the results of a business’s activities and then report the data gathered back to the business • every time a financial event happens, it is recorded in a transaction • a financial statement is all of the transactions summarized (there are 4 financial statements) What civilization invented accounting? Italians 3 MAINTYPES OF BUSINESSES 1. sole proprietorship: only one owner; personally liable for all debts of legally the business; part of the owner’s life (all profits/losses become apart of considered to the owner’s taxable income) be extensions of their owners 2. partnership: not truly formalized orderly but can be; there is more than 1 owner so the profits, taxes, and legal liability are shared b/tw the two owners • it is like a sole proprietorship except with more owners • a partnership agreement is typically drawn up • an advantage over the s.p. is that the partnership allows for more resources to be available with can boost the business’s growth 3. corporation: are totally separate entities from their owners; • owners can not lose more than what they have invested into the corporation since the owners and the corporation are a separate entity • Disadvantage: typically includes higher legal fees and more income taxes (one for the corporation & the other to the owner) • corporation is legally responsible for the taxes, debts, and liability issues • for example: if someone was to fall inside a store, the owners in the sole proprietorship and the partnership can be sued along with the business and everything with it. However, if someone was to fall inside the corporation’s building and wanted to sue the corporation, the owners would not be sued—only the corporation • SEPARATE ENTITY ASSOCIATION: the business, not owners of the business (known as stockholders), owns all of the assets, thus they must pay the liabilities. • this protects the stockholder’s personal dealings and makes sure that the business’s financial reports only include the business’s activities 8/26/16 What do we do in Accounting? • analyze: everything thats going on • record: the transaction (hundreds and thousands of reporting periods • summarize: using financial statements 2Types of Accounting: 1. private accountant: does accounting for one business and is an employee for that one business—does NOT work for any other business 2. public accountant: works for an accounting firm and provides accounting for multiple businesses—NOT an employee for the business • CPA “certified public accountant” Who are interested in Business Financial Statements? • Financial Statements (financial accounting reports): prepared periodically to provide information to the outside people of the business but do not release any internal records that could hurt the business • the people who are interested below are known as “outside users of financial information” 1. Lenders (Creditors): anyone who lends out money which includes banks and suppliers. Suppliers need the financial statements and credit history to evaluate if the business will pay back the money for the goods and delivery services. Banks use the financial statements to judge whether or not to loan money to a business—the banks can intervene if the bank isn't doing so well by looking at the financial statement 2. Investors: include stockholders who want to know if the business is worthy to invest in— financial strength of the business 3. Stockholders/Owners (Directors): members of the business board who are elected by the stockholders of either large private or public companies to oversee the company’s managers. the financial statements help them know if the company is making the right decisions and placing their money in the right places. 4. Government: the IRS in particular are very interested because by looking at the financial statements, they ensure the correct taxes on the business BASIC ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY • assets: what the company owns • merchandise, vehicles, technology, building/property, cash (the first and most important asset) • the right to collect money in the future is known as accounts receivable (what customers owe for prior sales) and is an asset listed directly under cash • liabilities: the amount that the company owes • for example, the employee’s pay, loans from the bank known as notes payable (money that the company owes and will pay back later or amounts borrowed from the bank that must be repaid)—the bank will make you sign a promissory note to have written proof that you promise to pay it back • accounts payable: unpaid bills • equity: is the owner’s net investment in the business • equity is made of two components: 1. common stock: represents the amount of money the owners put into the business in exchange for a part of the ownership—“equity paid in by stockholders” (pg. 9) 2. retained earnings: all of the profit that the company has ever made since the beginning of time which has not been distributed to the owners (undistributed profits)—“equity earned by the company” (pg. 9) • a business can only survive if it is profitable; thus the total amount earned from selling the goods/services must be higher that the costs to generate them • dividends: distribution of profit to the owner (profit distributed) Income Statement Formula REVENUE — EXPENSES = NET INCOME (LOSS) • revenue: what the company generates (sales)—sales of products and services • expenses: the costs the company generates in order to make revenue (rent, cost to manufacture or purchase their goods, labor, insurance, utility bills, running ads) • don't want the expenses stop be higher than the revenue or you will have a net loss • income statement (statement of operations): shows the revenue/expenses for a period of time (how well a business did that month/year) • in order to have a net income, the revenue must be higher than the expenses—if the expenses are higher than the revenue, the business will have a net loss • by generating a net income, a company increases its stockholder’s equity which can either be left alone to grow or it can be distributed amongst the company’s stockholders for personal use (dividends) Retained Earnings (gets its own financial statement)—“statement of retained earnings” BEGINNING + NET INCOME (LOSS) — DIVIDENDS = ENDING RETAINED EARNINGS RETAINED EARNINGS • beginning retained earnings: balance of the first day for the retained earnings • net income (loss): comes from income statement • dividends: this years distribution of profit to owners • retained earnings: the profits that have been accumulated in the company over time Financial Statements Order 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows Balance Sheet • based on the basic accounting equation • reports the amount of assets, liabilities and stockholder’s equity of a business at a specific point in time ASSETS = LIABILITIES + EQUITY — RETAINED (STOCKS) EARNINGS • statement of retained earnings: reports the way that net income and the distribution of dividends affected the financial position of the company during a set time period • increase in revenue means an increase in ending retained earnings which means an increase in net income and an increase in the ending retained earnings (if it decreases, everything decrease^^) • net income (reported on the income statement) is a component in determining the ending retained earnings on the statement of retained earnings. ending retained earnings from the statement of retained earnings is then reported on the balance sheet. cash on the balance sheet is equal to the ending cash on the statement of cash flows • cost principal: all of the assets that have been reported at original cost (recorded on the balance sheet) • statement of cash flows: reports the operating, investing, and financing activities that caused increases and decreases in cash during the current accounting period • operating: all activities related to running the business to generate profit (selling apps/services, employee wages, purchasing advertising, renting a building, buying insurance coverage, etc. • investing: all activities related to buying and selling productive resources with long lives (buildings, land, equipment, software), purchasing investments, and lending to others • financing: any activities related to borrowing money from banks, repaying bank loans, receiving cash from stockholders, or paying dividends to stockholders • typically if the company is new, they must purchase new software and equipment, borrow money, etc. so their statement of cash flow will be negative •


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