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Accounting

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measures business activities, processes the information into reports, and communicates the results to the decision makers.

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Financial accounting

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provides information for external decision makers, such as outside investors, lenders, customers, and the federal government.

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Managerial accounting

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focuses on information for internal decision makers, such as the company's managers and employers

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Financial accounting

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External Decision Makers: Should I invest in the business? Is the business profitable? Should we lend money to the business? Can the business pay us back?

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Managerial accounting

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Internal Decision Makers: How much money should the business budget for production? Should the business expand to a new location? How do actual costs compare to budgeted costs?

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Creditors

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Any person or business to whom a business owes money. Before extending credit to a business, a creditor evaluates the company's ability to make the payments by reviewing its financial statements.

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Certified Public Accountants (CPAs)

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are licensed professional accountants who serve the general public. CPAs work for public accounting firms, businesses, government entities, or educational institutions.

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Certified Management Accountants (CMAs)

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are certified professionals who specialize in accounting and financial management knowledge. Generally, CMAs work for a single company.

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Financial Accounting Standards Board (FASB)

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a privately funded organization, oversees the creation and governance of accounting standards.

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Securities and Exchange Commission (SEC)

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The SEC is the U.S. governmental agency that oversees the U.S. financial markets. It also oversees those organizations that set standards (like the FASB).

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Generally Accepted Accounting Principles (GAAP)

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is the main U.S. accounting rule book and is currently created and governed by the FASB.

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GAAP

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rests on a conceptual framework that identifies the objectives, characteristics, elements, and implementation of financial statements and creates the acceptable accounting practices.

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The primary objective of financial reporting

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is to provide information useful for making investment and lending decisions. To be useful, information must be relevant and have faithful representation.

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economic entity assumption

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An economic business entity is an organization that stands apart as a separate economic unit. An entity refers to one business, separate from its owners.

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Sole Proprietorship

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A business with a single owner. One (called the proprietor). Terminates at owner's choice or death; owner is personally liable; not separate taxable entities. The owner pays tax on the proprietorship's earnings. Type of business: small business

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Partnership

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A business with two or more owners and not organized as a corporation; two or more (called partners); terminates at a partner's choice or death; partners are personally liable; partnership is not taxed. Instead partners pay tax on their share of the earnings. Type of business: Professional organizations of physicians, attorneys, and accountants

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Corporation

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A business organized under state law that is a separate legal entity; one or more (called stockholders); indefinite; stockholders are not personally liable; separate taxable entity. Corporation pays tax. Type of business: From small business to large multinational businesses

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Limited-Liability Company (LLC)

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A company in which each member is only liable for his or her own actions; one or more (called) members or partners; indefinite; members are not personally liable; LLC is not taxed. Instead members pay tax on their share of earnings. Type of business: An alternative to the partnership

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A corporation is a

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distinct entity from a legal perspective. It is an entity that exists apart from its owners, who are called the stockholders or shareholders. A corporation may buy, own, and sell property; enter into contracts; sue; and be sued.

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No Mutual Agency

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means that the stockholders of a corporation cannot commit the corporation to a contract unless that stockholder is acting in a different role; such as an officer in the business.

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Corporate Taxation

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Corporations are separate taxable entities. They pay a variety of taxes not paid by sole proprietorship or partnerships.

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The Cost Principle

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states that acquired assets and services should be recorded at their actual cost (also called historical cost). The cost principle means we record a transaction at the amount shown on the receipt---the actual amount paid.

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Going concern assumption

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This assumes that the entity will remain in operation for the foreseeable future. Under the going concern assumption, accountants assume that the business will remain in operation long enough to use existing resources for their intended purpose.

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monetary unit assumption

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requires that the items on the financial statements be measured in terms of a monetary unit.

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The SEC requires that U.S. businesses

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follow U.S. GAAP

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International Financial Reporting Standards (IFRS)

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is a set of global accounting standards that are used by more than 116 nations.

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An audit

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is an examination of a company's financial statements and records.

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Sarbanes-Oxley Act

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intended to curb financial scandals. It requires management to review internal control and take responsibility for the accuracy and completeness of their financial reports.

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transaction

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is any event that affects the financial position of the business and can be measured with faithful misrepresentation.

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Stockholder Contribution- Sheena Bright contributes $30,000 cash to Smart Touch Learning, a corporation, in exchange for stock

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The two accounts involved in this transaction are Cash (Asset) and Common Stock (Equity)

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The business has more cash

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The cash increases

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The business received a $30,000 contribution and issued stock

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Common Stock increases

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Accounting equation

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Assets = Liabilities + Equity

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Purchase of Land for Cash- The business purchases land for an office location, paying cash of $20,000

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The two accounts involved are Cash (Asset) and Land (Asset)

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The business paid cash and therefore has less cash

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Cash decreases

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The business now has land

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Land increases

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Purchase of Office Supplies on Account -

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Smart Touch Learning buys office supplies on account (credit), agreeing to pay $500 within 30 days. This transaction increases both the assets and the liabilities of the business

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Purchase of office supplies on account

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involves two accounts Office Supplies (Asset) and Accounts Payable (Liability).

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Office Supplies

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is an asset, not an expense, because the supplies are something of value that the company has.

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Accounts Payable

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Purchasing on account. It is a short-term liability that will be paid in the future.

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Office supplies

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increases. The business now has more office supplies than it had before.

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Accounts payable

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increases. The business now owes more debt than it did before.

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Earning of Service Revenue for Cash- Smart Touch Learning earns service revenue by providing training services for clients

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The effect on the accounting equation is an increase in Cash and an increase in Service Revenue

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The business receives the clients' promise to pay $3,000 within one month

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This promise is an asset, an Accounts Receivable, because the business expects to collect cash in the future

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An increase in revenue

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increases equity

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On account

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can be used to represent either Accounts Receivable or Accounts Payable.

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If the business will be receiving cash in the future

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the company will record an Accounts Receivable

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If the business will be paying cash in the future

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the company will record an Accounts Payable.

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Accounting is used

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by decision makers including individuals, businesses, investors, creditors, and taxing authorities.

Flashcards To Learn Accounting – Chapter 1

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