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
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
