BUSINESS TERMS,EXPLANATIONS AND CALCULATIONS
Assets - Things company owns & uses to generate revenue
Liabilities - Amount that company owes
Equity - Amount invested in company by owners; owners claim no assets
Accounting equation - Assets = liabilities + equity
Truism in business - Company never receives greater than it gives & never gives
greater than it receives
4 Rules of debits & credits - 1. Debit amount received; credit amount given up
2. Debuts on left; credits on the right
3. In each transactions; list debits first (good) & credits last (bad)
4. Total debits = total credits
Making an ethical decision - 1. Identify ethical concerns- use personal ethics to
recognize concern
2. Analyze options- consider all good & bad consequences
3. Make ethical decision- choose best option given circumstances
Fraud - Intentional manipulation- focus on prevention. Once fraud is committed,
loses are rarely retrieved.
Fraud Triangle - Opportunity (low risk of being caught), Financial Pressure
(incentive), Rationalization (making situation justifiable)
GAAP (generally accepted accounting principles) - Financial accounting is
governed by concepts & rules.
1. Relevant info affects decision of user
2. Reliable info trusted by users
3. Comparable info aids in contrasting organizations
SEC- Securities and Exchange Commission - Federal agency congress has charged
to set reporting rules for org that sell ownership shares to public
FASB (Financial Accounting Standards Board) - Independent group of full-time
members responsible for setting accounting rules
, IASB (international accounting standards board) - Group that identifies preferred
accounting practices & encourages global acceptance; issues IFRS
Measurement/cost principle - Accounting info based on actual cost.
-if cash is given for a service, cost is measured by cash paid
-if other is exchanged (car traded for truck), cost is measured as cash value of what
is given up or received
This ensure reliability, verifiability
Revenue Recognition Principle - Recognition = recording
-happens when goods or services are provided to customers
-is recorded at the amount received
Expense Recognition Principle - A company records the expenses it incurred to
generate revenue reported
Full disclosure principle - A company must report the details behind financial
statements that would impact users' decision. Often found in footnotes
Going Concern Assumption - Accounting info reflects a presumption that the
business will continue operation instead of being closed or sold.
-implies business/property is reported at cost instead of, say, liquidation value that
insists closure
Monetary Unit Assumption - We can express transactions & events in monetary
units. Money being the common denominator in business
Time Period Assumption - Presumes that the life of a company can be divided into
time periods, months/years, & useful reports can be prepared for those periods
Business entity assumption - a business is accounted for separately from other
business entities, including its owner.
Materiality constraint - Only information that influences decisions (through
importance/dollar amt) need be disclosed
Cost-benefit constraint - Only info with benefits of disclosure greater than costs of
providing need be disclosed
Assets - Things company owns & uses to generate revenue
Liabilities - Amount that company owes
Equity - Amount invested in company by owners; owners claim no assets
Accounting equation - Assets = liabilities + equity
Truism in business - Company never receives greater than it gives & never gives
greater than it receives
4 Rules of debits & credits - 1. Debit amount received; credit amount given up
2. Debuts on left; credits on the right
3. In each transactions; list debits first (good) & credits last (bad)
4. Total debits = total credits
Making an ethical decision - 1. Identify ethical concerns- use personal ethics to
recognize concern
2. Analyze options- consider all good & bad consequences
3. Make ethical decision- choose best option given circumstances
Fraud - Intentional manipulation- focus on prevention. Once fraud is committed,
loses are rarely retrieved.
Fraud Triangle - Opportunity (low risk of being caught), Financial Pressure
(incentive), Rationalization (making situation justifiable)
GAAP (generally accepted accounting principles) - Financial accounting is
governed by concepts & rules.
1. Relevant info affects decision of user
2. Reliable info trusted by users
3. Comparable info aids in contrasting organizations
SEC- Securities and Exchange Commission - Federal agency congress has charged
to set reporting rules for org that sell ownership shares to public
FASB (Financial Accounting Standards Board) - Independent group of full-time
members responsible for setting accounting rules
, IASB (international accounting standards board) - Group that identifies preferred
accounting practices & encourages global acceptance; issues IFRS
Measurement/cost principle - Accounting info based on actual cost.
-if cash is given for a service, cost is measured by cash paid
-if other is exchanged (car traded for truck), cost is measured as cash value of what
is given up or received
This ensure reliability, verifiability
Revenue Recognition Principle - Recognition = recording
-happens when goods or services are provided to customers
-is recorded at the amount received
Expense Recognition Principle - A company records the expenses it incurred to
generate revenue reported
Full disclosure principle - A company must report the details behind financial
statements that would impact users' decision. Often found in footnotes
Going Concern Assumption - Accounting info reflects a presumption that the
business will continue operation instead of being closed or sold.
-implies business/property is reported at cost instead of, say, liquidation value that
insists closure
Monetary Unit Assumption - We can express transactions & events in monetary
units. Money being the common denominator in business
Time Period Assumption - Presumes that the life of a company can be divided into
time periods, months/years, & useful reports can be prepared for those periods
Business entity assumption - a business is accounted for separately from other
business entities, including its owner.
Materiality constraint - Only information that influences decisions (through
importance/dollar amt) need be disclosed
Cost-benefit constraint - Only info with benefits of disclosure greater than costs of
providing need be disclosed
