C1 accounting: Produces financial statements for measuring firm performance. Financial accounting: Provides information for external users: Investors, Creditors, Government, The public. Includes: Financial statements. Managerial a: Provides information for internal users: Managers. Includes: Budgets, Forecasts. Business types: proprietorship(proprietor-one, himself liable for company), partnership(partners-two or more, partners are liable), LLC(members, members are not personally liable. No need to pay tax.), corporation(stockholders usually many, stockholders are not personally liable. Need to pay tax). Accounting’s objective: to provide financial information about the reporting entity that is useful to existing investors, lenders and other creditors that in making decisions about providing resources to entity. Assumptions & Principles: Entity assumption(A business is a separate economic unit); The continuity (going concern) assumption(Entity will continue to exist indefinitely); The historical cost assumption(Assets recorded at purchase price); The stable-monetary-unit assumption(Need a unit or scale of measurement). Assets: Economic resources, Produce future benefit E.g. Cash, Inventory, Accounts receivable, Property, plant, and equipment. Liabilities: Outsider claims, Debts payable to others (creditors) e.g. Account payable, Long-term debt. Owner’s equity: Insider claims, Represents ownership by stockholders e.g. Paid-in debt, Retained earnings. Basic Accounting Equation: Assets = Liabilities + Owner’s Equity. Financial statement: Income statement: Reports the company’s revenues and expenses over an interval of time. Shows whether the company was able to generate enough revenue to cover the expenses of running the business, Statement of retained earnings: Net income (or net loss) flows from the Income Statement to the Statement of Retained Earnings, Balance sheet: Presents the financial position of the company on a particular date, Reports assets, liabilities, and stockholders’ equity, Statement of Cash flows: Measures activities involving cash receipts and cash payments over an interval of time(companies operate by selling goods and services to customers. Companies invest in long-term assets(sale or purchase assets). Companies need money for financing(stock or borrowing)).
Ch2. Accrual accounting: Record impact of transactions when they occur; Required by Generally Accepted Accounting Principles (GAAP); Record: Revenue when earned, Expenses when incurred. Cash accounting: Record only cash transactions; Cash receipts, Cash payments; Ignore important information; Result in incomplete financial statements; Only used by the smallest businesses. Revenues record principles: When good or service has been delivered to customer. expenses record principles: 1, identify all the expenses incurred during the accounting period. 2, measure the expenses, and recognize them In the same period in which any related revenues are earned. Accumulated depreciation: a kind of contra-assets. Deferrals: prepaid expenses(Recorded as an asset when purchased; Expensed when used or expired); Unearned revenues(Recorded as a liability when payment is received; Recorded as revenue when earned). Accruals: Accrued expense(Record expense before paying cash; Salaries, interest, and income taxes); accrued revenue(Record revenue before collecting cash; Earned and will collect next period). The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting. A T-account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits. Trial balance: A list of all accounts and their balances at a particular date, showing that total debits equal total credits. Categories of Adjustments: Depreciation: Allocate costs of plant assets to expense over useful lives. Deferrals: Business has paid or received cash in