What is accounting?
Accounting is the systematic process of recording, summarizing, and reporting financial transactions to provide useful information for decision-making. It involves measuring, processing, and communicating financial information about economic entities.
What is a primary purpose of accounting?
What is a primary purpose of accounting?
The primary purpose of accounting is to provide financial information that is useful for making economic decisions. This information helps stakeholders understand the financial health and performance of a business, ensuring transparency and accountability.
Who are the stakeholders of a business and what is their interest in the business?
Managers: Need financial information to make operational decisions.
Employees: Concerned with job security and compensation.
Creditors/Lenders: Interested in the company's ability to repay loans.
Suppliers: Want assurance of the company’s financial stability to maintain business relationships.
Customers: Interested in the company’s ability to provide goods and services.
Government/Regulators: Require information for tax and regulatory purposes.
Community: Interested in the company’s social and environmental impact.
What three business activities do all businesses engage in?
Investing Activities: Transactions involving the acquisition and disposal of long-term assets.
Financing Activities: Activities related to raising capital through debt or equity and repaying or paying returns on capital.
What are the three types of business and what makes them different from each other?
Merchandising Businesses: Sell tangible products purchased from suppliers, such as retail stores.
Manufacturing Businesses: Produce tangible products from raw materials, such as factories.
How do accountants report to stakeholders?
Balance Sheet: Presents the company’s financial position at a specific point in time, showing assets, liabilities, and equity.
Cash Flow Statement: Reports the cash inflows and outflows from operating, investing, and financing activities over a period.
Statement of Changes in Equity: Details changes in the company’s equity during a period, including net income, dividends, and issuance or repurchase of shares.
What is the accounting equation? Which financial statement makes use of the accounting equation?
Assets = Liabilities + Equity
This equation is fundamental to the balance sheet, which shows a company’s financial position by summarizing its assets, liabilities, and equity at a specific point in time.
Transaction Analysis
Increase in Equipment (Asset) (Net effect: No change in total assets)
What is GAAP? Who primarily establishes GAAP?
Liabilities
Equity
Investments by Owners
Distributions to Owners
Comprehensive Income
Revenues
Expenses
Gains
Losses
What are accounts and how do they differ from elements? Classify accounts into proper elements.
Liabilities: Accounts Payable, Notes Payable
Equity: Common Stock, Retained Earnings
Revenues: Sales Revenue, Service Revenue
Expenses: Rent Expense, Salary Expense
What are the eight basic concepts that serve as the foundation for GAAP?
Monetary Unit Assumption: Only transactions that can be expressed in money are recorded.
Time Period Assumption: The life of a business can be divided into time periods for reporting.
Cost Principle: Assets are recorded at their cost at the time of acquisition.
Full Disclosure Principle: All relevant information must be disclosed in the financial statements.
Going Concern Principle: Assumes the business will continue to operate indefinitely.
Matching Principle: Expenses are matched with the revenues they generate.
Revenue Recognition Principle: Revenue is recognized when it is earned and realizable.
Why is ethical and responsible reporting important when it comes to accountants and financial statements?
Partnership: Owned by two or more people, shared decision-making, but unlimited liability for partners.
Corporation: Separate legal entity, limited liability, easier to raise capital, but more regulation and double taxation.
Limited Liability Company (LLC): Combines the benefits of a corporation and a partnership, providing limited liability and flexible taxation.
The "best" form depends on the specific needs and goals of the business owner, including liability concerns, tax implications, and funding needs.
Who are the stakeholders of a business and what is their interest in the business?
Stakeholders of a business include:
Owners/Shareholders: Interested in profitability and return on investment.
Managers: Need financial information to make operational decisions.
Employees: Concerned with job security and compensation.
Creditors/Lenders: Interested in the company's ability to repay loans.
Suppliers: Want assurance of the company’s financial stability to maintain business relationships.
Customers: Interested in the company’s ability to provide goods and services.
Government/Regulators: Require information for tax and regulatory purposes.
Community: Interested in the company’s social and environmental impact.
What three business activities do all businesses engage in?
Operating Activities: Day-to-day activities involved in producing and selling goods or services.
Investing Activities: Transactions involving the acquisition and disposal of long-term assets.
Financing Activities: Activities related to raising capital through debt or equity and repaying or paying returns on capital.
What are the three types of business and what makes them different from each other?
Service Businesses: Provide intangible products, such as consulting or legal services.
Merchandising Businesses: Sell tangible products purchased from suppliers, such as retail stores.
Manufacturing Businesses: Produce tangible products from raw materials, such as factories.
How do accountants report to stakeholders?
Accountants report to stakeholders through financial statements, management reports, and regulatory filings. These reports include income statements, balance sheets, cash flow statements, and statements of changes in equity, providing comprehensive financial information.
What are the four basic financial statements and what is the purpose of each?
What are the four basic financial statements and what is the purpose of each?
Income Statement: Shows the company’s revenues and expenses over a period, resulting in net profit or loss.
Balance Sheet: Presents the company’s financial position at a specific point in time, showing assets, liabilities, and equity.
Cash Flow Statement: Reports the cash inflows and outflows from operating, investing, and financing activities over a period.
Statement of Changes in Equity: Details changes in the company’s equity during a period, including net income, dividends, and issuance or repurchase of shares.
What is the accounting equation? Which financial statement makes use of the accounting equation?
The accounting equation is:
Assets = Liabilities + Equity
This equation is fundamental to the balance sheet, which shows a company’s financial position by summarizing its assets, liabilities, and equity at a specific point in time.
Transaction Analysis
Example: Purchase equipment for $10,000
Cash: Decrease in Cash (Asset)
Increase in Equipment (Asset) (Net effect: No change in total assets)
What is GAAP? Who primarily establishes GAAP?
Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and procedures used in the preparation of financial statements.
GAAP is primarily established by the Financial Accounting Standards Board (FASB) in the United States.
What does the SEC stand for and what is the purpose of the SEC?
What does the SEC stand for and what is the purpose of the SEC?
The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for enforcing federal securities laws and regulating the securities industry, the nation’s stock and options exchanges. Its purpose is to protect investors, maintain fair and efficient markets, and facilitate capital formation.
What are the 10 elements of the financial statements?
What are the 10 elements of the financial statements?
According to the FASB’s conceptual framework, the elements are:
Assets
Liabilities
Equity
Investments by Owners
Distributions to Owners
Comprehensive Income
Revenues
Expenses
Gains
Losses
What are accounts and how do they differ from elements? Classify accounts into proper elements.
Accounts are individual records within the financial statements that track specific transactions related to the elements.
For example:
Assets: Cash, Accounts Receivable, Inventory
Liabilities: Accounts Payable, Notes Payable
Equity: Common Stock, Retained Earnings
Revenues: Sales Revenue, Service Revenue
Expenses: Rent Expense, Salary Expense
What are the eight basic concepts that serve as the foundation for GAAP?
Economic Entity Assumption: Separates business transactions from personal transactions.
Monetary Unit Assumption: Only transactions that can be expressed in money are recorded.
Time Period Assumption: The life of a business can be divided into time periods for reporting.
Cost Principle: Assets are recorded at their cost at the time of acquisition.
Full Disclosure Principle: All relevant information must be disclosed in the financial statements.
Going Concern Principle: Assumes the business will continue to operate indefinitely.
Matching Principle: Expenses are matched with the revenues they generate.
Revenue Recognition Principle: Revenue is recognized when it is earned and realizable.
Why is ethical and responsible reporting important when it comes to accountants and financial statements?
Ethical and responsible reporting ensures the accuracy, reliability, and integrity of financial information, which is crucial for maintaining trust with stakeholders and making informed decisions. It also prevents fraud and financial scandals that can harm the business and its reputation.
What are the four basic forms of business, and which one is best?
What are the four basic forms of business, and which one is best?
Sole Proprietorship: Owned by one person, easy to set up, owner has full control, but unlimited liability.
Partnership: Owned by two or more people, shared decision-making, but unlimited liability for partners.
Corporation: Separate legal entity, limited liability, easier to raise capital, but more regulation and double taxation.
Limited Liability Company (LLC): Combines the benefits of a corporation and a partnership, providing limited liability and flexible taxation.
The "best" form depends on the specific needs and goals of the business owner, including liability concerns, tax implications, and funding needs.
