Accounting For Non-Accountants

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Accounting

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the process of recording, classifying, and summarizing economic events through the preparation of financial statements

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American Institute of Certified Public Accountants (AICPA)

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professional organization of CPAs in the US

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Corporations

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businesses that are given the right to exist by an individual state in the US. With this right to exist the corporation is allowed to sell stock i which those buying stock become owners of the corporation. Can be set as for profit or non-profit

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Financial Statements

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reports prepared by companies on the financial status of their business

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Generally Accepted Accounting Principles (GAAP)

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The rules that govern the preparation of financial statements. These rules are developed by the AICPA, etc

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Partnerships

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A business entity with two or more owners. similar to proprietorships

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Proprietorships, Sole Proprietorships

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Businesses with one single owner.

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Conservatism Principle

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Whenever two or more accounting practices appear to be equally suitable to the transaction under consideration, the accountant should always choose the one that results in the lower or lowest Asset figure on the balance sheet and the higher or highest Expense on the Income Statement

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Consistency

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Practices and Methods used for presentation on the financial statements should be the same year to year and process to process. If there is a decision to change a footnote must be presented

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Entity Concept

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The principle that requires separation of the transactions of each business or person from those of the organization or individual

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Financial Accounting Standards Board (FASB)

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sets the accounting standards to be followed for the preparation of financial statements. All rulings are considered GAAP

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Going Concern Principle

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Assumes that a company will continue in business in the future

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Historical Cost Principle

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according to this rule, most Assets and Liabilities should be represented on the Balance Sheet at the amount that was paid to acquire the asset, or for the Liabilities the amount that was contracted to be paid in the future.

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Materiality Principle

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The principle that an item should only be included on the Balance Sheet if it would change any decisions of a statement user.

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Obtainable Information

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Information reported in financial statements must be accessible in a timely manner without an unreasonable expenditure of resources. For example time, effort and money - to be included in financial statements

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Quantifiable Information

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Information is easier to understand and use if it is quantified. However, when the information cannot be quantified but is still relavant to the users of financial statements, it must be shown in the financial statements in narrative form in a footnote

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Realizable Value Principle

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Assets should normally not be shown on the balance sheet at a value greater than they can bring the company

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Relevant Information

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Information reported on financial statements in that it helps statement users to estimate the value of the firm and/or evaluate the firms management.

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Securities and Exchange Commission (SEC)

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The body created by Congress in 1934. One of its duties is to prescribe the accounting principles and practices that must be followed by the companies that come within its jurisdiction

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Recognition Principles

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the process of recording Revenue into the financial statements. Revenue is recorded at the point of transfer of the merch or service, and not at the point of receiving the cash

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Reliable Information

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There should be sufficient and objective evidence available to indicate that the information presented is valid

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Stable Monetary Unit Concept

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Even though the value of the dollar changes over time (inflation), the values that appear on the financial statements in the US are normally presented at historical cost and do not take inflation into account

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Understandable Information

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Financial information must be comparable and consistent. Aligned with the GAAP.

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Verifiable Information

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Information on the financial statements must be based on sufficient evidence that can be substantiated and provides a reliable basis for evaluating the firm and its management.

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Accounting Equation

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A = L + OE
Assets = Liabilities + Owners Equity

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Accounts Payable

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A Short Term Liability (dept) incurred from the purchase of inventory

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Assets

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Items of value that are owned by the company and are represented on the balance sheet

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3 Things that make an asset an "asset"

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1) the company controls or owns it
2) the item must have value to the company
3) the value must be measurable

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Balance Sheet

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A listing of assets, liabilities, and owner's equities

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Creditors

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The individuals or companies to which money money or other assets are owed

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Intangible Assets

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Those assets that are not of value to a business and meet all tests of being an asset, but do not have tangible qualites. like trademarks or pattens

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Inventory

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An asset held by a business for the purpose of resale. like bikes at a bike store

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Liabilities

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Debts owed by a business

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Long-Term Assets

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Those items that will be consumed or converted to cash after a period of one year. Like a building or land

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Owner's Equity

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The difference between what is owned and what is owed

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Retained Earnings

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The amount of profit earned by the business since its inception, minus any money taken out or distributed to the owner

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Short -Term Assets

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Those assets that are cash or will be converted to cash or consumed within a period of one year or less.

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How do you find an owner's equity?

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Assets - Liabilities = Equity

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Accounts Receivable

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This is a term used to describe money that is to be received in the future for current sales of goods or services

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Accrual Basis of Accounting

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This accounting method recognizes transactions when revenue is earned, expenses are incurred, an purchases take place -whether or not cash exchanges hands at that moment. Used by GAAP and most businesses use this verses cash based method.

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Bad Debt Expense

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This expense appears on the Income Statement and is increased by the amount of the receivables that will not be collected

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Cash Basis of Accounting

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This accounting method only recognizes Revenue and Expenses.

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Bottom Line

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Another term used for net income

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Cost of Goods Sold

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The cost of all inventory that was sold during the period stated in the Income Statement

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Expenditures

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The spending of Cash

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Expenses

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expenditures made to generate Revenue.

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Gross Profit

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The difference between revenue and cost of goods sold before operating expenses, interest, and taxes are subtracted

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Income Statement

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This financial statement is a listing of all Revenues and Expenses of the business earned or incurred during a particular period of time. Usually produced monthly or quarterly

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Net Income

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The difference between revenue and expenses for a designated period of time

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Revenue

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The amount earned by a business by selling goods or performing services.

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Statement of Cash Flows

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One of the four required financial statements. This statement shows where the cash came from and how it was spend during the period of reporting

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Cash Equivalents

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The cash held by the business as well as the liquid short-term investments that can quickly be converted into cash within a short period of time

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3 Categories of Business Activity represented on the cash flow statement

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Operating Activities, Investing Activities, Financing Activities

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Accounts Receivable Write-Offs

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The process of identifying an account receivable that is never going to be paid and taking it off the books.

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Assets
debit/credi

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Increase w/ Debit
Decrease w/ Credit

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Liabilities
debit/credit

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Increase w/ Credit
Decrease w/Debit

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Budget

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A detailed plan that outlines future expectations in quantitative terms. Goal is to plan for the future and to control the operations of the company

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Capital Budget

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The budget for long-term assets.

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Control

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Involves ensuring that the objectives established during the planning phase of the budget preparation are attained

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Master Budget

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A network of many seperate budgets that are interdependent. The master budget starts with Sales Budget.