Financial Accounting

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Accounting

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A system of analyzing, recording, and summarizing the results of a business's activities and then reporting the results to decision makers

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Financial Statements

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Accounting reports that summarize the financial results of businesses and financing activities

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Basic Accounting Equation

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A=L+SE

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Separate Entity Assumption

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The financial reports of a business are assumed to include the results of only that business's activities

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Income Statement

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Reports the amount of revenues less expenses for a period of time

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Unit of measure assumption

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Results of business activities should be reported in an appropriate monetary unit, which in the United States is the U.S. dollar

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Accounts

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Accumulate and report the effects of each different business activity

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Statement of retained earnings

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Reports the way that net income and the distribution of dividends affected the financial position of the company during the period

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Balance Sheet

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Reports the amount of assets, liabilities, and stockholders' equity of a business at a point in time

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Statement of cash flows

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Reports the operating, investing, and financing activities that caused increases and decreases in cash during the period

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Generally Accepted Accounting Principles (GAAP)

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Rules of accounting created by the Financial Accounting Standars Board for use in the United States

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International Financial Reporting Standards (IFRS)

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Rules of accounting created by the International Accounting Standard's Board for international use

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Sarbanes-Oxley Act (SOX)

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A set of laws established to strengthen corporate reporting in the United States

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Assets

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Resources presently owned by a business that generate future economic benefits

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Liabilities

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Amounts presently owed by a business

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Stockholders' equity

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The amount invested and reinvested in a company by its stockholders

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Cost principle

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Assets and liabilites should be initially recorded at their original cost to the company

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Transaction

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An event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders' equity of a business

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Chart of accounts

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A summary of all acount names (and corresponding account numbers) used to record financial results in the accounting system

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Journals

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Used to record the effects of each day's transactions; organized by date

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Ledger

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Used to summarize the effects of journal entries on each account; organized by account

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Debit

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The left side of an account, or the act of entering an amount onto the left side on an account

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Credit

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The right side of an account, or the act of entering an account into the right side of an account

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Journal entries

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Indicate the effects of each day's transactions in a debits-equal-credits format

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T-account

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A simplified version of a ledger account used for summarizing the effects of journal entries

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Classified balance sheet

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A blalance sheet that shows a subtotal for current assets and current liabilities

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Current Assets

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To be used up or converted into cash within 12 months of the balance sheet

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Current Liabilities

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Debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date

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Noncurrent

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Assets and liabilities that do not meet the definiton of current

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Conservatism

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Using the least optimistic measures when uncertainty exists about the value of an asset or liability

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Revenues

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Amounts earned by selling goods or services to customers

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Expenses

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Costs of business necessary to earn revenues

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Net Income

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The excess of revenues over expenses

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Time period assumption

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The long life of a company is divided into shorter periods, such as months, quarters, and years

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Accural basis accounting

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Reports revenues when they are earned and expenses when they are in curred, regardless of the itming of cash receipts or payments; required under GAAP

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Revenue principle

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the requirement under accural basis accounting to record revenues when they are earned, not necessarily when cash is received for them

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Unearned Revenue

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A liability representing a company's obligation to provide goods or services to customers in the future

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Matching Principle

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The requirement under accural basis accounting to record expenses in the same period as the revenues they generate, not necessarily the perid in which cash is paid for them

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Trial balance

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An internal report that lists all accounts and their balances to check on the equality of total recorded debits and total recorded credits