Financial Accounting Libby 7E

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External Financial Reporting

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To provide useful economic information about a business to help external parties make sound Financial decisions.

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Relevant

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Information can influence a decision; it is timely and has predictive and/or feedback value.

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Reliable

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information is accurate, unbiased, and verifiable.

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Separate-entity assumption

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States that business transactions are accounted for separately from the transactions of owners.

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Unit Of Measure Assumption

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States that accouting information should be measured and reported in the national monetary unit.

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Continuity Assumption

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States that businesses are assumed to continue to operate into the foreseeable future.

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Assets

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Are economic resources with probable future benefits owned by the entity as a result of past truncations.

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Historical Cost Principle

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Requires assets to be recorded at historical cost-cash paid plus the current dollar value of all non-cash considerations given on the date of the exchange.

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Current Assets

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Are assets that will used or turned into cash within one year. Inventory is always considered a current asset regardless of the time need to needed to produce and sell it.

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Liabilities

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are probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services.

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Current Liabilities

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Are obligations that will be settles by providing cash, goods, or services within the coming year.

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Stockholders equity

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Is the financing provided by the owners and business operations.

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Contributed Capital

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Results from owners providing cash to the business.

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Retained Earnings

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refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.

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Current Asset

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Cash, Inventories, Accounts Receivable

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Non-current Asset

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Properties (land, building, and equipment), Notes Receivable (due in five years)

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Current Liability

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Accounts Payable, Accrued Expenses Payable

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Non-current Liability

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Long-Term Debt.

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Stockholders Equity

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Retained Earnings

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Materiality

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Exception suggests that small amounts that are not likely to influence a users decision can be accounted for in the most cost-beneficial manner.

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Conservatism

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Exception suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses.

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Transaction

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Is an exchange of assets or services for assets, services, or promises to pay between a business and one or more external parties to a business or a measurable internal event such as the use of assets in iterations.

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Account

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Is a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement time.

Asset
Liability
Stockholders Equity
Revenue
Expense Accounts

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Transaction Analysis

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Is the process os studying a transaction to determine its economic effect on the business in terms of the accounting equation.

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Debit (DR)

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is on the left side of an account

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Credit (CR)

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is on the right side of an account

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Credit Balance

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Accrued Expense Payable
Long-Term Debt
Retained Earnings
Accounts Payable

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Debit Balance

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Inventories
Accounts Receivable
Properties (land,building, and equipment)
Notes Receivable (due in five years)
Cash

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Journal Entry

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Is an accouting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.

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Compound Entry

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Any Journal Entry that affects more than two accounts.

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T-Account

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is a tool for summarizing transaction effects for each account, determining balances and drawing inferences about a companies activities.

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Current Ratio

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Current Assets
-------------------- = Current Ratio
Current Liabilities

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Dual Effects

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Every transaction has at least two effects.