Sole Proprietorship
One owner
Advantage: easy to form
Seperate entity for accounting purposes (Economic Entity Concept)
Not a separate entity for legal purposes or tax purposes
Owner personally responsible for the company's debts (unlimited liability)
Partnership
Two or more owners. Profits and losses are divided among the owners.
Separate entity for accounting purposes
Not a separate entity for legal purposes or tax purposes
Owners personally responsible for the partnership's debts- unlimited liability
Corporation
Business incorporated under the laws of a particular state. They must file a charter and bylaws with the state where incorporated.
Stockholders/shareholders
Separate legal entity from its owners- separate entity for accounting purposes and tax purposes
Bo
Monetary Unit Assumption
Only transactions that can be expressed in terms of money can be included in the accounting records. Assumes monetary unit is stable. Use USD to record.
Economic Entity Assumption
Activities of the business are separate from activities of the owners.
Time Period Assumption
The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the Income Statement for a specific time period.
Going Concern Assumption
The company will not go out of business in the near future. Not liquidating.
Historical Cost Principle
Record assets at the cost paid to acquire them.
Full Disclosure Principle
Provide all information sufficiently important to influence a decision. Include footnotes with financial statements.
Generally Accepted Accounting Principles (GAAP)
Rules and assumptions under which financial statements must be prepared. Used in US (rule based accounting)
Securities and Exchange Commission (SEC)
Ultimate authority (enforcer)
Financial Accounting Standards Board (FASB)
Sets accounting standards in the US. Sets GAAP
American Institute of Certified Public Accountants ( AICPA)
Advises FASB. Professional organization for certified public accountants.
Public Company Accounting Oversight Board (PCAOB)
Sets audit standards.
International Accounting Standards Board (IASB)
Created in 2001. Develops worldwide accounting standards: IFRS (International Financial Reporting Standards)- US adoption, many countries currently using (principle based accounting)
Sarbanes-Oxley (SOX) Act
New penalties exist for management if the financial statements are inaccurate or incomplete (includes both fines and imprisonment). Requires the CEO and the CFO to certify the annual financial statements.
Requires some directors to be independent of manag
Understandability
Information should be comprehensible to those who are willing to spend time to understand it.
Relevance
Capacity of information to make a difference in a decision.
Faithful Representation
Is complete, neutral, and free from error
Comparability
Allows user to analyze two or more companies and look for similarities or differences. (compare company to other companies, companies use similar accounting methods)
Consistency
Allows comparisons within a company from one accounting period to the next. (once we select a method stick with it)
Materiality
The dollar magnitude of the transaction makes a difference in how it is recorded. Does an error in any way affect the judgement of someone relying on the information. (companies will set a threshold)
Conservatism
Don't overstate assets or revenues, don't understate liabilities or expenses. Use least optimistic estimate when two estimates of amounts are about equally likely.
Current Assets
Cash, Marketable Equity Securities (MES, short-term investments), Accounts Receivable, Inventory, Supplies, Prepaid Expense
Non-Current Assets
Long-term Investments
Plant, Property & Equipment (Fixed Assets)-
Land, Building, Equipment, Vehicle, Furniture & Fixtures, Accumulated Depreciation
Intangible Assets- Patent, Trademark, Copyright, Franchise, Goodwill
Patent
Exclusive right to manufacture or sell a product
Copyright
Right to protect artistic material
Franchise
Exclusive right to operate in geographical area
Goodwill
Amount of purchase price in excess of the market value of net assets (assets-liabilities) when a business is purchased.
Current Liabilities
Accounts Payable, Wages Payable, Unearned Revenue, Notes Payable (short-term)
Long-term Liabilities
Note Payable (long-term), Mortgage Payable, Bonds Payable
Stockholder Equity
Common Stock, Retained Earnings
Current Ratio
Current Assets/Current Liabilities
Working Capital
Current Assets-Current Liabilities
Debits
Increases expenses, assets, and dividends
Credits
Increases liabilities, equity, and revenue
Revenue Recognition Principle
Tells us to record revenues when the earnings process is complete regardless of when cash is received. (deliver goods/perform service)
Matching Concept
Match revenues earned with expenses incurred (used up) in the same accounting period when the expense helped to generate revenue regardless of when cash is paid.
Deferred Revenue
Unearned revenue
Deferred Expense
Prepaid expense
Accrued Assets (Revenue)
Creates a receivable
Accrued Liability (Expense)
Creates a payable
Sole Proprietorship
One owner
Advantage: easy to form
Seperate entity for accounting purposes (Economic Entity Concept)
Not a separate entity for legal purposes or tax purposes
Owner personally responsible for the company's debts (unlimited liability)
Partnership
Two or more owners. Profits and losses are divided among the owners.
Separate entity for accounting purposes
Not a separate entity for legal purposes or tax purposes
Owners personally responsible for the partnership's debts- unlimited liability
Corporation
Business incorporated under the laws of a particular state. They must file a charter and bylaws with the state where incorporated.
Stockholders/shareholders
Separate legal entity from its owners- separate entity for accounting purposes and tax purposes
Bo
Monetary Unit Assumption
Only transactions that can be expressed in terms of money can be included in the accounting records. Assumes monetary unit is stable. Use USD to record.
Economic Entity Assumption
Activities of the business are separate from activities of the owners.
Time Period Assumption
The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the Income Statement for a specific time period.
Going Concern Assumption
The company will not go out of business in the near future. Not liquidating.
Historical Cost Principle
Record assets at the cost paid to acquire them.
Full Disclosure Principle
Provide all information sufficiently important to influence a decision. Include footnotes with financial statements.
Generally Accepted Accounting Principles (GAAP)
Rules and assumptions under which financial statements must be prepared. Used in US (rule based accounting)
Securities and Exchange Commission (SEC)
Ultimate authority (enforcer)
Financial Accounting Standards Board (FASB)
Sets accounting standards in the US. Sets GAAP
American Institute of Certified Public Accountants ( AICPA)
Advises FASB. Professional organization for certified public accountants.
Public Company Accounting Oversight Board (PCAOB)
Sets audit standards.
International Accounting Standards Board (IASB)
Created in 2001. Develops worldwide accounting standards: IFRS (International Financial Reporting Standards)- US adoption, many countries currently using (principle based accounting)
Sarbanes-Oxley (SOX) Act
New penalties exist for management if the financial statements are inaccurate or incomplete (includes both fines and imprisonment). Requires the CEO and the CFO to certify the annual financial statements.
Requires some directors to be independent of manag
Understandability
Information should be comprehensible to those who are willing to spend time to understand it.
Relevance
Capacity of information to make a difference in a decision.
Faithful Representation
Is complete, neutral, and free from error
Comparability
Allows user to analyze two or more companies and look for similarities or differences. (compare company to other companies, companies use similar accounting methods)
Consistency
Allows comparisons within a company from one accounting period to the next. (once we select a method stick with it)
Materiality
The dollar magnitude of the transaction makes a difference in how it is recorded. Does an error in any way affect the judgement of someone relying on the information. (companies will set a threshold)
Conservatism
Don't overstate assets or revenues, don't understate liabilities or expenses. Use least optimistic estimate when two estimates of amounts are about equally likely.
Current Assets
Cash, Marketable Equity Securities (MES, short-term investments), Accounts Receivable, Inventory, Supplies, Prepaid Expense
Non-Current Assets
Long-term Investments
Plant, Property & Equipment (Fixed Assets)-
Land, Building, Equipment, Vehicle, Furniture & Fixtures, Accumulated Depreciation
Intangible Assets- Patent, Trademark, Copyright, Franchise, Goodwill
Patent
Exclusive right to manufacture or sell a product
Copyright
Right to protect artistic material
Franchise
Exclusive right to operate in geographical area
Goodwill
Amount of purchase price in excess of the market value of net assets (assets-liabilities) when a business is purchased.
Current Liabilities
Accounts Payable, Wages Payable, Unearned Revenue, Notes Payable (short-term)
Long-term Liabilities
Note Payable (long-term), Mortgage Payable, Bonds Payable
Stockholder Equity
Common Stock, Retained Earnings
Current Ratio
Current Assets/Current Liabilities
Working Capital
Current Assets-Current Liabilities
Debits
Increases expenses, assets, and dividends
Credits
Increases liabilities, equity, and revenue
Revenue Recognition Principle
Tells us to record revenues when the earnings process is complete regardless of when cash is received. (deliver goods/perform service)
Matching Concept
Match revenues earned with expenses incurred (used up) in the same accounting period when the expense helped to generate revenue regardless of when cash is paid.
Deferred Revenue
Unearned revenue
Deferred Expense
Prepaid expense
Accrued Assets (Revenue)
Creates a receivable
Accrued Liability (Expense)
Creates a payable