ACCT Ch. 1-4

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