- Financial accounting provides information for people outside the firm.
- Management accounting generates inside information for the managers.
AICPA:- American Institute of Certified Public Accountants
Organizing a Business: A business can take 1 of several forms:
- proprietorship: A proprietorship has a single owner, called the proprietor.
- partnership: A partnership has 2 or more persons as co-owners, and each owner is a partner (LLP).
- limited-liability company (LLC):A limited-liability company is one in which the business (and not the owner) is liable for the company’s debts.
- corporation: A corporation is a business owned by the stockholders, or shareholders.
GAAP: Generally A
ccepted Accounting Principles
- Accountants followed professional guidelines.
- In US, Financial Accounting Standards Board (FASB) formulates GAAP, provide information for making investment and credit decisions.
The Entity Concept
- Organization stands apart from other economic unit.
The Reliability Principal
- also call the objectivity principal.
- accounting records are based on information supported by object evidence.
The Cost Principle
- assets and services should be recorded at their actual
- historical cost (not the market value).
The Going-Concern Concept- assumes that the entity will remain in operation long enough to use existing assets.
The Stable-Monetary-Unit Concept
- accountants assume that the dollars purchasing power is stable and ignore inflation.
THE ACCOUNTING EQUATION
- Assets = Liabilities + Owners’ equity (also called capital)
Assets:
- Assets includes cash, merchandise inventory (or just inventory), property, plant, and equipment.
- Land, buildings, and equipment are called property, plant, and equipment (abbreviated as PPE), plant assets, or fixed assets.
Liabilities include a number of payables, such as accounts payable and notes payable.
- note payable is a written promise to pay on a certain date - “short-term borrowings."
- Long-term debt is a liability that’s payable beyond 1 year
Owners’ Equity- Assets − Liabilities = Owners’ Equity
- Assets = Liabilities + Stockholders’ Equity
- Assets = Liabilities + Paid-in Capital + Retained Earnings
Paid-in Capital
- Retained Earnings = Revenues - Expenses
net income, net
earnings, or net profit.
Dividends are distributions to stockholders of assets (usually cash)
