accounting equation. “accounting is the language of business” another language

Accounting Equation

“ACCOUNTING IS THE LANGUAGE OF BUSINESS”

Another language

Measures and Communicates using this language

Communicates activities of a business(transactions) using accounts

Accounts are details summarized in Classifications

Sole Proprietorship – one owner Owner gets all income, others can take personal

assets Partnership – more than one owner Partners share in liability and income

Limited Liability Partnership Law firms, accounting firms- cannot take personal

assets Corporation

Limited Liability, double taxation

Knowledge of classifications will help understand the transactions of a business

A = ASSETSL = LIABILITIESSE = STOCKHOLDER’S EQUITYR = REVENUEE = EXPENSES

CASH MARKETABLE SECURITIES ACCOUNTS RECEIVABLE PREPAID EXPENSES SUPPLIES EQUIPMENT BUILDING INVESTMENTS

Listed by Liquidity

Accounts Payable Wages Payable Taxes Payable Notes Payable Mortgage Payable

Listed by length of time—shortest first

Common Stock Paid in Capital in Excess of Par Retained Earnings

Repair Revenue Sales Income from Services

Wages Expense Rent Expense Supplies Expense Maintenance Expense

Listed by the highest expense first.

BE 1-4 pg 36 BE 1-5 pg 36 BE 1-6 pg 37

Must know how each transaction effect cash

Listed in three types of cash activities:

OPERATING – all current activities- INVESTING – in yourself and other businesses FINANCING –Debt and Equity –external source

Exercise 1-1 pg 38, 1-2 pg 39, 1-3 pg 39

Assets=Liabilities + Stockholder’s Equity +Revenue -Expenses

A = L + SE + R = E own owes worth sell cost of

business

E 1-4 pg 39, E1-5 pg 39

Assets = Liabilities + BALANCE Stockholder’s Equity SHEET

Revenue - INCOME Expenses STATEMENT

Statement of Stockholder’s Equity

Common Retained Stock Earnings

◦ Beginning balance XXXX XXXX◦ Plus Issuance XXXX◦ Plus Net Income From Income State

◦ Less dividends XXXX◦ Ending Balance XXXX XXXX

◦ Exercise 1-6

Operating – Current Accounts Investing – investing in yourself and others Financing- Debt and Equity(your own stock)

E1-1 pg 38

GAAP – Generally Accepted Accounting Principles

Rules to follow SEC – Securities and Exchange

Commission FASB – makes the rules IFRS – International Rules

PRIMARY QUALITATIVE CHARACTERISTICS Relevance – timeliness, predictive, confirmatory Faithful representation – verifiability, Neutrality,

Completeness

SECONDARY QUALITATIVE CHARACTERISTICS Comparability Consistency Cost Effectiveness Materiality

Underlying Assumptions Economic Entity Monetary Unit Periodicity Going Concern

Problem 1-6b pg 49