What is financial Accounting?
How we measure business activities then communicate them to decision makers.
Legal Forms of Business (what are the pros and cons of each)
•Sole Proprietorship/Partnership – Individual Takes on risk of P/P
•Pro: Easy to set up
•Con: Individuals take on Risk of P/P, Can’t transfer ownership
•Corporation
•Pro: Transfer of ownership is easier, Shareholder and corp are separate entity
•Con: Double taxed, setting up corp is more involved
Standards and who sets the standards
In the U.S. –US GAAP set by the Financial Accounting Standards Board (FASB)
All other countries – IFRS (International Financial Reporting Standards) set by the
International Accounting Standards Board (IASB)
Goal is to create financial statements that are Relevant (useful) and Faithfully Represent
(complete, free from error) the economics of the company
Ways to record transactions
Cash accounting - recognize transaction when cash changes hands.
Accrual accounting - recognize transaction when transaction takes place (risk and
rewards have passed).
oRevenue Recognition Principal-Recognize revenues when provide a good or
service to customers
oMatching Principal-Report expenses in the same period as the revenues they help
to generate.
The Accounting Equation: Assets = Liabilities + Stockholder’s Equity
Asset=A resource that the business owns
Liability=An obligation to another party ( i.e. amount owed to a lender or other creditor)
Stockholders’ Equity = Stockholders’ claims to the company’s resources (the value of
Stockholders’ interest)
oStockholders’ Equity = Common Stock + Retained Earnings
oCommon Stock = Owners’ investments
oRetained Earnings = Accumulation of all prior period’s Net Income not yet paid to
owners. = Revenues – Expenses –Dividends
Transactions are consolidated in Financial Statements
oThe Income Statement: details Revenues and Expenses and resulting Net Income over a
period of time. How do you determine Net Income?
oThe Statement of Retained Earnings: Details the Net Income and Dividends paid to owners
over a period of time. Retained Earnings = ∑NI - ∑Dividends
What does the statement of retained earnings look like?
oThe Balance Sheet: Provides balances in Assets, Liabilities, and Stockholders’ Equity at a
specific point in time. Provides the financial position, ie how is the company financed.
oCash flow statement organized into 3 categories:
General Journal(list of all journal entries) vs General Ledger (All activity by account)
Trial Balance (Ending Balance in each account)
Recording Transactions
•What are the accounts affected
•What type of account is it: Asset, Liability, Owners’ Equity, Revenue, Expense?
•Should the account be increased or decreased?
•Based on the type of account and whether it should be increased or decreased should you
debit or credit the account?
