Accounting Equation
&
Accounting Concepts
5 Ways to Classify Accounts
1.
2.
3.
4.
5.
Assets
Liabilities
Owners Equity
Revenue
Expense
Asset
Asset = own
Anything of value that is owned
Used to acquire additional assets or to operate a
business
Examples: cash, petty cash, supplies,
equipment, accounts receivable, prepaid
insurance
Liability
Liability = Owe
Amount the business owes to others
Examples: Accounts payable, notes
payable, other bills unpaid
Owners Equity
Amount owned amount owed
Amount remaining after the value of
liabilities is subtracted from the assets
Owners equity amount of business
actually owned by the owner
Owners Equity
1.
2.
2 Most Common Accounts
Capital summarize owners equity in
business
Drawing used when an owner
withdraws either cash or merchandise for
personal use.
Revenue
Any income earned from the sale of goods
or services and results in an increase in
owners equity.
Examples: Sales, Services
Expense
Price paid for goods or services used to
operate a business, resulting in a decrease
in owners equity
Examples: Rent, Utilities, Advertising,
Wages
Accounting Equation
Assets = Liabilities + Owners Equity
Double EntryEntry-System
Also called Duel Entry System
Accounting Equation must always be in
balance
Transactions
Changes in the accounting equation
Must always change 2 accounts to keep
the accounting equation in balance
Will always have a debit and a credit
T accounts
Used to keep balances of accounts
Left side = Debit
Right side = Credit
Account Name
Debit
Credit
Normal Balances
Side of account which increases
Assets = Left side increases
Liabilities = Right side increases
Owners Equity = Right side increases
Accounting Framework
All businesses must use the same
reporting practices to record financial
information.
GAAP Generally Accepted Accounting
Principles
SEC Securities and Exchange
Commission
FASB Financial Accounting Standards
Board
AICPA
American Institute of Certified Public
Accountants
National professional organization of CPAs
Provides CPAs with resources, information,
and leadership
Advocacy, Certification and Licensing,
Recruiting and Education, and Standards
and Performance
12 Accounting Concepts
1.
Entity Accounting records are kept for
entities and not the people who own or
run the company.
Business is considered its own person
A business can marry (merger), have
kids (subsidiary), and die (discontinue
operations).
Accounting Concepts
2.
Money-Management for an accounting
Moneyrecord to be made, it must be able to be
expressed in monetary terms.
Financial statements show only a
limited picture of the business.
Accounting Concepts
3.
Going Concern financial statements are
prepared with the expectation that a
business will remain in operation
indefinitely.
Assets cost can be (amortized)
spread over its expected life.
Liquidated how quickly or the ease
an asset can be converted to cash
Accounting Concepts
4.
Historical Cost the price paid to acquire
the asset.
5.
worth changes over time
Dual Aspect (Accounting Equation)
Assets = Liabilities + Owners Equity
Accounting Concepts
6.
Objectivity accounting entries will be
recorded on the basis of objective
evidence.
Source documents: invoices,
receipts, bank statements, calculator
tapes
All information comes from source
documents and is based on FACT
not opinion.
Source Documents
A business paper which information is
obtained.
Prove a transaction has occurred.
Examples: checks, purchase orders,
invoice, receipts, calculator tapes,
memorandums
Accounting Concepts
7.
Time Period specific interval of time for
which an entitys reports are prepared.
Fiscal year (July 1 June 30) or
12 month period
Natural year
(January 1 December 31)
Once a time period is set, it must not
change
Accounting Concepts
8.
Conservatism understating rather than
overstating revenue (income) and
expense amounts that have a degree of
uncertainty.
Rule is to recognize revenue when it is
reasonably certain and measurable and
recognize expenses as soon as reasonable
possible.
Better to err on caution than to inflate or
overstate positive results.
Accounting Concepts
9.
Realization Revenue (income) is
recognized when earned or realized.
Seller receives cash or has a claim to
cash (accounts receivable) after a
sale of goods or services.
Recorded when received, not when
awarded
Accounts Receivable
Customer has charged on account,
sold on account
Normal debit balance
Asset account because money is owed to
the company and will be collected at a
later date.
Accounts Payable
Company buys something on account and
will pay at a later date.
Normal Credit balance
Liability account because money is owed
to a vendor and must be paid later
Accounting Concepts
10.
Matching Revenues and related
expenses must be recorded in the same
accounting period.
Avoids overstatement of income
11.
Consistency Once an entity decides on
a method of reporting it must keep the
same method for all subsequent events.
Accounting Concepts
12.
Materiality accounting practice that
records events that are significant
enough to justify the usefulness of the
information.
Example: We do not record a
transaction each time we use a
sheet of paper as an Office Supply
Expense; instead we wait until we
purchase a large quantity and then
expense it.
