The Separate Entity Assumption states that business activities must be accounted separately from the personal activities of its owners
The Going Concern Assumption states that the business will continue operating in the foreseeable future, meeting its contractual demands
The Monetary Unit Assumption states that the business reports its financial results with the national monetary unit
Elements of the balance sheet are measured by historical cost, which is the cash-equivalent value on the date of the transaction.
Additional Paid-in Capital is the money paid by an investor above the par value of the stock price
Treasury Stock is stock bought back by the issuing company
Current assets are resources that will be used or turned into cash within one year
Inventory is always considered a current asset
Current liabilities are those that will be settled within one year
Assets are listed in order of liquidity, and liabilities are listed in order of maturity
Stockholders’ Equity can be referred to as financing provided by owners or contributed capital.
Retained Earnings can be referred to as financing provided by operations or earned capital.
Companies may not report intangibles like patents or short-term leases on the balance sheet for various reasons. Hence, it is important to read the notes to the financial statements to gain a holistic view of operations.
The Dual Effects Concept states that each transaction has at least two effects on the accounting equation, which must remain in balance
Par value is the legal face value of the share established by the company’s board of directors. It has no relation to the market price of the share.
It is impractical for companies to keep track of account balances after each transaction. Instead, they are recorded in a general journal, which is then transferred to a general ledger.
Credits are the sources of economic benefit - liabilities, owners’ equity, and revenue
Debits are the destinations of economic benefit - dividends, expenses, and assets
The DEALER acronym helps remember that debits are on the left, credits are on the right
Assets increase with debits, liabilities, and equity increase with credits
Double Entry Bookkeeping is the concept that every accounting entry has an opposite entry in a different account, so at least two t-accounts are used when recording a transaction
Current Ratio = Current Assets / Current Liabilities
The Current Ratio measures a company’s ability to pay its short-term obligations with short-term assets. The higher the ratio, the better equipped the company is. However, a ratio that is too high may suggest an inefficient use of resources.
The current ratio may be a misleading measure of liquidity if significant funds are tied up in assets that cannot be easily converted into cash.
The current ratio can be improved by paying creditors immediately before the preparation of financial statements.