Accounting101

• faithful characteristic

  Truthful, meaning it is complete, free of error, and neutral (unbiased).
• Relevant characteristic


  Applicable or pertinent to your decision making, helps you predict the future and/or confirm decisions you made in the past.
• Comparable characteristic


  Can compare the same business from year to year OR between two different businesses in the same industry.
• Verifiable characteristic


  Anyone looking at the information would determine similar amounts.
• Timely characteristic


  Information is provided quickly (as old information is less useful).
• Understandable characteristic


  Group and present information so it is clear and concise.
• Separate Entity assumption


  Only the activities of the business are included in the business’s financial information.
• Unit-of-Measure assumption


  All transactions must be reported using the same monetary unit. Usually this is the monetary unit of the country the business’s head office is located in, even if the business has offices in many countries.
• Going Concern assumption


  Businesses will continue their operations well into the future.
• Historic Cost assumption


  Purchases should be recorded at the amount that was paid for them.
• Time Period (Periodicity) assumption

  Information is broken into artificial time periods such as a month, quarter or year, so that stakeholders can analyze and compare information to make decisions.
• Full Disclosure assumption


  If something will affect the decisions of the external stakeholders, it must be reported.
• what assumption is best related to faithful?


  Separate entity and full disclosure
• what assumption is best related to relevant?


  Separate entity, going concern, and time period
• what assumption is best related to comparable?

  Unit of measure and going concern
• what assumption is best related to verifiable?

  historic cost
• what assumption is best related to timely?

  time period
• what assumption is best related to understandable?

  All of them! Separate Entity, Unit-of-Measure, Going Concern, Historic Cost, Time Period, Full Disclosure
• accounting system


  an information system that collects, groups, and communicates a business’s financial position, including its financial health and profitability.
• Financial statements


  tell a business’s story, what it does and how well it does it. They provide a business’s financial performance, its current financial position, and its cash flows.
• GAAP


  generally accepted accounting principles
• assets defined


  owned (ownership has transferred), benefits the company in the future (used to generate revenue), happened in the past (transfer was a past event)
• liabilities defined


  owed to third parties (obligation), repaid in the future (give up goods, cash, or service), due to a past event (happened in the past)
• equity defined


  wealth due to owners. made up of two things: owner's capital (capital provided by the owners) and retained earnings: profit that is generated less dividends paid to the owners.
• Assets minus liabilities = equity
• revenue defined


  income earned which can only be earned by having already provided or delivered a service or a good.
• expenses defined


  cost of the resources used, consumed or incurred to generate revenue
• five financial reporting elements

  assets, liabilities, equity, revenue, expenses
• profit = revenues minus expenses
• retained earnings = profit minus dividends
• equity = owner's capital + retained earnings
• When revenues increase, equity increases because revenues increase profit and profit increases retained earnings, which then increases equity.
• When expenses increase, equity decreases because expenses reduce profit and a reduction in profit is a reduction in retained earnings, which is then a reduction in equity.
• Equity = Owner's Capital + Revenue - Expenses - Dividends
• variations of the basic accounting equation

  Assets = Liabilities + Equity, Liabilities = Assets - Equity, Assets - Liabilities - Equity = 0.
• Assets = Liabilities + Owner’s Capital + Revenue – Expenses - Dividends
• Earned by the business

  revenue
• help to generate revenue


  expense
• owned by the business


  asset
• used, consumed, or incurred


  expense