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 = ASSETS L = LIABILITIES SE = STOCKHOLDER’S EQUITY R = REVENUE E = 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  CommonRetained  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