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Accounting Equation
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“ACCOUNTING IS THE LANGUAGE OF BUSINESS” Another language
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Measures and Communicates using this language Communicates activities of a business(transactions) using accounts Accounts are details summarized in Classifications
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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
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Knowledge of classifications will help understand the transactions of a business A = ASSETS L = LIABILITIES SE = STOCKHOLDER’S EQUITY R = REVENUE E = EXPENSES
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CASH MARKETABLE SECURITIES ACCOUNTS RECEIVABLE PREPAID EXPENSES SUPPLIES EQUIPMENT BUILDING INVESTMENTS Listed by Liquidity
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Accounts Payable Wages Payable Taxes Payable Notes Payable Mortgage Payable Listed by length of time—shortest first
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Common Stock Paid in Capital in Excess of Par Retained Earnings
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Repair Revenue Sales Income from Services
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Wages Expense Rent Expense Supplies Expense Maintenance Expense Listed by the highest expense first.
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BE 1-4 pg 36 BE 1-5 pg 36 BE 1-6 pg 37
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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
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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
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Assets = Liabilities + BALANCE Stockholder’s Equity SHEET Revenue - INCOME Expenses STATEMENT
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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
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Operating – Current Accounts Investing – investing in yourself and others Financing- Debt and Equity(your own stock) E1-1 pg 38
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GAAP – Generally Accepted Accounting Principles Rules to follow SEC – Securities and Exchange Commission FASB – makes the rules IFRS – International Rules
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PRIMARY QUALITATIVE CHARACTERISTICS Relevance – timeliness, predictive, confirmatory Faithful representation – verifiability, Neutrality, Completeness SECONDARY QUALITATIVE CHARACTERISTICS Comparability Consistency Cost Effectiveness Materiality
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Underlying Assumptions Economic Entity Monetary Unit Periodicity Going Concern Problem 1-6b pg 49
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