Professional Documents
Culture Documents
Basic Accounting
Concepts: The
Balance Sheet
McGraw-Hill/Irwin
11 Basic Concepts
1. Money measurement.
2. Entity.
3. Going concern.
4. Cost.
5. Dual aspect.
6. Accounting period.
7. Conservatism.
8. Realization.
9. Matching.
10.Consistency.
11.Materiality.
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Concept #1:
Money Measurement
Accounting records are recorded in
monetary terms at value at time
transaction is recorded.
Severe limitation.
Some items cant be easily valued.
E.g., presidents health, effect of strike.
Difficulties.
May or may not be separate legal entity.
E.g., family owned business.
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Cost Concept
Non-monetary Assets
E.g., land, buildings, machinery and similar.
Maintain in accounting records at book value.
Generally, book value = fair value only at time of
acquisition.
Dual Aspect
Fundamental accounting equation:
Assets = Liabilities + Owners equity
For a corporation:
Assets = Liabilities + Stockholders equity
Assets = Liabilities + Paid-in cap. + Ret. earnings
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Dual Aspect
Transactions are events that affect accounting
records.
Every transaction has a dual impact on
accounting records.
Dual impact:
Results in maintaining equality of accounting
equation.
Double-entry accounting system.
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Balance Sheet
Statement of Financial Position.
Point in time or status report.
More formally, Statement of Financial
Position.
Contains (and shows equality of amounts of):
Assets = Liabilities + Owners equity.
Assets = Liabilities + Shareholders equity.
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Balance Sheet
Resources and Claims View
Assets = Claims on assets.
Owners equity is a residual claim.
Shortcomings:
Balance Sheet is not at market or liquidating
values.
Owners equity as a claim is unclear (i.e., residual
claim).
Claim is a legalistic view (i.e., better suited to
liquidation, not to going concern).
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Balance Sheet
Sources and Uses of Funds View
Assets.
how funds were used or invested.
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Account Categories
Groups of related items.
Main categories.
Assets.
Liabilities.
Owners (shareholders) equity.
Revenues.
Expenses.
Discretion of management.
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Assets
An asset must be:
1.
2.
Acquired in a transaction.
An economic resource (i.e. provide future
benefits).
3.
4.
Reporting of Assets on
Balance Sheet
Grouped into categories.
Decreasing order of liquidity (i.e., in US).
Current assets (almost) always shown
separately.
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Current Assets
Cash.
Funds available for disbursement.
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Current Assets:
Marketable Securities
Investments that are:
Readily marketable, AND,
Expected to be converted to cash within
one year.
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Current Assets:
Accounts (and Notes) Receivable
Accounts Receivable:
Owed by customers.
Reported at amount owed less an
estimated uncollectible amount.
Current Assets:
Inventories
Items that are:
Held for sale in ordinary course of business,
In process of production for sale, or
To be consumed in production of goods or
services to be sold.
Current Assets:
Prepaid Expenses
Intangible.
Usefulness will expire in near future.
Examples:
Prepaid rent expense.
Prepaid insurance expense.
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Other Assets
Investments (not expected to be sold
within a year).
Intangible assets.
Goodwill, patents, trademarks, copyrights.
Longer life than prepaid expenses.
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Liabilities
Obligations to transfer assets or provide
services to outside parties.
Arising from past transactions or events.
Claims against entitys assets.
But not against specific assets, unless indicated.
Current Liabilities
Satisfied or extinguished within one year
or normal operating cycle, if longer.
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Current Liabilities:
Accounts (and Notes) Payable
Accounts Payable:
Suppliers (i.e. vendors) claims for goods or
services furnished, but not yet paid.
Unsecured.
Notes payable:
Short-term loans.
Formal written note.
Includes amounts owed to financial institutions.
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Current Liabilities:
Taxes Payable
Owed to government agencies for taxes.
Income taxes often shown separately
because of size.
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Current Liabilities:
Accrued Expenses
Earned by outside parties but not yet
paid (i.e., unpaid expenses).
Usually no invoice.
Includes interest payable, wages
payable.
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Current Liabilities:
Deferred Revenues
Also called unearned revenues or precollected revenues.
Advance payment received, but company
has not yet performed service or
delivered product.
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Current Liabilities:
Current Portion of Long-Term Debt
Portion due within upcoming year.
Gives complete picture of entitys shortterm obligations.
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Long-Term Liabilities
Also called:
Long-term debt.
Non-current liabilities.
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Owners Equity
Amount owners have invested in entity.
Also know as Net assets (i.e., Assets
minus Liabilities).
For a corporation:
Shareholders or stockholders equity .
Shares of stock evidence ownership
interest.
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Two Categories of
Shareholders Equity
Paid-in or contributed capital.
Retained earnings.
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Shareholders Equity:
Paid-in Capital
Amount owners have paid in to purchase
shares of stock.
Classified as:
Par value.
Additional paid-in capital.
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Shareholders Equity:
Retained Earnings
Reinvested earnings from inception to
date less dividends to date.
If negative, amount labeled as deficit.
Question: Is Retained Earnings the same
as Cash?
No, does not indicate the form of
reinvestment.
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Unincorporated Businesses
Proprietorship.
Business owned by one person.
Partnership.
Business owned jointly by two or more
persons.
Utilize a Capital account for each partner.
Capital account decreased by withdrawals
by each owner (i.e., drawings).
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1/1:
1/2:
1/3:
1/4:
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