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Accounting Principles and Business Transactions Cheat Sheet by

Textbook Summary of Corporate Financial Accounting 10e, Ch 1, by Warren/Reeve/Duchac.

Accounting Principles

Generally Accepted Accounting Principles (GAAP) allow investors and other users to compare one company to another.
Financial Accounting Standards Board (FASB) has the primary respon­sib­ility for developing accounting principles and publishes Statements of Financial Accounting and Interp­ret­ations of these standards.
The Securities Exchange Commission (SEC), a US government agency, has authority over accounting and financial inform­ation for companies whose shares of stock are traded and sold to the public.
SEC follows the FASB guidelines but may issue Staff of Accounting Bulletins to address accounting matters FASB did not include.
Intern­ational Accounting Standards Board issues Intern­ational Financial Reporting Standards (IFRS) which is different from the FASB.
They're working together to develop a set of worldwide accounting principles to facilitate investment and business in a global economy.

Accounting Equation

Resources owned by a business:
- cash
- land
- buildings
- equipment
Rights are divided into 2 types:
- rights of the creditors (liabi­lities)
- rights of the owners (owner's equity)
Accounting equation showing the relati­onship among all 3 variables:
Asset = Liability + Owner's Equity
Liabil­ities are shown before owner's equity because creditors have first rights to the assets.

Accounting Concepts

Shows the economic data in an accounting system directly related to the business ONLY and does not include personal activi­ties, properties and debts by the owner.
A business entity can take the form of a propri­eto­rship, partne­rship, corpor­ation or limite­dli­ability company (LLC).
- own by one individual
- easy and cheap to organize
- resources are limited to owner
- used by small businesses
- own by two or more indivi­duals
- combined skills and resources
- a separated legal tax entity
- generates 90% of business revenues
- ownership divided into shares (stock)
- obtain resources by issuing stock
- used by large businesses
Limited liability company (LLC)
- combines partne­rship & corpor­ation
- used as altern­ative to partne­rship
- tax and legal liability advantages
Amounts are recorded in accounting records at their cost or purchase price.
The cost concept includes the object­ivity and unit of measure concepts.
object­ivity concept requires the amount be based upon objective evidence where the final agreed upon amount has been establ­ished.
Revisions upward­/do­wnward on offers, appraisals and opinions can make the accounting report unstable or unreliable.
unit of measure concept requires the economic data be recorded in dollars.

Business Transa­ctions

Business transa­ctions are defined as an economic event or condition that DIRECTLY changes an entity's financial condition or even it's operat­ions.
Changes in business credit rating does not directly affect cash or any other asset, liability or owner's equity amount.
All business transa­ctions can be stated in terms of changes in the elements of the accounting equation.
Summary of Transa­ctions
- effect is either an increase (+) or decrease (-) in the equation elements
- the two sides are always equal
- stockh­older's equity is increased (+) by amounts invested by stockh­olders
- stockh­older's equity is increased (+) by revenues and decreased (-) by expenses
- stockh­older's equity is decreased (-) by dividends paid to stockh­olders
Stockh­older's Equity
- Capital Stock
- Retained Earnings
Capital stock is shares of ownership distri­buted to investors of corpor­ations.
Retained earnings is the stockh­older's equity created from business operations through revenue and expense transa­ctions.
Both transa­ctions are reported separately from each other


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