1 - Accounting in Business - Ch. 1

ucla | MGMT 1A | 2022-09-26T20:55

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Table of Contents

• Recall
• Notes
• Lecture

Recall

1. Accounting Equation
   1. Assets = Liabilities + Equity
   2. Equity = Assets - Liabilities
2. Expanded Accounting Equation
3. Assets have “Expected Future Return”
4. Liabilities are an obligation to provide service/products
5. Equity is residual interest in assets after liabilities
6. Net Income
   1. Revenue - Expenses
7. Financial Statements
   1. Income Statement
   2. Balance Sheet
   3. Cash Flow Statement
   4. Stockholder Equity Statement

Notes

Supplemental Definitions

• debit (dr)
  • amount owed
• credit (cr)
  • amount received
• asset accounts
  • accounts receivable
    • revenue not collected but owed
  • prepaid expenses
    • expenses paid before revenue collected
• liability accounts
  • accounts payable
    • resources collected but not payed for
  • accrued expenses
    • revolving expenses due but not payed
  • notes payable
    • debt owed but not payed
  • deferred revenue
    • services provided but revenue not collected
• equity accounts
  • capital contribution
    • contribution of assets to a company/asset
    • increase with credit, decrease with debit
  • dividends (drawings)
    • distribution of assets to owners
    • inc. w/ debit, dec. w/ credit
  • income statement accounts
    • revenue
      • inflow of assets in exchange for services
      • inc. w/ credit, dec. w/ debit
    • expenses
      • outflow of assets necessary for revenue
      • inc. w/ debit, dec. w/
• net income
  • revenue - expenses
• general ledger
  • collection of all accounts and their balances
  • T-Account
    • normal debit balance (left)
      • dividends, expenses, assets
    • normal credit balance (right)
      • liabilities, equity, revenue
• users of accounts
  • investors
    • owners of a business
  • regulators
    • monitors of compliance of laws
  • customers
    • consumers of a business’ products
  • suppliers
    • providers of assets to a company
  • management
    • individuals who operate a business
• FASB
  • Financial Accounting Standards Board
  • established GAAP
    • Generally Accepted Accounting Principles
• SEC
  • Securities and Exchange Commission
  • oversees proper use of GAAP by publicly traded companies

Big Ideas

• accounting equation (ALOE)
  • Assets = Liabilities + Owner’s Equity

• double-entry book keeping

  T-Account

  • debits (left)
  • credits (right)
• assets
  • resources owned/controlled by firms which have “expected future benefit”
  • normal debit balance
    • increased by debit, decreased by credit
  • asset accounts
    • cash, accounts receivable, prepaid expenses, supplies, equipment, land
• liabilities
  • claims by creditors against assets
  • obligation to provide products/services/assets in the future
  • normal credit balance
    • increase with credit, decrease with debit
  • liability accounts
    • accounts payable, accrued expenses, notes payable, deferred revenue
  • liability accounts
    • accounts payable, accrued expenses, notes payable, deferred revenue
• owner’s equity
  • claim on a company’s assets
  • residual interest in the assets of a business, after deducting liabilities
  • equity accounts
    • capital contribution, dividends (drawings), revenue, expenses
• expanded accounting equation (DEALER)
  • dividend + expenses + assets = liabilities + equity (contributions) + revenue
• users of accounting information
  • external users
    • investors, regulators, customers, suppliers
  • internal users
    • management
• financial statements + notes
  • income statement
    • describes company’s net income/loss over a period
  • statement of stockholders equity
    • describes equity (common stock, retained earnings, preferred stock, dividends)
  • balance sheet
    • snapshot of a company’s financial position in terms of assets, liabilities, and equity
  • cash flow statement
    • identifies cash inflows (receipts) and outflows (payments) over a period of time
  • notes to financial statements
    • description of company’s operations to clarify/disclaimer statements

Accounting Principles

• Revenue Recognition Principle

  • recognize revenue when it is earned
    • goods/services are provided and
    • amount expected is known (received or not)
• Matching Principle (expense recognition)
  • match expenses to the period in which a company generates revenue
• Conservatism
  • if uncertain, recognize expenses and liabilities ASAP but revenue and assets when reasonably assured
• Measurement Principle
  • accounting information is based on actual cost
  • then subsequent adjustments to market value
  • objective - information is independent unbiased evidence

Laws and Regulations

• FASB
  • established GAAP to structure accounting practices
• SEC
  • oversees public companies using laws below
• 1933 Act (Truth and Securities Law)
  • requires investors receive financial info concerning securities prior to public sale
• 1934 Act
  • requires public companies to report periodic financial info on 10Q (quarterly), 10K (annually
  • requires notification of important events to investors on Form 8K
• Sarbanes-Oxley Act (SOX)
  • protects investors from possible fraudulent corporate activity
  • established Public Company Accounting Oversight Board (PCOAB)
  • requires management to document internal controls and effectiveness and must certify control system
  • independent auditor must also certify controls in an audit opinion

Lecture

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**SUMMARY
**Companies accrue assets, liabilities, and equity in order to operate and can be tracked by accounting statements. These statements gather information from different “accounts” to analyze a company using a debit/credit ledger.
Accounting information is standardized by the FSBA and is described by principles which maintain a structural system of tracking operations.
The SEC enforces the GAAP standardization for public companies through various laws mostly created due to malpractice and economic crashes.