Term | Definition |
Accounting | Described as the language of business.
Process of recording, classifying summarizing, reporting, analyzing and interpreting economic data. |
Users | Owners
Managers
Creditors
Government Agencies
Accrediting Agencies |
Analyzing | Does and activity constitute a transaction? |
Recording | Documenting a transaction. |
Classifying | Organizing the data into useful categories. |
Summarizing | Providing an overall view of the financial picture. |
Interpreting | Deriving meaning from the data. |
Accounting Elements | Assets
Liabilities
Owners Equity |
Assets | Property rights of value.
Money
Land Building Fixtures
Equipment
Merchandise
Accounts Receivable
Securities
Copyrights
Supplies |
Liabilities | Contractual debt obligations: also called creditors interest.
Accounts Payable
Salaries Payable
Notes Payable
Bond Payable |
Owner's Equity | Amount by which assets exceed liabilities.
Also called net worth, net assets, capital, ownership interest.
Revenue
Expense
Drawing |
Accounting Equation | Assets = Liabilities + Owners Equity |
LIABILITIES | = ASSETS - OWNERS EQUITY |
OWNERS EQUITY | = ASSETS - LIABILITIES |
Double Entry System | Each transaction affects at least two accounts. Each transaction is recorded in a a manner that maintains a balance of the accounting elements. |
Account | A record used to keep track of changes in each element of the accounting equation. |
Journal | A book of original entry that serves as chronological record of daily business transactions. |
Ledger | A collection of individual records of each account. |
Debit | Left side on an account.
Increase Assets.
Decreases Owners Equity.
Decreases Liability
DR=CR |
Credit | Right side of an account.
Decreases Assets
Increases Owners Equity
Increases Liability
DR=CR |
Temporary Owners Equity | Accounts are maintained for an accounting period (a year) and then closed to the permanent owners equity account (capital or retained earnings)
Revenue
Expense
Drawing
"Change. Zero it out" |
Revenue | Represents the receipt (inflow) of an asset resulting from business operations.
Increase Equity.
Cash (Common Asset)
Sales
Service
Credit = Increase OE |
Expense | Represents the use (outflow) of an asset to generate revenue.
Decreases Equity.
Salaries
Utilities
Rent
Wage
Debit Side |
Drawing | Represents withdrawal (outflow) of an asset for personal use.
Decreases Equity
Debit Side |
Trail Balance | A list of all accounts showing the title and balance of each account. |
Income Statements | Summarizes revenue and expenses to determine the level of profit or loss. |
Balance Sheet | Summarize the assets, liabilities and owners equity at a specified date to determine the financial status of the organization. |
Example: Assets= $50 Liability= $30 | OE= $20 |
Purpose: Accounting | Provide financial information regarding the current business operations to interested parties, especially outside stakeholders. |
Financial Condition | Profitability and Solvency |
Managerial Performance | Effectiveness v. Efficiency |
General Ledger | Includes assets, liabilities, and capital accounts grouped together. |
Accounts Receivable Ledger | Collection of all persons and businesses that owe money to the practice. |
Accounts Payable Ledger | Collection of all persons and businesses the practice owes money to. |
Assets = Equities | Equities represent the sources of assets or business interests. |
Liabilities | outside interest—creditor’s claim. |
Owners’ Equity | inside interest—owners’ claim.
Affects two accounts: assets and liabilities |