20 Basic concepts of Accounting

Explain the nature and general purposes of financial statements. Financial statements are presentations

of information in financial terms about an enterprise that are believed to be fair and accurate. They describe certain attributes of the enterprise that are important for decision makers,

particularly investors (owners) and creditors.

LO2-2 Explain certain accounting principles

that are important for an understanding of financial

statements and how professional judgment by accountants may affect the application of those principles. Accountants prepare financial statements by applying a set of standards or rules referred to as generally accepted accounting principles. Consistent application of

these standards permits comparisons between companies and between years of a single company. Generally accepted accounting principles allow for significant latitude in how certain transactions should be accounted for, meaning that professional judgment is particularly important.

LO2-3 Demonstrate how certain business transactions affect the elements of the accounting

equation: Assets = Liabilities + Owners

Equity. Business transactions result in changes in the three elements of the basic accounting equation. A transaction that increases total assets must also increase total liabilities and

Owners equity. Similarly, a transaction that decreases total assets must simultaneously decrease total liabilities and owners' the equity. Some transactions increase one asset and reduce to another. Regardless of the nature of the specific transaction, the accounting equation must stay 1n balance at all times. contribution

LO2-4

Explain how the statement of financial

position, often referred to as the balance sheet

All is an expansion of the basic accounting equation. The statement of financial position, or balance sheet, presents statements in detail the elements of the básic accounting equation. 

creditors Various types of assets are isted and totaled. The enterprise's

liabilities are listed, totaled, and added to the owners' equity. 

statements.

The balancing feature of this financial statement is one of its for dominant characteristics because the statement is simply an expansion of the basic accounting equation.

LO2-5 Explain how the income statement reports

overall an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses. Revenues are created as the enterprise provides goods and services for its customers. Many expenses are required to be able to provide those goods and services. The difference between the revenues and expenses is net income or net loss.

LO2-6 Explain how the statement of cash flows

accounting presents the change in cash for a period of time in terms of the company's operating, investing, and financing activities. Cash is one of the most important assets, and the statement of cash flows shows in detail how the enterprise's cash balance changed between the beginning and end of the accounting period. Operating activities relate to

ongoing revenue and expense transactions. Investing activities

relate to the purchase and sale of various types of assets (for

example, land, buildings, and equipment). Financing activities

describe where the enterprise has received its debt and equity financing. The statement of cash flows combines information about all of these activities into a concise statement of changes in cash that reconciles the beginning and ending cash balances.

LO2-7

accounting concepts definition

Explain how the statement of financial

position (balance sheet), income statement, and

statement of cash flows relate to each other. 

The three primary financial statements are based on the same underlying

transactions. They are not alternatives to each other, but rather represent three different ways of looking at the financial activities of the reporting enterprise. Because they are based on the same transactions, they "articulate" with each other.

LO2-8 Explain common forms of business

ownership-sole proprietorship, partnership, and corporation-and demonstrate how they differ in

terms of their statements of financial position. Owners equity is one of three major elements in the basic accounting equation. Regardless of the form of organization, owners equity represents the interest of the owners in the assets of the reporting enterprise. For a soy proprietorship, owner's equity consists of the interest of a single owner. For a partnership,

owners he ownership interests of all partners are added together to determine the total owners' equity of the enterprise the For a corporation, which may have many owners, the total1 contribution to the enterprise represents its owners' equity. In

all cases, the enterprise's net income is added to owners' equity.

LO2-9 Discuss the importance of financial statements to a company and its investors 

creditors and why management may take steps to improve the appearance of the company in its financial statements. Financial statements are particularly important for investors and creditors in their attempts to evaluate future cash flows from the enterprise to them. Management is

interested in the enterprise looking as positive as possible in its financial statements and may take certain steps to improve the overall appearance of the enterprise. A fine line, however, exists between the steps management can take and the steps that are unethical, or even illegal. required

Key Terms Introduced or

Emphasized in chapter2

Types of accounting concepts

accounting equation (p. 46) Assets are equal to the sum of liabilities plus owners' equity. articulation (p. 41) The. Close relationship that. exists among the financial statements that are prepared on the basis of the same

underlying transaction information.

assets (p. 42) Economic resources owned by are entity

Rinke sheet (p. 40) The financial statement showing the tint

position of an enterprise by summarizing its assets, liabilities,

ac Owners equity at a point in time. Also called the statement of financial position.

business entity (p. 42) An economic unit that controls resources,

nears obligations. and engages in business activities. 

capital stock (p. 59) Transferable units of ownership an corporation.

corporation

(p. 58) A business organized as a separate epaenttty and chartered by a state, with ownership divided into transferable shares of capital stock.

cost principle (p. 43) The widely used principle of accounting for assets at their original cost to the current owner.

creditor.

(p. 44) A person or organization to whom debt is owed.

deflation 

(p. 44) A decline in the general price level, resulting in

an increase in the purchasing power of the monetary unit. 

disclosure (p. 60) The accounting principle of providing with

financial statements any financial! and other facet that are necessary

for proper interpretation of those statements.

expenses (p. 51) Past, present, or future. reductions in cash

required to generate revenues.

financial statement (p. 40) A declaration of information believed

to be true and communicated in monetary terms.

financing activities (p. 53) A category in the statement of cash flows that reflects the results of debt and equity financing reresections.

Accounting concepts with examples

going-concern assumption p. 43)Are assumption by accountants that a business will operate in, the foreseeable future less specific evidence suggests that this is not a reasonable assumption.

income statement (p. 0) A acuity statement that subtree from the enterprise s revenue those expenses required to generate reacts the revenues, resulting in a net income or a net loss.

inflation (p. 44) An increase in the general price level, resulting

in a decline in the purchasing power of the monetary unit investing activities (p. 3) A category in the statement of cash flows that reflects then results of purchases and sales of assets as land, buildings, and equipment

Demonstration liabilities (p. 44) Debts or obligations of an entity that resulted

from past transactions. They represent the claims of creditors on the enterprise's assets.

liquidity (p. 59) Having the financial ability to pay debts as they

become due.

negative cash flows (p. 41) A payment of cash that reduces the enterprise's cash balance. 

operating activities (p. 53) A category in the statement of cash flow's that includes the cash effects of all revenues and expenses included in the income statement.

Owners equity (p. 45) The excess of 

assets over liability

Accounting Concepts in Hindi

The amount of the owners investment in the business, plus profits from successful operations that have been retained in the business. 

partnership (p. 58) An unincorporated form of business organization in which two or more persons voluntarily associate for purposes of carrying out business activities.

positive cash flows (p. 41) Increases in cash that add to the enterprise's cash balance.

retained earnings (p. 59) The portion of stockholders' equity that

has accumulated as a result of profitable operations. 

revenues p. 1) increases in the enterprise's assets as a result of profit-oriented activities.

sole proprietorship (p. 57) An unincorporated business owned

by a single individual. 

stable-dollar assumption (p. 44) An assumption by accountant

of that the monetary unit used in the preparation of financial statements is stable over time or changes at a sufficiently slow rate that the resulting impact on financial statements does not distort the accounting motion future

Principles of financial Accounting

statement of cash flows (p. 4) An activity statement the reasonable

explains the enterprise's change in cash in terms of its operating investing. and financing activities. 

subtracts statement of financial position (p. 40)  Same as balance sheet generate stockholders (p. 58, Owners of capital stock in a corporation poise

stockholders' equity (p. 59) 

The owners' equity of an enter resulting organized as a corporation.

window dressing (p. 61) Measures taken by managing its cash such

calmly intended to make a business look as strong as possible balance sheet, income statement, and. statement of cash alows.