| Chapter Two - Statement of Financial Accounting Concepts |
Breakdown of Common Terminology:
Account Receivable (A/R) – When you sell to people and accept their IOU Account Payable (A/P) – When you buy from people and give them your IOU Prepaids – When you pay for something in advance (Rent paid at the beginning of the month) Current Assets – Liquid assets which will be converted into cash within the next fiscal year Owner’s Equity – Two components: Revenue Recognition – We recognize a sale once we have done our part (cash is immaterial) Matching Principle – We attempt to recognize expenses with the revenues they generate Example – Company buys 100 TVs (no expense), company sells a TV for $200 (expense) Accrual – Revenue earned/expense incurred before cash is exchanged Deferral – Cash is exchanged before revenue is considered earned or expense incurred
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We use accrual accounting rather than cash accounting since it provides a better portrait of a company’s actual performance and allows for a better basis to predict future performance.
In addition, accrual accounting is the required method by GAAP – not cash basis accounting
Memorize the Basics
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Assets
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Liabilities
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Owner's Equity
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| Cash and Equivalents |
Accounts Payable |
Contributed Capital |
| Accounts Receivable |
Wages Payable |
Retained Earnings |
| Prepaids |
Notes Payable |
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| Property, Plant & Equipment |
Unearned Revenue |
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| Intangibles (Patents/Trademarks) |
Long-Term Debt |
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