Chapter 2 Flashcards
(52 cards)
what are two sources of financing available to businesses
- equity
2. debt
equity
financing obtained from contibutions and reinvestments of profit
debt
financing that the business obtains through loans, a business is obligated to repay debt financing but is not obligated to repay its equity financing
shares certificate
when a company recives cash contibutions from its owners- evidence of ownership
shareholders equity
the amount invested and reinvested in a compant by its shareholders
promissory note
terms for repaying the loan- detailed legal document
suppliers bill or invoive
when a business buys items on credit
Double entry system
accounting systems capture both what is received and what is given
fundamental idea of business
to create value through exchange
cost principle
assets and liabilities should be initially recorded at their original cost to the company
three important features for unstanding how accounting works
- companies always document its activities - share certificates, promissoty notes, and cheques and invoices
- the companyn always recives something and gives something
- each exchange is ananlyzed to determine a dollar amount that represents the value of items given and recieved- cost
accountants then asign names to each item exchanged and then analyze their financial effects on the accountin equation
basic accounting equation
aseets= liabelities + Shareholders equity
transactions
include 2 types of events
business activities that affect the basic accountin equation are called tansactions. they are of special importance because thety are the only activities that enter the financial accounting system
- external exchange
- internal events
external exchange
exchanges involving assets, liabilites and shareholders equity that you can see between the company and someone else. for example starbucks exchanging a drink for cash
internal events
occur within company. example when making red buill the company add all the ingredients to make the product: some assets are used up , for example sugar, to create different assets
what would not count as a transaction on the accounting system
promises. for example a promise to hire an employee or to pay rent but the transaction has not yet happened. when it does it will be included.
the acocunting methof
analyze, record, summarise
analyse the transaction
determining whether a transaction exsists and if it does, analysing its impact on the account equation. two ideas are used:
- Duality of effects: every transaction has two effects on the basic accounting equation- push and pull
A=L+SE: ASSETS MUST always = Li and SE
account titles
what doing transaction analysis - a name is given to each item exchanged- to ensure they are used appropriately a chart of account is created
chart of accounts
a list that designates a name and reference number that the company will use when accounting for each iten that it exchanges. for exchample:
cash, cookware, equipement, note payable, acconuts payable…
transaction letters
used in the accounting eqaution so that we can refer back to the original transaction description if needed
for ex: a) cash
goal of transcation analysis
identify the specific accounts affected
the dollar amount of the change
direction of the change + / -
how to record and summarize
enter the effects in a spreadsheet- only practical for small companies.
for large companies with milllions of transactions they use computerized accounting systems. it follws an accounting cycle which is repeated day after day- month after month
a three-step analyze-record-summarize process is applied to
daily transactions and followed by adjustments and closing processes at the end of the accounting period
