separate from personal activities (eg sole proprietorship; accounting activities are separate from personal even though they’re legally the same in a sole proprietorship). Corporations exist to limit liabilities for investors, give the company indefinite life, allow managers to act on behalf of entity without assuming personal liability when
What is the accrual principle?
· (as opposed to cash flow-based accounting which
can distort results as accounting items are only recorded when the cash is
spent/received). Recognizes that things
like buildings are valuable over a long period of time and depreciate. Estimate the value of what gets created or
used up whether it is cash or not. Cash
may happen before (pre-paying insurance), during (sales), or after (cash on an
account receivable). When should we
recognize a revenue? Lots of accounting
discussion around this question. In
general: revenue recognition is:
can be measured or estimated reasonably accurately (final price may depend on
factors like performance of completed product)
can be measured or estimated and have been incurred (need to remember to
account for expenses like warranty)
Cash or a
reasonable promise of payment has been received
What is the matching principle?
Match revenues with
expenses incurred in the same period so that you can make economic decisions.
what is a going concern
Not accounting’s job to
figure out whether the company can continue to run, we just assume it will. Can have implications for things
like accounts receivable (who would pay up if you were going bankrupt).
Consistency/comparability - what is meant by this?
Consistency is your policies are the same year over year; accounting policies don’t change willy-nilly. Comparability means that you use accepted methods of presenting information to competitors in the industry; auditors would question why you would be doing something different.
What is the Confirmative value?
that helps determine whether expectations have been met. For example, the income statement provides
information about whether the company met earnings expectations.
What is the predictive value?
Information that helps capital providers make decisions about the future. For example, the statement of cash flows can provide information about whether the company has sufficient funds to expand or if it needs to raisefunds from capital providers.
What is materiality?
amount/information matters to decision makers; it is of sufficient magnitude
that knowing or not knowing the information would (potentially) change the
decision. For example, a $1mil
estimation error may be material to a $10mil company, but not a $100bil
What happens when you record cost of goods sold?
COGS are debited; Inventory is credited
How do you calculate retained earnings?
Subtract all expenses from revenues; the balance is added to your retained earnings.