Saturday, February 25, 2012
Introduction
Introduction
In our days it is important to have a knowledge on basic accounting to carry a successful control of our lives economic, take this control will help the person physical or legal that read this manual, to acquire knowledge about accounting basic terms and process and so serves, besides to have a better vision on the steps to follow to take your company a proper order and will not suffer from damage penalized by the law or other institutions to the breaching with some procedure or not to implement the necessary documentation for made movements.
Objectives
Share basic information about important steps in accounting
Provide the reader with information about how to run a business
Give information on why it is important to have knowledge of accounting
Index
In this manual, you may find the following information:
- Accounting basic concepts
- Management accounting and tax accounting
- Main Ledger accounts
- Bank recomciliation
- Petty cash
- Fixed assets and depreciation
- Five essential funtions of accounting
- T count and doble entry accounting
- Journal entries
- Financial statement
- Accounting book
- Commercial documents
Glossary
To expand vocabulary terms about the book we offer the next page where you can clarify any doubts:
http://www.tuition.com.hk/dictionary/a.htm
Accounting Basic concepts
Accounting Basic concepts
Since ancient times the man is forced to carry logs and controls of possessing it, by what we can define Accounting as annotations, calculations and States numerical lead both individuals and legal, in order to register, classify and control property values.
Accounting is a tool that can help us to easily reach a budgeted life without overdrafts.
In business terms accounting can help us with:
- Show numerically what happens in the company
- Indicated as the real life of a company is
This is due to that is should register all the movements that take place and this allows to control entries, exits, money subtractions, also can keep track of income and expenses, allowing to justify and explain to the owners if the company's sustainability. Is of great importance that all the accounting process generally accepted accounting principles:
• "Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.
• Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.
• Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
• Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
• Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense.
• Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.
• Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value
• Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription. The given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.
• Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.
• Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken."
Summary accounting provides information on the actual status of a company through financial statements, this facilitates to decision-making is correct, because these decisions up to the company to improve or go into decline.
Written by
Angie Rivera
Sources consulted:
According to the above information is important for us to apply these basic principles of accounting to get a better result in the development of the company, this is an instructional support for walking and maintaining transparency and accountability in the management of the institution .
Written by
Angie Rivera
Author: Gerardo Guajardo
Second Edition
http://www.infomipyme.com/
Management accounting and Tax Accounting
Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.
Tax Accounting
Balance sheet items can be accounted for differently when preparing financial statements and tax payables. For example, companies can prepare their financial statements implementing the first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces the current year's taxes payable. Sources consulted
Written by Edwin Fernández
Main ledger accounts
There are five basic categories in which all accounts are grouped:
Assets
A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. A balance sheet item representing what a firm owns. Assets are bought to increase the value of a firm or benefit the firm's operations.
The assets are divided into three groups
Current assets
• Banks counts: This is money which is preserved in any bank. You can have this money at the time deemed necessary.
• Accounts receivable: Sales by products or services offered by the company.
Fixed assets
Goods that acquired the company are not intended to sell, but to stay at this.
Some examples to current assets are:
• Buildings
• Transport equipment
• Furniture and office equipment
Other Assets
These are not classified in the Group of current assets and fixed assets, but are owned by the company and are used to carry out their programmes.
Some examples to current assets are:
• Software licenses
Liabilities
A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.
Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability.
Liabilities are divided in: 
1. Short-term liabilities: Obligations which must cancel with in less to a year.
Ex: Accounts payable
Taxes payable
2. Long-term liabilities: Obligations that the company must cover one period of more than one year.
Ex: Notes payables (Promissory note)
Capital - Stock holders
Capital: It is the difference between assets and liabilities of the company.
Stock holders: Contribution of the shareholders to begin the company.
It is calculated either as a firm's total assets minus its total liabilities, or as share capital plus retained earnings minus treasury shares:
Stock holder's Equity = Total Assets - Total Liabilities
OR
Stock holder's Equity = Share Capital + Retained Earnings - Treasury Shares
Revenues
They are all the funds it receives the organization. They can be generated by donations, sale or rental of products or services.
Expensives
Payments that perform the company by receive any product to service:
Example:
- Rent
- Salaries
- Transportation
- Public servicesThe five ledger accounts should be handled as best as possible in order to know why? is being used and taking into account the whole operation should take into account specific information, with clear detail of what happened so that it can be useful for future.
Written by
Angie Rivera
Sources consulted
Author: Gerardo Guajardo
Second Edition
Bank reconciliation
Bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement, with the goal of ascertaining the differences between the two and booking changes to the accounting records as appropriate. The information on the bank statement is the bank's record of all transactions impacting the entity's bank account during the past month.
At a minimum, you should conduct bank reconciliation shortly after the end of each month, when the bank sends the company a bank statement containing the bank's beginning cash balance, transactions during the month, and ending cash balance. It is even better to conduct bank reconciliation every day, based on the bank's month-to-date information, which should be accessible on the bank's web site. By completing a bank reconciliation every day, you can spot and correct problems immediately.
The essential process flow for a bank reconciliation is to start with the bank's ending cash balance, add to it any deposits in transit from the company to the bank, subtract any checks that have not yet cleared the bank, and either add or deduct any other items. Then, go to the company's ending cash balance and deduct from it any bank service fees, NSF checks and penalties, and add to it any interest earned. At the end of this process, the adjusted bank balance should equal the company's ending adjusted cash balance.
Bank Reconciliation Terminology
The key terms to be aware of when dealing with a bank reconciliation are:
• Deposit in transit: Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.
• Outstanding check: A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.
A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity's bank account does not contain sufficient funds. NSF is an acronym for "not sufficient funds." The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.
We should remember two basic concepts which will be used in this process:
• One is bank statement - list of all transactions which occurred during a particular period of time and impacted cash in bank account of business. Such statement is prepared by bank and is provided to the company owning account in the bank.
• The other is cash book - it is accounting book of prime entry listing all the transactions which impacted cash in bank and this book is prepared by the accountant
It is required that entries on the bank statement are exactly the same as entries in the cash book, since cash book is a reflection of bank statement. Also the final balance in the bank statement should be equal to the final balance in the cash book.
If we take cash book, in it we can see how much cash business has at the end of particular period.
However actually it might happen, that balance of cash book is not the same as the balance in the bank statement. The question how to do bank reconciliation covers process how to explain and eliminate such difference.
To prepare the bank reconciliation statement, the following rules may be useful for the students:
1. Check the cash book receipts and payments against the bank statement.
2. Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.
3. Make a list of these items.
4. Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.
5. Make a list of these items.
6. Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.
Method (Starting With the Cash Book Balance):
a) If the cash balance is a debit balance, deduct from it all ck´s, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.
b) If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.
Alternatively:
Example
Condition:
March 31, 2009. Company ABC has a balance in the cash book equal to $706.56. In the bank statement there is a balance equal to $987,45
Checking cash book and bank statement it was determined that:
$50 of cash receipt during March was not recorded in the cash book.
Amount paid by CK and recorded into the cash book, but not yet recorder into the bank statement amount to $ 145.90
Ck submitted for payment and recorded in the cash book, but not yet presented to the bank amount to $376.79
The task is to do bank reconciliation
1. First step: is to make correction to the cash book
Cash Book
Opening balance $706.56
Correction of error +$50
Closing balance $756.56
2. Second step: is to make adjustments to the bank statements
Bank Statement $ 987.45
Check received but not included into the bank statement +$ 145.90
Ck´s paid but not yet submittedto the bank -$ 376.79
Closing balance $756.56
After finalizing the process how to do bank reconciliation we have the same final balance in cash book and bank statement
Video
Written by
Natasha Méndez
Sources consulted
Author: Harold Averkamp
Date: june 14 of 2011
http://www.accountingcoach.com/online-accounting-course/13Xpg01.html
Video
Written by
Natasha Méndez
Sources consulted
Author: Harold Averkamp
Date: june 14 of 2011
http://www.accountingcoach.com/online-accounting-course/13Xpg01.html
Petty cash
Petty cash refers to small amounts of cash kept on hand in a business. (The term "petty" comes from "petite," or "small.") There are two reasons to keep petty cash:
• To make change for customers or patients.
• To pay for small purchases which require cash, such as food for the office lunch or coffee supplies, or for parking. Most retail businesses keep a cash drawer as do health care practices.
Using a petty cash log or petty cash slips will help capture these expenses so they can be used to offset income for business tax purposes.
Keep as much cash as you need in your cash drawer, but not too much, so it isn't a temptation for employees or robbers.
Sources consulted
Written by Edwin Fernández
Fixed Assets and Depreciation
Fixed Assets and Depreciation
In terms of realization of cash, fixed assets have a longer liquidity time period. For example, if the business has purchased land and buildings, it will take a longer time to be realized in cash. In contrast, the current assets of the company – including money receivable, inventory, etc. – have a shorter time frame to be realized in cash.
In order to reduce the burden on the business accounting bodies all over the world, the depreciation tool is used to determine the actual value of the asset and use it as a sinking fund to replace the asset in the future.
The whole process of depreciation calculation occurs at the end of the year when accounts are prepared. The calculation is a non-cash expense which is estimated or forecasted and is shown in both the profit and loss statement and the balance sheet.
The question of why fixed assets should be depreciated is a common one asked by many. The main reason for calculating depreciation is to calculate the recovery of cost that is incurred on fixed assets over their useful life. This ensures the owner’s capital is intact. By following the process, future provisions can be made for replacement costs when the present asset is retired from the business.
The true value of an asset can be ascertained if depreciation is taken into account. If depreciation is not calculated, the asset value shown in the accounting books would be higher than the actual or true value.
Moreover, depreciation is often added to the cost of production so as to find out the actual cost of production. This is because machinery and equipment used to produce the product often incurs some sort of wear and tear of the asset. This must be calculated and added to the cost of producing the product.
Thirdly, depreciation must be calculated to find out the correct profit of the year and to find out the actual position of the business through the balance sheet. Unless the depreciation value is calculated and considered like other expenses, the true profit or loss of the business cannot be ascertained.
Lastly, as per Company Act statutes, a company cannot declare dividends until it has calculated depreciation and charged it to the books.
Example: You may recall that Jim, the owner of Joint Ventures, was less than thrilled with the need to lease a plane from Hurt’s Plane Rental. So he decided to buy a used plane for $75,000.How should the payment be recorded?
Since the expenditure is very large and the plane should be useful for several years, it is not reasonable to treat the acquisition as an expense. Clearly, the plane is a fixed asset. Because the plane will help generate revenue over several periods, it is not a current period expense. This is the entry for the acquisition:
One asset account, Equipment, has increased while a second asset account, Cash, has decreased.
Example: Assume that Joint Venture’s plane will last twenty years. There is no reason to assume that this plane will physically deteriorate more rapidly in the beginning or end of its useful life, so the straight-line method is used. Dividing $75,000 by 20 years gives an annual depreciation amount $3,750 per year. The entry for recording the annual depreciation is:
Accumulated depreciation is known as a contra asset account. It is found on the left (asset) side of the balance sheet, but unlike other assets, it normally has a credit balance. The idea is to allow an asset’s acquisition price to be reflected at its original cost, offset by the amount of depreciation taken against it. The fixed asset section of Joint Ventures’ balance sheet as of 12/31/04 would look like this:
Because businesses usually have several fixed assets purchased at different times, with different useful lives and different depreciation methods, it is necessary to keep a separate schedule of these assets called a fixed asset schedule. An example of a portion of a fixed asset schedule is:
Depreciation methods for fixed assets
In most circumstances you can choose between the diminishing value and straight line methods of calculating depreciation.
You do not have to use the same depreciation method for all your assets, but you must use whatever method you choose for an asset for the full year. You can change methods for any asset from year to year.
You can elect not to depreciate an asset.
The depreciation rates for various assets are set by Inland Revenue, and are based on the cost and useful life of the asset being depreciated. The general depreciation rates both diminishing value and straight lines apply as follows:
1993-2005 asset rates: Use for assets acquired on or after 1 April 1993 and before 1 April 2005, and buildings acquired on or after 1 April 1993 and before 19 May 2005, and
2006 and future year’s asset rates: Use for assets other than buildings acquired on or after 1 April 2005 and buildings acquired on or after 19 May 2005.
1. Diminishing value depreciation
The amount of depreciation is worked out on the adjusted tax value of the asset. This value is the original cost less any depreciation already claimed in previous years. If you are registered for GST the original cost price should not include GST you have already claimed in your GST return.
Example
A car purchased in May 2005 has a depreciation rate of 30% diminishing value.
Note: For secondhand and imported used cars the 20% loading does not apply.
The cost (excluding GST) was $30,000.
2. Straight line depreciation
Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. If you are registered for GST, the cost excludes any
GST you have already claimed in your GST return.
Example
If the car in the example above is depreciated using the straight line method, the rate is 21%.
The GST-exclusive cost is $30,000, so the depreciation to claim each year is $6,300
$30,000 x 21% = $6,300
3. Pooling assets
• You may use a pool system to depreciate low-value assets collectively rather than individually and depreciate them as though they were a single asset.
• You must use diminishing value depreciation rates for pooled assets.
• You can pool assets that: individually cost $2,000 or less, or have been depreciated so the adjusted tax value is $2,000 or less, and are used 100% for business, or are liable for fringe benefit tax if the business use is less than 100%.
• Each pool is depreciated using the diminishing value method, at the lowest rate applying to any asset in the pool.
Video
Video
http://www.youtube.com/watch?v=EGfTmoXGyVM
Written by
Natasha Méndez
Sources consulted
Author: John Day
Date: november 24, 2011
http://www.investorwords.com/1416/depreciation.html
Written by
Natasha Méndez
Sources consulted
Author: John Day
Date: november 24, 2011
http://www.investorwords.com/1416/depreciation.html
Five essential funtions of Accounting
Recording:
It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner.
Classifying:
Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as "Ledger".
Summarizing:
This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements:
• Trial Balance
• Income statement
• Balance sheet.
Analysis and Interprets:
The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of policies for executing such plans.
Communicate:
The accounting information after being meaningfully analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statements etc.
Sources consulted
T count and double Entry Accounting
The simplest account structure is shaped like the letter T. The account title and account number appear above the T. Debits (abbreviated Dr.) always go on the left side of the T, and credits (abbreviated Cr.) always go on the right.
Accountants’ record increases in asset, expense, and owner's drawing accounts on the debit side, and they record increases in liability, revenue, and owner's capital accounts on the credit side. An account's assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner's drawing accounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances. To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account's balance. You may find the following chart helpful as a reference.
Accountants’ record increases in asset, expense, and owner's drawing accounts on the debit side, and they record increases in liability, revenue, and owner's capital accounts on the credit side. An account's assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner's drawing accounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances. To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account's balance. You may find the following chart helpful as a reference.
Occasionally, an account does not have a normal balance. For example, a company's checking account (an asset) has a credit balance if the account is overdrawn.
The way people often use the words debit and credit in everyday speech is not how accountants use these words. For example, the word credit generally has positive associations when used conversationally: in school you receive credit for completing a course, a great hockey player may be a credit to his or her team, and a hopeless romantic may at least deserve credit for trying. Someone who is familiar with these uses for credit but who is new to accounting may not immediately associate credits with decreases to asset, expense, and owner's drawing accounts. If a business owner loses $5,000 of the company's cash while gambling, the cash account, which is an asset, must be credited for $5,000. (The accountant who records this entry may also deserve credit for realizing that other job offers merit consideration.) For accounting purposes, think of debit and credit simply in terms of the left-hand and right-hand side of a T account.
The key factor of a double entry system is the presence of a ‘cash book’ account. This account contains the entries made when assets (e.g. money) are taken into or released from the accounting system. As such the total value of this account always matches the total value of the assets in the system. Using accountant’s ‘T charts’ to represent this we use the following example that uses two accounts only. The ‘cash book’ and an account in the name of ‘Smith’. (a) £300 is entered into this system to be allocated to the Smith account. The £300 is credited to the Smith account (credits are on the right, debits on the left). To match this debit of £300 is allocated to the Cash Book.
(c) If another account is added in the name of Pattel and £100 is transferred from Smith to Pattel then £100 is debited from Smith and £100 credited to Pattel.
At the end of this the Smith account balance is £150, the Pattel account is £40 and the Cash Book is £-190, the negative sum of the other accounts. On this simple basis very complex asset tracking systems can be built.
The above example is shown below as entries in this data model (the column list is kept as simple as possible for clarity).
The balance of the POSTING Amount column always being zero after every complete JOURNAL transaction (and the software must not allow an incomplete one). From the above the total in the Cash Book adds up to –190 which is the negative sum of the 150 belonging to Smith and the 40 belonging to Pattel.
ACCOUNTING PERIODS
Our accounting model so far is perfectly sound but could creak under high volumes as we can never delete anything. Most accounting requirements include the concept of an accounting period, maybe monthly, three monthly or yearly, for example. Whilst there is no need to constrain the logical requirement for an accounting period by tying it too closely to the physical model it provides a useful indication as to where to break flow of the data. The year end is often a convenient point, either the calendar year end or the financial year end. By adding a period indicator column to the POSTING table (and also to its primary key) the data can be split into discreet time chunks that can be validated independently. If in the above example the next set of entries fell into the next accounting period the balances outstanding are brought forward as summary entries in the next period first (leaving out the currency exchange example for simplicity).
Written by
Natasha Méndez
Sources consulted
Author: Jhon Wiley
Date: may 5, 2011
http://www.accounting-basics-for-students.com/T-accounts.html
Journal Entries
After a transaction occurs and source document is generated, the transaction is analyzed and entries are made in the general journal. A journal is a chronological listing of the firm´s transaction, including the amounts, accounts that are affected, and in which direction the accounts are affected.
A journal entry takes the following format
In addiction to this information, a journal entry may include a short notation that describes the transaction. There also may be a column for a reference number so that the transaction can be tracked through the accounting system.
The above format shows the journal entry for a single transaction. Additional transaction would be recorded in the same format directly below the first one, resulting in a time-ordered record. The journal format provides the benefits that of all the transaction are listed in chronological order, and all parts (debits and credits) of each transaction are listed together.
Because the journal is where the information from the source document first enters the accounting system, it is known as the book of original entry.
Compound Journal Entries
The format shown above has a single entry for the debit and a single entry for the credit, this type of entry is know as a simple journal entry. Sometimes, more than two accounts are affected by a transaction so more than two lines are required. Such a journal entry is know as a compound journal entry and takes the following format:
For example, if an expense is incurred in which part of the expense is paid with cash and the remainder placed in accounts payable, then two lines would be used for the credit – one for the cash portion and wants for the account payable portion. The total for the two credits must be equal to the debit amount.
As many accounts as are necessary can be used in this manner, and multiple accounts also can be used for the debit side if needed.
Special Journals
The general journal is the main journal for a wide range of transactions. Of these, a business usually finds itself performing some types much more frequently than others.
By grouping specific types of transaction into their own special journal, the efficiency and organization of the accounting system can be improved.
Some commonly – used special journals:
• Sales Journal
• Purchases Journal
• Cash Receipt Journal
• Cash Disbursements Journal
While a special journal may be organized differently from the general journal, it still provides the core transaction information such a date, debits and credits, and the relevant accounts.
Sources consulted
Written by Edwin Fernández
Financial Statement
Business report information in the form of financial statements issued on a periodic basis. GAAP requires the following four financial statements:
• Balance Sheet: statement of financial position at a given point in time
• Income Statement: revenues minus expenses for a given time period ending at a specified date.
• Statement of Owner´s Equity: also know as Statement of Retained Earnings or Equity Statement
• Statement of Cash Flows: Summarizes sources and uses of cash, indicates whether enougt cash is available to carry routine operations• Statement of Owner´s Equity: also know as Statement of Retained Earnings or Equity Statement
Balance Sheet The balance sheeet is based on the following fundamental accounting model:
Assets = Labilities + Equity
Assets can be classed as either assets or fixed assets, Current assets are assets that quickly ans easily can be converted into cahs, cometimes at a discount to the purchase price. Current assets include cash, accounts receivable, marketable securities, notes receivable, inventory and prepaid assets such a prepaid insurance. Fixed assets include land, buildings, and equipment. Such assets are recorded at historical cost, which often is much lower than the market value.
Liabilities represent the portion of a firm´s assets that are owed to creditors. Liabilities can be classed as short-term liabilities (current)and long-term (not-current) liabilities. Current liabilities include accounts payable, notes payable, interest payable, and wages payable and taxes payable. Long-term liabilities include mortgages payable and bonds payable. The portion of a mortgages long-term bond that is due within the next 12 months is classed as a current liability, ans usually is referred to as the current portion of long-term debt. The creditors of a business are the primary claimants, getting paids before the owners should be business cease to exist.
Equity is referred to as owner´s equity in a sole propietorship or a partnership,asd stockholders´ equity or shareholders´equity in a corporation. The balance sheet reports the resourses of the entity
Income Statement:
Present the result of the entity´s operations during a period of time, the equation to decribe income is:
Net Income= Revenue – Expenses
Revenue are the inflows from the delivery or manufactureof a product or from a servic. Expenses are inflows incurred to produce revenues.
Operations incomecan be separated from oters forms of income, can described by:
Net Income:Revenue – Expenses + Gains – Losses
Statement of Retained Earnings The Equity Statement explaing the changes in retained earnings this appear on the balance sheet are influenced by incomes and dividens. This Statement use information from the income statementand provide information to balance sheet.
Ending Equity = Beginning Equity + Investments – Withdrawals + Income
The dividends paid are substitute by withdrawals; the equity is calculated of this way:
+ Premium on Common Stock (issue minus par value)
+ Preferred Stock (recorded at par value)
+ Premium on preferred Stock (issue minus par value)
+ Retained Earnings = Stockholder´s Equity Example:
Cash Flow Statement This Statement is useful to companies to evaluating the ability to pay it bills, The cash flow provides the following information:
• Sources of cash
• Uses of cash
• Change in cash balance
The cash flow statement represents an analysis of all the transactions of the business, reporting where the firm obtained its cash and what it did with it. The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and for the income statement for the period.
Written by
Natasha Méndez
Sources consulted
Author: David Harper
Date: october 17, 2011
Written by
Natasha Méndez
Sources consulted
Author: David Harper
Date: october 17, 2011
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