Accounting Fundamentals

• The key output of the accounting process is a set of financial statements.

Statement of Financial Position or Balance Sheet

• Shows the financial position of a business at a specific point in time.
• Includes assets, liabilities, and owner's equity (capital).
• Assets are economic resources owned by the business expected to provide future gain.
• Liabilities include debts and obligations to pay, representing claims of creditors on assets.
• Owner's Equity includes the owner's stake in the business, claims on assets, investments, plus or minus the results of operations.
• Owner's equity comes from owner investments and business earnings.
• Balance sheet accounts (assets, liabilities, equity) are real or permanent accounts.
• Assets are classified in current assets and non-current assets based on their liquidity.

Classification of Current Assets

• Expected to be realized or sold during the entity's normal operating cycle.
• Held primarily for trading purposes.
• Realized within 12 months of the balance sheet date.
• Cash or cash equivalents that are not restricted for more than 12 months.
• Cash includes readily available coins, currencies, checks, and bank deposits.
• Cash equivalents are short-term investments easily convertible to cash with insignificant value change risk.
• Marketable securities include stocks and bonds held for a short duration, typically purchased with excess cash.
• Trade and Other Receivables include collectible amounts: Accounts, Notes, and Interest Receivable.
• Accounts Receivable is the amount collectible for sales or services rendered on credit.
• Notes Receivable is a promissory note from a client for services or goods received.
• Interest Receivable is the interest amount collectible on promissory notes from clients.
• Advances to employees includes money loaned to employees payable in cash or salary deduction arrangements.
• Accrued income means income earned that hasn't been received yet.
• Inventories represent unsold goods at the end of the period, applicable to merchandising businesses.
• Prepaid Expenses include supplies or services paid in advance, with benefits to be received in the future.
• Short-term investments represents investments intended for immediate sale.
• Contra-asset accounts are deducted from related asset accounts like the Allowance for Bad Debts and Accumulated Depreciation.

Contra Asset Accounts

• Allowance for bad debts covers losses from uncollectible accounts and is deducted from accounts receivable to reach the net realizable value.
• Accumulated depreciation represents the expired cost of property, plant, and equipment due to usage, and is deducted to get the asset's carrying/book value.

Classification of Non-current Assets

• Long-term investments represent wealth accretion through capital distribution, for capital appreciation, or for trading, with investments intended for an extended duration.
• Property, Plant, and Equipment (PPE) are tangible assets used for production, services, or administration, expected to be used for more than one period.
• Examples of PPE include land, buildings, equipment, furniture and fixtures, etc.
• Land represents real estate owned by the enterprise.
• Buildings include structures accommodating the business operations.
• Equipment includes items such typewriters, air-conditioners, computers in the office, store or factory setting.
• Specific accounts for equipment may include office, store, delivery, transportation and machinery equipment titles.
• Furniture includes tables, chairs, carpets, curtains in office and store settings.
• Fixtures include things such as light fixtures, and wall decor.
• Intangible assets are identifiable, non-monetary assets without physical form used for production, services, rental, or administration.
• Intangible assets include goodwill, patents, franchises, trademarks, brand names, secret processes, subscription lists, and non-competition agreements.

Goodwill:

• Intangible asset representing the excess purchase price of a company.

• Items include proprietary assets or intellectual property and brand recognition, and aren't easily quantifiable.

• Companies must annually review goodwill value on financial statements and record impairments.

• Goodwill has indefinite life, unlike other intangible assets like patents.

• Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities.

• If Company ABC's fair value (assets-liabilities) is $12 Billion; a company purchases ABC for $15 Billion; premium for acquisition is $3 Billion which is included on the balance sheet as goodwill.

Liabilities

• Liabilities classified as either current or non current.

Classification of Current Liabilities

• Expected to be settled during the entity's normal operating cycle
• Held primarily for trading purposes.
• Due to be settled within twelve months after the balance sheet date.
• The entity doesn't have an unconditional settlement deferral right for at least twelve months after the balance sheet date.
• Trade and Other Payables refer to payable amounts
• Accounts Payable: include debts from acquiring from asset or service.
• Notes Payable: include debts from asset purchases or service acquisition evidenced by a promissory note representing the principal amount.
• Loan Payable: liability to pay the bank from borrowing funds, payable within twelve months or shorter.
• Utilities Payable: obligation to pay utility companies for services received, such as telephone, electricity, and water.
• Unearned Revenues: obligations from advance payments before goods/services are provided, settled upon delivery/rendering such as unearned rent.
• Accrued Liabilities: amounts owed for incurred expenses not yet paid, such as salaries, utilities, taxes, and interest.

Classification of Non-Current Liabilities

• Are long-term obligations payable for over one year.
• Examples, mortgage and bonds payble.
• Mortgage Payable is business's long-term dept with security or collateral in real properties. The creditors can foreclose in case of business not making payments.
• Bonds Payable is a certificate of indebtedness saying interest rate and terms of repayment.

Owner's Equity

• Are claims to the business and the residual interest in assets after deducting all liabilities.
• Capital refers to the owner's original and additional investment, increased by net income and decreased by withdrawals or loss incurred during the year.
• Drawing represents owner withdrawals of cash/assets.
• Income Summary is a temporary account used at the end of the accounting period to close income and expense accounts, showing net income/loss before closing the capital account.
• A chart of accounts lists the used by companies in their records and helps to identify where the money is going and coming from.
• It is the foundation of financial statements.

Test your knowledge of accounting principles! This quiz covers intangible assets, goodwill, financial statements, and the statement of cash flows. It also addresses owner's equity, liabilities, and payables.