Accounting Key Concepts

• These notes consolidate key concepts and information from the accounting quiz.

Accounting Fundamentals and Principles

• Luca Pacioli is credited with creating the double-entry bookkeeping method, the basis of modern accounting.
• The fundamental accounting equation is Assets (A) = Liabilities (P) + Equity (PL).
• The equation shows that assets are financed by liabilities and equity.
• Financial accounting and management accounting are primary divisions.
• Financial accounting focuses on external reporting.
• A permutative event alters the composition of equity without changing its total value.

Financial Statements

• A balance sheet demonstrates the financial position at a certain date, exhibiting assets, liabilities, and equity.
• Demonstrated Position requires a record of every debit having a corresponding credit.
• Every accounting entry affects at least two accounts.
• The income statement shows revenues, costs, and expenses over a period.
• Periodic inventory evaluation relies on methods such as FIFO (First-In, First-Out).
• FIFO assumes the first item purchased is the first sold.

Assets and Liabilities

• Assets are financed by liabilities and equity.
• Assets include all the economic resources of a company.
• Current assets are short-term assets intended for sale such as merchandise inventories
• Transactions are recorded in the Daily and General Ledger Books.
• Long-term bank loans are non-current liabilities because their financial obligations have maturity dates are over a year.
• Non-current assets include assets that will be utilized for more than one year, such as land, buildings, and equipment.
• Financial statements are necessary to incorporate a balance sheet, income statement, and CF statement
• Fixed costs do not vary with production volume.

Adjustments, Errors, and Audits

• Adjusting entries correct accounting errors or omissions.
• Corrections are made because errors do happen
• The trial balance verifies the equality of debits and credits.
• If debits and credits are equal the movement is running correctly

Intangible Assets

• Intangible assets lack physical substance but have economic value, like brands, patents, and software.
• Amortization systematically reduces the value of an intangible asset over time, similar to depreciation.

Revenue and Expenses

• Operational expenses include costs such as rent, which are part of the company’s fixed costs.
• Revenues should be recognized independently of the payment or receipt of funds
• Operating income of commercial businesses primarily consist of sales, while for service, revenue involves in providing labor which is more profitable.

Equity and Liabilities

• Retained earnings increase because of equity
• Liabilities are obligations that a company has agreed to
• Financial accounting should remain transparent to avoid creating unethical situations.
• Judgement is needed to create the books and records

Taxes

• Direct taxes are levied directly on income and earnings and are the income tax (IR).
• Indirect taxes are embedded in the price of goods and services, such as ICMS.

Financial Statement Analysis

• The statement of cash flows demonstrates liquidity for the firm
• The income statement demonstrates the generation of profit or loss.
• Good records demonstrate the analysis needed for firms

Budgeting

• The goal is planning revenue & expenses of course but its main objective is to demonstrate if a company is capable of taking on more debt and other transactions.

Business Characteristics & Legal Stuff

• All businesses need to prepare for the worst case
• If the business declines then the plan should improve the business's capital

Audit and Regulation

• Regulations should ensure the creditability of companies
• Following GAAP, and laws can make an efficient business but there are cases where this won't improve the business

Globalization

• The top most standards that exist will influence the world for decades
• Every company regardless if internal or external will depend on this

Errors (preventing them)

• Make sure to prevent misinterpretations and make information easy to access to avoid conflicts.
• A good ethical business maintains clear and transparent information.

How accounting is defined.

• It is defined as a system that records entities and their asset liabilities in an organized and structured way.