Notes on Financial Accounting (ACG2021) by User:Joel Vannatta Chapter 1

Different forms of businesses
Sole Proprietorship: A business with a single owner.
 * Advantages
 * 1) The owner maintains complete control of the company
 * 2) The owner receives the full benefits of the company's profits
 * Disadvantages
 * 1) The owner has full legal liability for covering the debts of the company; the owner's personal assets can be seized by debtors
 * 2) There is limited investment capital and talent that may be required to make the company successful

Partnership: A business with 2 or more owners, but is not publically traded. Corporation: A business that is recognized as a legal entity and is owned by stockholders.
 * Advantages
 * 1) There is more investment potential than a sole proprietorship.
 * 2) The owners may have different skills that will benefit the company.
 * Disadvantages
 * 1) In order to leave the partnership, one partner must convince the other purchase his share, or find another investor to do so; it is more difficult than selling stocks.
 * 2) One owner may be held liable for another's financial decisions; there is still full liability for the company's debts.
 * 3) Control over the business is split between the different owners.
 * Advantages
 * 1) Limited liability: Stockholders are not held liable for the company's debts beyond their initial investment into the company.
 * 2) It is easy to transfer ownership of the company through buying or selling stocks. This also makes it far easier for the company to raise funds.
 * 3) It is easier to find people with skills that will benefit the company because corporations generally have more chances for advancement than sole proprietorships or partnerships.


 * Disadvantages
 * 1) Corporations are taxed more heavily than other companies.
 * 2) Publically traded corporations always have the risk of being bought out by their competitors, especially if they are smaller companies.

Internal users: individuals who use a company's accounting information from within the company. They include marketing managers, production suptervisors, and company officers.

External users: individuals who use a company's accounting information from outside of the company. They include investors, creditors, and the IRS.

Key terms:
Assets: Resources owned by a business. Example are cash, equipment, and money owed to the company.

Liabilities: A company's debts and obligations. Examples are money owed by the company, company services that have been paid for but not yet provided, and bank loans.

Common stock: The total amount of money paid by the stockholders for the shares that they purchased.

Dividends: A portion of a company's profits that are paid to the shareholders based on the number of shares that they own. The frequency of dividend payments vary from company to company.

Revenue: Money earned by the company through selling of goods or services.

Expenses: Money spent by the company to purchase goods or services

Examples of Assets:
Cash: Money that is not currently being used by the company

Accounts receivable: Money that has been earned, but not received

Notes receivable: Money owed with payment agreed to be made at a later time, usually with interest

Property, plant, and equipment: Objects such as land, buildings, and vehicles used by the company

Examples of Liabilities:
Accounts payable: Money owed, but not yet paid

Notes payable: Money owed with payment agreed to be made at a later time, usually with interest

Unearned revenue: Money that has been paid to the company, but the goods or services have not yet been provided

Salaries payable: Salaries owed to employees that have not yet been paid

Examples of Revenues:
Sales revenue: Revenue earned from the sale of goods

Service revenue: Revenue earned from providing services

Interest revenue: Revenue earned from collecting interest

Examples of Expenses:
Cost of Goods Sold: The cost purchasing or producing inventory that has been sold (i.e. the cost of ingredients for a cake sold in a bakery)

Marketing expensed: Includes the cost of advertising

Income taxes: Usually a percentage of a company's income after all other expenses

Financial Statements
There are 4 main types of financial statements used in financial accounting:

Balance Sheet: provides a statement of all of the asses, liabilities, and owner's equity for a single point of time.

Income Statement: provides a record of revenues and expenses for a period of time (month, quarter, year, etc).

Retained Earnings Statement: records the amount of revenue remaining after expense and dividends have been paid, for a period of time.

Statement of Cash Flows: records how the company obtained cast, and how that cash was used, for a period of time.

Balance Sheet
Example

ABC Corporation

Balance Sheet

December 31, 2010

 Assets 

 Liabilities and Stockholders' Equity 

The purpose of a balance sheet is to show the balance between assets and liabilities: for every dollar in assets (owned by the company), there is a corresponding dollar in either liabilities (owed by the company) or Stockholder's Equity (owned by the stockholders). This gives the equation, Assets = Liabilities + Stockholders' Equity. At any point in time, one should be able to enter these amounts and arrive at a balance.