Essay About Accounts Receivable And Short-Term

Accounting – Finanatial Statements
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CHAPTER 2 STUDYNOTES
CHAPTER 2 FINANCIAL STATEMENTS: AN OVERVIEW
ACCOUNTING EQUATION A = L + OE
ASSETS (what company ownsЖe.g. cash, buildings, equipment, inventory, patents)
LIABILITIES (what company owes to othersЖe.g. loans from bank, bonds issued,
amounts owned to suppliers)
OWNERS EQUITY (whats left for the owners if assets are applied to pay off
liabilities)ЖIf a corporation, composed of two parts:
Ð* Capital StockЖamounts invested in company by owners (i.e. shareholders) to
acquire their ownership interest
Ð* Retained EarningsЖnet profits (revenues minus expenses) earned by the company
over the years that have not yet been withdrawn (i.e. paid to shareholders as
dividends)
NOTE: Liabilities and Owners Equity show the sources of funds to acquire the assetsЖ
amounts invested by owners (paid in capital portion of Owners Equity), reinvestment of
profits (retained earnings portion of Owners Equity) or amounts borrowed (Liabilities)
ACCOUNTING FOR BUSINESS TRANSACTIONS
GAAP requires use of accrual method of accounting rather than cash basis accounting.
Under accrual accounting, events are recorded when they occur rather than when the
related cash changes hands. As examples (assuming ABC Co. is your company and has a
12-month operating cycle):
Ð* ABC Co. provides consulting services to a client. Project is completed and bill is
mailed on December 20, 2002. Check from client is received on January 28, 2003.
Ð* Revenue is recorded in December 2002 and asset “accounts receivable” is
recordedЖincome is recognized when earned, not when cash is later received.
Ð* Account Receivable is an asset accountЖit represents amounts owed to you
by customers/clients for work performed for them or goods sold to them. It
represents the legal right to receive cash in the near future for work already
performedЖso it is “earned”
Ð* When cash is received in January 2003, NO income is recorded; instead account
receivable is decreased and cash is increased (i.e. transfer between two asset
accounts)
Ð* ABC Co. hires XYZ law firm to perform legal services related to business
transactions on its behalf. XYZ performs the services in December 2002 and gives
ABC Co. bill for these legal services in December 2002. ABC Co. pays bill on
CHAPTER 2 STUDYNOTES
January 29, 2003. ABC records expenses when the underlying good or service is
provided to the company, not when the company pays for the good or service.
Ð* Legal expense is recorded by ABC in December 2002 and a liability “accounts
payable” is recorded.
Ð* Accounts payable is a liability account (short-term)Жit represents amounts
the company owes to its suppliers for goods purchased or to its service
providers.
Ð* When bill is paid in January 2003, expense is NOT recognized; instead, cash
(asset) and accounts payable (liability) are both decreased.
Ð* Computer is acquired on December 26, 2002. ABC Co. receives a bill from Computer
Company which it pays on January 6, 2003. Assets are recorded when legal
possession is taken, not when the cash actually changes hands.
Ð* Asset (computer) is recorded in December 2002 on ABCs books because ABC
takes legal title to it, along with a liability (accounts payable).
Ð* When bill is paid in January 2003, liability and cash accounts are both decreased.
KEY FINANCIAL STATEMENTS
BALANCE SHEET
Ð* Key statement of accounting equationЖAssets = Liabilities + Owners Equity
Ð* Picture of company as of a particular day (e.g. last day of year, month or quarter) as
to what it owns (assets), what it owes (liabilities) and whats left for owners (owners
equity)
Ð* Should be presented in classified format
Ð* Current assets are presented first & sub-totaled
Ð* Current assets are cash & other assets that will be turned into cash or used up
within a year
Ð* Typically accounts receivable, inventory, notes receivable (if short-term–1 year.
Ð* Liabilities are also classified into current & non-current (often called long-term
for liabilities) based on when they are due to be paid
Ð* Common current liabilitiesЖaccounts payable, wages payable, taxes payable,
notes