ACC 310 - Chapter 3

Interim statements (or quarterly statements)

Financial statements for shorter time periods

Sales discount (cash discount)

If a customer pays within the discount period, the company receives the discounted amount, which is less than the original selling price. The difference is called "sales discount" Sales discount is also a reduction in the company's sales revenue

Temporary accounts (periodic accounts)

Used to determine the changes in retained earnings that occur DURING A PERIOD, and their account balances are NOT carried forward. The accounts are revenue, expense, gain, loss, and dividend. At the end of each period, temporary accounts are closed, and their amounts are included in retained earnings.

Contra account

Used to reduce the value of a related account. The rules for increasing or decreasing a contract account are exactly the OPPOSITE for the re related account it is intended to reduce. Ex. Accumulated Depreciation is a contra account used to accumulate the depreciation recorded for Property, Plant, and Equipment

Net sales

A company's sales minus its sales returns and allowance and sales discounts

What errors does the trial balance NOT identify

-Entire transaction may not have been recorded, or may have been recorded twice -Entire transaction may not have been posted to the accounts, or may have been posted twice -Equal dollar amounts of debits and credits, but the wrong amounts may have been recorded for a transaction -A journal entry may have recorded a transaction using a wrong account -A journal entry may have been posted to a wrong account ALWAYS DOUBLE CHECK all of the journal entires, postings, and account totals to make sure they are correct

Advantages to using a general journal

-Helps prevent errors. -All the journal entry information (including the explanation) is recorded in chronological order in one place

General journal consists of

-data column -column to list the titles of the accounts affect by each entry -column to list the account numbers -debt column and credit column to list the amounts recorded as a debit or credit to each account

Accounting cycle

A company completes a series of steps during each period to record, store, organize, summarize, and report the accounting information contained in its transactions, events, and arrangements.

Worksheet

A company often prepares a "worksheet" to minimize errors, simplify recording of adjusting and closing entires in the general journal, and make it easier to prepare the financial statements. **NOT a substitute for ANY accounting records or financial statements Completing a worksheet pg. 3-29

Accural accounting

A company records revenues in the period in which assets have been generated (or liabilities satisfied) by selling and delivering goods or services to customers, even though the cash flows from customers may occur in a different period. It may not be up to date at the end of the accounting period so companies must record adjusting entries

Cash-basis accounting

A company records revenues when it collects cash from sales and records expenses when it pays cash for its operations *NOT allowed under GAAP or IFRS

Basic Components of an Accounting System

Accounting equation (framework of the system) Source documents used to generate accounting information Records used to organize and store accounting information Outputs - the financial statements

Accounts

Accounts are used to store the recorded monetary information form its transactions, events, and arrangements. Ex. Cash, Accounts Receivable, Buildings, Accounts Payable, Wages Payable, Sales Revenue, Cost of Goods Sold, Salaries Expense, Common Stock, RE, and Dividends.

Prepaid expense

A good or service purchased but not fully used up by the end of the period Recorded as an Asset

Subsidiary ledger

A rout of accounts, all of which relate to one specific company activity A company creases subsidiary ledgers that supplement the general ledger to: -reduce the size of the general ledger -minimize errors -dividing the accounting tasks -keep up-to-date records of its credit customers and suppliers

Adjusting entires are classified into three broad categories:

Deferrals Accruals Estimates

Trial balance

A worksheet that lists all the general ledger accounts and their balances It is used to verify that the total of the debit balances is equal to the total of the credit balances If a trial balance doesn't balance there IS an ERROR If an error recalculate the debits and credits and check the numbers. If it is still an error, compute the difference between the debit and credit column totals and divide by 9. If it is evenly divisible by 9, a transposition or a slide may have occurred.

Posting

After a company records its transactions, events, and arraignments in a general journal, it updates each account in the general ledge by "posting" (transferring) the date and debit and credit amounts from the journal entries to the accounts in the general ledger

Post-closing trial balance

After companies prepare and post the closing entires, they prepare a "post-closing trial balance" to verify that the debit balances total is equal to the credit balances total in the permanent accounts.

Double -entry accounting system

All accounts on the left side of the accounting equation (assets) are increased by debits (entries on the left side of the T-account) and decreased by credits (entries on the right side of the T-account). All accounts on the right sid elf the equation (liabilities and shareholders' equity) are increased by credits (entries on the right side of the T-account) and decreased by debits (entries on the left side of the T-account).

General journal

All companies record transactions, events, and arrangements in the "general journal"

Results of the closing entires:

All of the company's revenue, expense, gain, loss, and dividend accounts are closed (having zero balances) and are ready to accumulate the revenue, expense, gain, loss, and dividend information for the next accounting period The ending balance in the RE account is increased by an amount because of the excess of net income over dividends Only the permanent balance sheet accounts have nonzero balances

Adjusting entries

All revenues and expenses are recorded in the appropriate period and all assets and liabilities have correct ending balances. Adjusting entries ALWAYS affect both a permanent (balance sheet) and a temporary (income statement).

Straight-line depreciation

Allocates a proportionate amount as an expense to each period Annual Depreciation expense = (Cost - Estimated Residual Value)/Estimated service life

Arrangement

An agreement or a promise by the company with another party or entity. Ex. A company may have arrangements such as warranties to repair defective products sold to customer sir promises to pay pension and other retirement benefits to employees.

Accrued expense

An expense that has been incurred, but has not yet been paid. Ex. accrued salaries and accrued interest and accrued income tax

Event

An occurrence that affect the company. Either internal (using equipment in operations or external (a gain in the fair value of an investment security)

Accruals

Arise when cash flows occur after recognition not an item in income Ex. Wages payable and accounts receivable

Deferrals

Arise when cash flows occur prior to recognition of an item in income Ex. prepaid expenses and deferred revenue

Deferred revenue (unearned revenue)

Arises when customers pay in advance for the future delivery of goods or performance of services.

Permanent accounts

Asset, liability, and shareholders' equity accounts whose balances at the END of the period are carried forward to the next period

Non-current assets

Assets that are expected to be consumed over more than one year or one operating cycle. Ex. Tangible (Property, plant, and equipment), intangible (licenses, patents, copyrights, goodwill), financial (investments), and natural resources (timer, oil, gas reserves)

Current assets

Cash and those assets that are expected to be converted into cash or consumed within one year or the operating cycle, whichever is longer Ex. Cash, receivables, investments in marketable securities, inventories, prepaid items

Assets

Company's economic resources

Annual report

Contains the financial statements for the company's fiscal year, along with the accompanying supporting schedules and notes, management's discussion and analysis, and other information disclosed to the various external users.

Depreciation

Cost allocation process

Cost of goods available for sale

Cost of goods available for sale = Beginning Inventory + Net purchases *Net purchases = Purchases - returns, allowances, and discounts

Cost of goods sold

Cost of goods sold = Cost of goods available for sale - Ending Inventory

DEAD COLR

DEBITS Expenses Assets Dividends (Loss) CREDITS Owner's equity (Shareholders' equity) - Common Stock - RE - AOCI Liabilities Revenue (Gains)

Special journal

Designed to record a particular type of transaction, such as sales journal, purchases journal, cash receipts journal, and others.

Dividends

Distributions of assets to owners, which reduce retained earnings

Special journal

Enables a company to record specific types of frequent, similar transactions Special journals are used to: -divide the accounting tasks -reduce the time needed t complete the various accounting activities -create a chronological listing of similar transactions

Equations

Ending Balance in Retained Earnings = Beginning Balance in Retained Earnings + Net Income - Dividends Net Income = Revenues - Expenses + Gains - Losses

General ledger

Entire set of accounts for a company After posting the general ledge includes the journal entry information within ALL of the accounts The general journal contains the journal entry information in chronological order

Reversing entry

Exact reverse (accounts and amounts) of an adjusting entry. *Optional Purpose: simplify the recording of subsequent transactions related to the adjusting entry.

Source documents

Include the monetary amount, parties involved, terms and conditions, and other relevant information The inputs to this accounting system are source documents that con taint information about transactions, events, and arrangements that affect a company's economic resources, obligations, and equity. ex. Sales invoices, checks, freight bills, and contracts

Interest

Interest = Principal x Rate x Time

Transaction

Involves the transfer or exchange of resources between the company and another party, such as a purchase of inventory from a supplier or the sale of a product to a customer

Closing entires

Journal entries that a company makes at the end of the period to: - reduce the balance in each temporary account to zero -update the Retained Earnings account

Journal entry

Just below each entry is a brief written explanation

Adjusted trial balance

Listing all the accounts and account balances AFTER adjustments (but BEFORE closing) in either a debit or a credit column

Revenues

Measure the inflows of assets and the settlements of obligations from selling goods and providing services to customers

Expenses

Measure the outflows of assets that a company consumes and the obligations a company incurs in the process of operating the business. Revenues reprot eh resources generated by a company, and expenses report the resources consumed

Net income

Net Income = Revenues - Expenses + Gains - Losses

Chart of accounts

Numbering system that organizes the accounts efficiently and minimizes errors in the recording process.

Liabilities

Obligations owed to creditors

Non-current liabilities

Obligations that will become use after one year or one operating cycle

Framework for Common Adjusting Entries:

Pg. 3 -20

Accounting system

Primary purpose of a company's accounting system is to record, organize, summarize, and report useful information to external financial statement users and stakeholders, as well as to the company's managers for making operating, investing, and financing decisions.

Statement of shareholders' equity

Provides information about the common shareholders' equity claims and how those claims changed during the period.

Accounting equation

Provides the framework for the accounting system and is the structure in which companies record transactions, events, and arrangements. Assets = Liabilities + Shareholders' Equity A = L + OE Assets = Liabilities + (Contributed Capital + Retained Earnings + AOCI (accumulated other comprehensive income) Assets = Liabilities + Contributed Capital + (Beginning Retained Earnings + Net Income - Dividends) + Beginning AOCI + Other Comprehensive Income (OCI) Assets = Liabilities + BRE + (Revenues - Expenses + Gains - Losses) - (Dividends + Beginning AOCI + OCI) Assets = Liabilities + [Contributed Capital + BRE + Revenues - Expenses + Gains - Losses - Dividends + Beginning AOCI + OCI]

Estimates

Recognized amounts on the balance sheet and income statement that are not known with certainty and must be estimated Ex. depreciation expense and bad debt expense

Periodic inventory system

Record inventory purchases in a Purchases account, so that the Inventory account balance does not change during the period.

Accruals

Represent transactions, events, or arrangements in which the cash flows occur AFTER the related expenses are incurred or revenues are earned Accrued expenses (wages payable or income taxes payable) obligates to make future payments for expenses or benefits the company consumed in the current period. Accrued revenues (accounts receivable) revenues that have been earned by the company, but not yet collected from customers.

Gains or losses

Result from transactions in which the company sells assets or settles liabilities for more or less than their book values.

Accrued revenues

Revenues that a company has earned but has not yet received Ex. Accrued interest income

4 most common types of special journals

Sales Journal: Record all (and only) sales of merchandise on credit Purchases Journal: Record all (and only) purchases of merchandise on credit Cash Receipts Journal Cash Payments Journal

Shareholders' equity

Shareholders' residual interest in the company's assets after the liabilities have been satisfied.

Purchase discount

Some suppliers offer a discount on credit sales for prompt payment within a discount period known as "purchase discount: Also a reduction in the cost of inventory

Major steps of the Accounting cycle:

Step 1: Record the transactions, events, and arrangements in a journal Step 2: Post the journal entries to the accounts in the ledger Step 3: Prepare and post adjusting entries Step 4: Prepare the financial statements Step 5: Prepare and post closing entires for the temporary accounts: revenues, expenses, gains, losses, and divided accounts

Preparation of financial statements

Step 1: The balance of each account in the ledger is recomputed if necessary to reflect the effects of the adjusting entries Step 2: An adjusted trial balance is prepared Step 3: The income statement and balance sheet are prepared in sequential order directly from the information in the adjusted trial balance.

Net book value (carrying value)

Subtracting this contra account from the asset account results in the "net book value"

Balance sheet

Summarizes the amounts of the assets, liabilities, and shareholders' equity at the END of the period. The balance sheet reports the company's FINANCIAL POSITION at a point in time, whereas the other primary financial statements explain CHANGES in the company's financial position

Statement of cash flows

Summarizes the cash receipts and cash payments during the period. Net cash flows (inflows minus outflows)

Income Statement

Summarizes the results of the income-producing activities for the period.

Contributed capital

The amount of capital invested by owners

Retained earnings

The cumulative amount of net income generated by the company minus the dividends distributed to owners ERE = BRE + NI - Dividends

Depreciable cost

The difference between the original cost and an estimate of the later value (residual value, salvage value, scrap value, or trade-in value). Allocated as an expense to each period in which the asset is used

Perpetual inventory system

The inventory account is updated for each purchase or sale.

Current liabilities

Those obligations that will become due within one year or the operating cycle, whichever is longer

Deferrals

Transactions, events, or arrangements in which the cash flow occur BEFORE the related expenses are incurred or revenues earned Deferred expenses on the balance sheet represent economic benefits that are not completely used up by the end of the period and that the company can consume in operations in future periods Deferred revenues on the balance sheet represent obligations when customers prepare for goods and services, which the company will earn in future periods when it delivers the goods or services

Control account

When a company uses this subsidiary ledger, it still keeps an "Accounts Receivable" account in the general ledger. It is referred to as a control account because its debit balance MUST be equal to that of the subsidiary ledger.

Sales allowance

When a customer agrees to keep damaged merchandise and the company refund s apportion of the selling price.

Sales return

When a customer returns merchandise and receives a refund

Purchase allowance

When the company agrees to keep damaged inventory and receives a refund from its supplier.

Purchase return

When the company returns inventory to its supplier and receives a refund of the purchase price

Slide

When the digits are listed in the correct order but are mistakenly moved on decimal place to the left or the right.

Transposition

When two digits in a number are mistakenly reversed.

Elements that effect the balance sheet

assets liabilities shareholders' equity investments by owners (contributed capital) distributions to owners (dividends) revenues expenses gains losses comprehensive income

Bad debts

customer accounts that will not be collected

Accumulated other comprehensive income (AOCI)

measures and reports the total amount of other comprehensive income (OCI) items, which consist of a few income items that the FASB has designated to be recognized in AOCI until they are realized, at which time they are recognized in net income.