Accounting chapter 1, 2, 3

Temporary Accounts

These get closed: revenues, expenses, dividends and income summary

Deferred Revenue

Unearned revenue, cash is received before revenue is recognized. (first a liability, then revenue when adjusted) Adjustment: debit liability, credit revenue

Example of accrual basis

When buying insurance for 24 months, the expense gets spread out over the entire benefited period. Under cash basis, the entire cost of insurance would be recorded at once

Managerial accounting

provides info to internal users via internal reports

Liabilities

debit - credit +

Assets

debits+ credit -

Full disclosure principle

Requires a company to include all info in financial statements that would impact users decisions

Liability Accounts

Accounts payable, notes payable, unearned revenue, accrued liabilities- amounts owed that are not yet paid.

Time Period Assumption

The life of a business can be divided into distinct time periods, such as months and years

Adjusting accounts

Any changes in accounts balances has to originate in the journal -> ledger. Cash account will never be apart of adjusting journal entry

Statement of Cash Flows

Cash flow from operating, investing and financing activities

Accrued Revenue

Cash is received after revenue is recognized (Your receivables) Adjustment: Debit Asset, credit revenue.. At later date: credit asset, debit cash, credit revenue

Equity Accounts

Common Stock, Revenues, Dividends, RE, Expenses

D.E.A.D

DEBIT- expenses, assets and dividends

Statement of Retained Earnings

Explains changes in retained earning over a period of time.

Generally accepted accounting principles

GAAP

Equity

Owner's claim on assets

PR

Post Reference In journal: account number In ledger: pg # of journal where the entry came from

Adjusted Trial Balance

Prepared after all the adjusting entries are posted to the ledger

Post closing trial balance

Prepared after the closing entries have been posted. Only accounts on here should be assets, liabilities and equity accounts

Financial Accounting Standards Board

Private group that issues GAAP and set both broad and specific principles

Revenue Recognition Principle

Provides guidance on when a company must recognize revenue. Revenue is recorded only when the service is complete.

Financial Accounting

Provides info to external users via financial statements

Matching principle

Record expenses that were incurred to generate the revenues recorded in the accounting period

T-account

Represents a ledger account and is a tool used to understand the effects of one or more transactions

Assets

Resources owned or controlled by a company

Accrual Basis

Revenues are recognized when earned and expenses are recognized when incurred

IASB

Same as FASB but internationally

SEC

Securities and exchange commission (sets GAAP, that is issued by FASB). Establishes reporting requirements and sets GAAP for companies that issue stock

Financial Statements

1. Income statement - period of time 2. Statement of Retained Earnings-period of time 3. Balance Sheet-SPECIFIC DATE 4. Statement of Cash Flows-period of time

The accounting cycle

1.Analyze transactions 2. Journalize 3.Post 4. Prepare unadjusted trial balances 5. Adjust 6. Prepare adjust trial balance 7. Prepare statements 8. Close 9. Prepare post-closing trial balance

Journals

1.Transactions are in chronological order 2. A journal is used to record business transactions 3. In a journal, both the debit and credit side of transaction can be seen

Going-Concern Assumption

Accounting info reflects the presumption that the business will continue operating

Analyzing and Recording Process

1. Analyze each transaction and event from source documents 2. Record relevant transactions and events in a journal 3. Post Journal info to ledger accounts 4. Prepare and analyze the trial balance 5. income statement 6. Statement of Retained Earnings 7. Balance Statement 8. Cash flow statement

Business entity assumption

A business is accounted for separately from its owner or other business entities

Measurement Principle (cost principle)

Accounting info should be based on actual cost

Sarbanes-Oxley Act of 2002

Aims at curbing financial abuses by companies that issue stock to the public. Requires that public companies apply both accounting oversight and stringent internal controls to ensure more transparency, accountability and truthfulness in reporting transactions

Adjusting Accounts

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount and ensure that the revenue recognition and matching principle are followed

Accounting Period

Any period of time a company decides to report about. Fiscal- 12 months

Determining Equity

Begin Balance +additional investments +/- net income/loss -dividends

Retained earnings

Beginning Balance +/- net income/loss (Rev-exp) -dividends

Accrued expenses

Cash is paid after expense is recognized (your payables) Adjustment: debit expense , credit liability (payables). At later date: debit liability, debit expense, credit cash

COLR

CREDIT- owners equity, liabilities, revenues

REID

Close your revenue, expenses, income summary and dividends

liabilities

Creditors claim on assets

Classified Balance Sheet

Current assets Non current assets- Long-term investments, Plant assets, intangible assets Current liabilities Noncurrent liabilities Equity

Depreciation (deferred expense)

Depreciation is the process of computing expense by allocating the cost of the plant and equipment over their expected useful lives. (Asset cost-salvage value)/useful life

Balance Sheet

Describes a company's financial position at a point in time. (Assets, liabilities and Equity-common stock/shareholders equity, retained earnings included).

Income Statement

Describes a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities

permanent accounts

Don't get closed: Assets, liabilities, common stock, retained earnings. They roll over to the next accounting period

Retained Earnings

Income not distributed to shareholders Revenue, expenses and dividends

Trial Balance

Lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. Like a balance sheet, it is prepared on a particular date

Cash Basis

Not consistent with GAAP: Revenues are recognized with cash is received and expenses recorded when cash is paid

Ledger

The collection of all accounts for an information system. Asset account starts with 1, liability with 2, equity with 3

Account Balance

The difference between total debits and total credits for an account

Monetary Unity Assumption

Transactions are expressed using "money" as a common denominator

Posting transactions

Transferring from journal to ledger

Current items

With one year or within the company's operating cycle, whichever is longer

Asset Accounts

cash, land, buildings, equipment, prepaid accounts, notes rec., accounts rec., supplies

Equity (common stock-dividends+revenues-expenses)

common stock: debit -, credit + dividends: debit+, credit - Revenues: debit -, credit + Expenses: debit +, credit -

Deferred expenses

pre-paid expenses. cash is paid before expense is recognized. (prepaid insurance, rent. First an asset, then expense when adjusted). Adjustment: credit asset, debit expense.