Accounting Chapter 1-3
Income statement
Revenes, expenses, net income -communicates operating performance for a period of time -net income: total revenue and gains minus total expenses and losses -most important financial statement -first before retained earnings -covers a period of time usually a year
Entity assumption
all organizations stand apart as a separate economic unit -divisions within the same organization can also be reported separately -separate from owners
liability
an economic obligation payable to an individual or organization outside the business
what is a prepaid expense?
asset
DEALOR
dr: dea cr: lor
long term assets
expected to be held and used for longer than one year -examples: property plant and equipment
credit
give -note payable, cash
revenues
increase in retained earnings from delivering goods and services
Net working capital
measure of a company's ability to pay current debts using current assets (measure of operating liquidity) -total current assets - total current liabilities
purchased photography supplies for cash
nothing swapped one asset for another
accounts
record of an asset, liability and stockholder's equity element (including revenues, expenses, and dividends) -records all changes -cabinet example
stockholder's equity
the stockholder's ownership interest in the assets of a company
a list of all accounts with their balances
trial balance
Deferrals
(Prepayments) -putting off -a deferral is an adjustment for an item in which the business paid or received cash in advance
1. Prepaid expense
(asset account)=An expense paid in advance -initially recorded as an asset -adjusting entry: the amount of the asset used/expired during the period must be expensed
2. Unearned revenue
(liability account)=revenues paid in advance -initially recorded -cash---revenue
repaired an old photograph for a customer and billed them for the service
(service revenue, account receivable) increase asset increase stockholders equity
owner's equity
(stockholder's equity) -equity represents owner (insider) claims on assets -Paid in Capital: amounts stockholders have invested -Retained Earnings: Net income, expenses, dividends
closing entries
-Prepares the accounts for the next period - Sets temporary accounts to zero -temporary accounts: closed to retained earnings at the end of the year, include revenues, expenses, and dividends -they transfer revenues, expenses, and dividends into the retained earnings account
4 elements of an account
-beginning balance -+/-increases to the balance --decreases to the balance -=ending balance
Accumulated depreciation
-contra asset -"accumulates" amounts charged to depreciation over the asset's life -companion account to each plant asset account -use it to persevere the cost of the long term asset
1.Accured expense
-expenses are recored when incurred to match revenues, not necessarily when cash is paid -examples: salary expense and salary payable, interest expense and interest payable, utilities expense and utilities payable -expense--cash
Adjusting entries
-occur at the end of every accounting period before a company can issue its financial statements
2. Accured revenue
-revenue recognized first before cash is received -revenue that has been earned but not yet collected -examples: sales revenue and accounts receivable when billing a customer at the end of the period -revenue--cash
trial balance
-shows that debits equal credits -prepared at the end of an accounting period -facilities the preparation of the financial statements -assets listed first then liabilities and stockholder's equity
useful
1. relevant and faithfully represented 2. comparable 3. timely 4. understandable
the accounting cycle
1. source documents 2. transaction analysis 3. record in journal 4. post to ledger 5.unadjusted trial balance 6. record and post adjusting entries 7. adjusted trial balance 8. financial statements 9. close temporary accounts 10. post closing trial blanace
two purposes of the adjusting process
1.measure income 2.update the balance sheet
Expense recognition principle
AKA the "Matching Principle" -Expenses are the costs of assets used up and of liabilities created in earning revenue -Expenses need to be measure and recognized (recorded) in the same period in which the related revenues are earned, not necessarily when cash is paid
accounting equation
Assets=Liabilities + Owners Equity -must always stay in balance -stockholder's equity is paid in capital and retained earnings
adjusting entry affects what
1.revneus or expenses (to measure income) 2.asset or liability (to update the balance sheet)
what do adjusting entries never involve
CASH because cash is always kept up to date
financial statements
Income Statement Statement of retained earnings balance sheet cash flows
revenue principle
WHEN to record revenue and WHAT amount to record 1. When to record: -revenue is recorded when earned (not necessarily when cash is received) -revenue is earned when the good or service has been delivered 2. Amount to record: -cash value (i.e the price)
income statement
a financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period
accounts payable
a liability backed by the general reputation and credit standing of the debtor
time period concept
accounting information is reported at regular intervals -important to record accounting information in the correct accounting period
book value
amount reported on the balance sheet of "the books" =historical cost of plant asset-accumulated deprecation
current asset
an asset that is expected to be converted to cash sold or consumed during the next 12 months or an operating cycle whichever is longer
current ratio
another means of expressing operating liquidity -current ratio= total current assets divided by total current liabilities
historical cost principle
assets are recorded at their actual cost (the amount paid on the date of purchase) -aka the purchase price principle
paid monthly rent
assets decrease stockholder's equity decreases
paid employee salary
assets decrease stockholders equity decreases
purchased lab equipment on account
assets increase liabilities increase
owner invests cash and receives common stock
assets increase stock holder's equity increase
provided developing services and received cash
assets increase stockholders equity increases
stable monetary unit assumption
assumption that the dollar's purchasing power is relatively stable
how much in total debt does the company have?
balance sheet
what assets does the company have?
balance sheet
what is the company's financial position at the end of the year?
balance sheet
the amount of an entity's receivables as of a given date generally appear on the
balance sheet in the current asset section
Statement of retained earnings
beginning retained earnings net income cash dividends ending retained earnings -communicates what a company did with its net income during the period -retained earnings represents the cumulative earnings kept by a company
the ending balance of retained appears on
both the statement of retained earnings and the balance sheet (beginning isn't)
Journal
chronological record of transactions 1. specify each account affected by the transaction and classify by type 2. determine if the accounts are increased or decreased 3. record (journalize) in the journal following the rules of debits and credits -debits must equal credits -journal--post--ledger
Statement of cash flows
communicates generating cash and how a company generated and used cash during the period -operating activities (starts with net income) -investing activities -financing activities (includes paying dividends)
stockholder's equity
contributed to capital and retained earnings
liabilities
creditor (outsider) claims on assets -represent an obligation to pay or for performance -what other people give to support assets -wages payable, accounts payable
Balance sheet
current assets long term assets total assets current liabilities long term liabilities stockholder's equity total liabilities and stockholder's equity -illustrates the company's financial position at a point in time -snap shot -prepared as of a specific date
double entry accounting means that each transaction
debits at least one account and credits at least one account
paid the balance of the account for the lab equipment
decrease asset decrease liability
paid a dividend
decrease assets decrease stockholders equity
rules to liabilities
decrease debit increase credits
rules to owner's equity
decrease debits increase credits
expenses
decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues
dividends
distributions by a corporation to its stockholders -never effect net income because its not an expense -recorded as direct reductions of retained earnings
retained earnings
earning that have not been distributed to stockholders
assets
economic resources expected to provide a future benefit -cash, merchandise inventory, equipment, knowledge -resources consumed to make profits
current assets
expected to be used, sold or consumed within 12 months -examples: cash, accounts receivables, supplies, inventory, and prepaid expenses
what is not a current asset
furniture
Assets
future benefit -cash, accounts receivables, notes receivables, inventory, prepaid expenses, land/buildings/equipment/furniture/fixtures
GAAP
generally accepted accounting principles -accounting guidelines formulated by the financial accounting standards board that govern how accountants measure, process, and communicate financial information
collection of cash on account would
have no effect on net income or stockholder's equity because they balance
an investor would evaluate which financial statement?
income statement
how well did the company perform during the year?
income statement
what were the company's net sales for the year
income statement
rules to assets
increase debit decrease credit
increases in stockholder's equity arise from
investments in the business by owners and earning net income
the basic summary device of accounting
ledger
what is unearned revenue?
liability
balance sheet
list of an entity's assets, liability, and owners' equity as of a specific date
adjusted trial balance
lists all the accounts and their final, adjusted balances
Accounting
measures business activities, processes data into reports, and communicates results to decision makers
limited liability company/partnership
members (many) -popular form of multi owner businesses -no business income tax -no personal liability for owners
cash
money and any medium of exchange that a bank accepts at face value
collected for the photograph repair done earlier in the month
nothing
liabilities
obligation to pay or to perform -accounts payable, notes payable, accrued liabilities, unearned revenue
current liabilities
obligations/debts payable during the next 12 months -examples: long term notes payable, bonds payable
Adjusting the accounts
occurs at the end of every accounting period -needed because some account are not kept up to date during the accounting period -always involve one expense or revenue and one asset or liability
accruals
opposite of deferrals -recognize revenue/expense before receiving cash/paying cash -(1) Incur an expense before paying cash (2) Earn revenue before receiving cash
stockholder's equity
owner claims to a company's assets -common stock, retained earnings
Accounts receivable vs accounts payable
receivable -sales to customers on account or collection (the customer pays) payable -vendor purchases and pays on account (business owes to vendor)
debit
receive -cash, reduction in note payable
cash basis accounting
revenue is recognized when cash is received expenses are recognized when cash is paid (not acceptable in businesses)
accrual accounting
revenue is recognized when earned expenses are recognized when incurred (true earnings)
Net income
revenues minus expenses -revenus: inflows of resources that increase net income and retained earnings through delivering goods and services to customers -expenses: outflows of resources that decrease net income and retained earnings. Costs of doing business -dividends: distributions of assets (cash) generated by income to stockholders which decrease retained earnings -dividends are not an expense
Proprietorship
singe owner -easy to start and flexible -most common form of business -small retail stores or professional businesses -no business income tax -owners are personally liable for business debts and paying taxes
every transaction has two sides
something given something received
transactions
specific events that have a financial impact on a company that can be reliably measured
how much cash did the company generate and spend
statement of cash flows
how much cash was generated by operating activities
statement of cash flows
another name for a balance sheet is
statement of financial position
did the company declare a dividend during the year
statement of retained earnings
why did the company's retained earnings change during the year?
statement of retained earnings
amount of net income reported on the income statement also appears on the
statement of retained earnings and the balance sheet
the ending balance in retained earnings appears on the
statement of retained earnings only
Corporation
stockholders (many owners) -legally distinct from its owners -largest -ability to raise large sums of capital -creditors most protection -double taxation of profits: 1.corporate tax 2.dividends taxed
statement of retained earnings
summary of the changes in the retained earnings of a cooperation during a specific period
primary objective of financial reporting is to provide info
that is useful for making investing and lending decisions
stable monetary unit assumption
the dollar's purchasing power is stable over time -ignore inflation
continuity (going concern) assumption
the entity will continue to exist indefinitely -entity will remain in operation for the foreseeable future
Depreciation
the process of allocating the cost of a plant asset to expense (depreciation expense) over the asset's useful life -not a process of valuation -follows the expense recognition principle by matching deprecation expense to the multiple years that the asset is used to generate revenue -requires a unique adjusting entry because the plant assets accounts are not impacted by the adjusting entry
debt ratio
the proportion of a company's assets financed with debt -debt ratio=total liabilities divided by total assets
General partnership
two or more partner owners -easy to start and flexible -small retail stores or professional businesses -no business income tax -owners are personally liable for business debts and paying taxes -creditors most protection
where do expenses go in the accounting equation?
under owner's equity
where does revenue go in the accounting equation?
under owner's equity