Accounting - Chapter 4 - Survey of Accounting

Assume that a company earned $100 of service revenue from a client, but only $30 was collected.

30 cash and 70 accounts receivable in the assets column, and +100 service revenue in the revenues column.

Income Statement

<---Net income = Revenues - Expenses.

Credit ABBR Cr

A decrease in asset and expense accounts; and increase in liability, stockholders' equity, and revenue accounts. When you input data tot he right; Credit entry. An account that has a balance on its right side is said to have a credit balance.

Two Categories of adjustments:

Accruals, and re classifications

T- account

An account format with debt on the left side and credit on the right side.

Adjustment

An entry usually made during the process of "closing the books" that results in more accurate financial statements. Adjustments involve accruals and re classifications. Adjustments are sometimes made at the end of interim periods, such as month-end or quarter-end, as well. The result of adjustments is to make both the balance sheet at the end of the accounting period and the income statement for the accounting period more accurate. That is, asset and liability account balances are appropriately stated, all revenues earned during the period are reported, and all expenses incurred in generating those revenues are subtracted to arrive at net income.

Debit ABBR. Dr

An increase in expense and asset accounts; a decrease in liability, stockholders' equity, and revenue accounts. When you input information to the left; Debit entry INCREASE EXPENSE AND LOSS ACCOUNTS, AND DECREASE REVENUE AND GAIN ACCOUNTS.

Stockholders' equity accounts:

Are decreased with debits, normally have a credit balance, are increased with credits.

The Balance Sheet Equation-A Mechanical Key (sh1)

Assets = Liabilities + Stockholders' equity. Assets = Liabilities + Stockholders' equity Assets = Liabilities + Paid-in capital + Retained earnings Assets = Liabilities + Paid-in capital + Retained earnings (beginning of period) + Revenues (during the period) - Expenses (during the period)

Source documents

Generated by transactions, such as invoice from supplier, a copy of a credit purchase made by a customer, a check stub, or a tape printout of the totals from a cash register's activity for a period. These source documents are the raw materials used in the bookkeeping process and support the journal entry. EVIDENCE OF A TRANSACTION. Transactions----recorded in--> Journal ---- posted in--> Ledger Supported by source documents. Canceled checks, purchase orders, invoice from suppliers.

What is the beauty of bookkeeping?

Is that debit and credit entries to accounts, and account balances, are set up so that if debits equal credits, the balance sheet equation will be in balance.

What does it mean when an adjustment must be made?

It means that a more accurate income statement-matching of revenue and expense-and a more accurate balance sheet will result from the accrual or reclassification accomplished by the adjustment.

What does it mean when the "books are in balance"?

It means that the sum of all accounts with debit balances in the ledger equal the sum of all accounts with credit balances in the ledger.

The Bookkeeping/Accounting Process (h1)

The bookkeeping/accounting process begins with transactions and culminates in the financial statements.

Accrual

The process of recognizing revenue that has been earned but not collected, or an expense that has been incurred but not paid. At the end of the accounting period.

What is debit and credit?

The terms debit and credit are used by banks to describe additions to or subtractions from an individual's checking account. For example, your account is credited for interest earned and is debited for a service charge or for the cost of checks are are furnished to you. From the bank's perspective, your account is a liability; that is, the bank owes you the balance in your accounts, Interest earned by your account increases that liability of the bank; hence, the interest is credited. Service charges reduce your claim on the bank-its liability to you- so those are debits from the bank's perspective. Debit = Charge. To charge an account is to make a debit entry to the account.

Journal

Transactions are initially recorded in a journal, a day by day, or chronological, record of transactions. Transactions are then recorded in-posted to- a ledger.

In the horizontal model,

a minus sign in the expenses column means that net income is lower as a result of expenses being higher.

Balance Sheet

assets=liabilities + stockholders' equity

Merchants who send you a notice that they have "charged" your accounts are really communicating that they have:

debited your accounts to increase your account balance, which is shown as an asset (accounts receivable) in their accounting records.

transactions

economic interchanges between entities that are accounted for and reflected in financial statements. transactions ---> procedures for sorting, classifying, and presenting (bookkeeping). Selection of alternative methods of reflecting the effects of certain transactions (accounting) ---> Financial statements. are summarized in accounts, and accounts are further summarized in financial statements. Can be seen as the bricks that build financial statements.

Although revenues and expenses are reported on the income statement, they also:

impact stockholder's equity on the balance sheet.

What does it mean when a revenue or expense must be accrued?

it means that revenue has been earned by selling a product or providing a service, or that an expense has been incurred, but that cash has not been received (from a revenue) or paid (for an expense) so an account receivable or an account payable, respectively, must be recognized.

When using the horizontal model, the arrow from net income to stockholders' equity indicates that:

net incomes affects retained earnings, which is a component of stockholders' equity.

The account format of the balance sheet:

presents assets on the left, while liabilities and stockholders' equity items are shown on the right.

Chart of accounts

serves as an index to the ledger, and each account is numbered to facilitate the frequent written references that are made to it.

Ledger

serves the function of, but rather than having a large sheet with a column for each asset, liability, and stockholders' equity category, there is an account for each category. (manual bookkeeping, each account is a separate page in a book, much like a loose leaf binder.

Reclassifications

the initial recording of a transaction, although a true reflection of the transaction at the time, does not result in assigning revenues to the period in which they were earned or expenses to the period in which they were incurred. As a result, an amount must be reclassified from one account to another (at the end of the accounting period) to reflect the appropriate balance in each amount.

Closing the books

the process of posting transactions, adjustments, and closing entries to the ledger and preparing the financial statements.

If debits equal credits

then the company's balance sheet equation will be in balance.

Under accrual accounting, year end adjustments are made:

to ensure that expenses are recognized in the year in which they are incurred and because the cash receipt from the revenue may occur before or after the event that causes revenue recognition. To ensure that revenues are recognized in the year in which they are earned.