Acctg 1 SMC Hicks Midterm Chapter 1-5

Accounting Cycle Steps

1) Analyze transactions: Analyze transactions to prepare for journaling 2) Journalize: Record account including debits and credits in a journal 3) Post: Transfer debits and credits from the journal to the ledger 4) Prepare unadjusted trial balance: Summarize unadjusted ledger accounts and amounts 5) Adjust: Record adjustments to bring account balances up to date; journalize and post adjustments 6) Prepare adjusted Trial Balance: Summarize adjusted ledger accounts and amounts 7) Prepare statements: Use adjusted trial balance to prepare financial statements 8) Close: Journalize and post entries to close temporary accounts 9) Prepare post-closing trial balance: Test clerical accuracy of the closing procedures 10) Reverse (optional): Reverse certain adjustments in the next period Steps 4, 6, and 9 can be done on a work sheet.

Post-closing trial balance

A list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted. It lists the balances for all accounts not closed. These accounts comprise a company's assets, liabilities, and equity, which are identical to those in the balance sheet. The aim of a post-closing trial balance is to verify: Total debits equal total credits for permanent accounts All temporary accounts have zero balances The post-closing trial balance is usually the last step in the accounting process

Permanent accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed aka real accounts report on activities related to one or more future accounting periods. They carry their ending balances into the next period and generally consist of all balance sheet accounts. These asset, liability, and equity accounts are not closed

Temporary accounts

Accounts used to record revenues, expenses, and withdrawals; they are closed at the end of each period. aka nominal accounts. Accumulate data related to one accounting period. They include all income statement accounts, the withdrawals account, and the Income Summary. They are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period. The closing process only applies to temporary accounts

Working papers

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements. Internal documents

Expanded accounting equation

Assets = Liabilities + (Owner Capital, - Owner Withdrawals + Revenues - Expenses) () is equity

Accounting equation

Assets = Liabilities + Equity Together, liabilities and equity are the source of funds to acquire assets. Liabilities are shown first before equity because creditors' claims must be paid before the claims of owners.

Classified balance sheet

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications. organizes assets and liabilities into important subgroups to provide more information to decision makers.

Current assets

Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer

Net income

Determined by income from operations adjusted for nonoperating items Amount earned after subtracting all expenses necessary for and matched with sales for a period. aka income, profit, or earnings occurs when revenues exceed expenses. -Net income increases equity. -aka earnings or profit

Closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account.

Net loss

Excess of expenses over revenues for a period. occurs when expenses exceed revenues, which decrease equity.

Deprecation

Expense created by allocating cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Balance sheet

Financial statement -Refers to the financial condition of the company at the close of business at the end of the period --describes a company's financial positions (types and amounts of assets, liabilities, and equity) at a point in time. -The left side of the balance sheet lists a company's assets: cash, supplies, and equipment. -The upper right side of the balance sheet shows what the company owes to its creditors --other liabilities (such as a bank loan) will also be listed here -The presentation of the balance sheet can be done in either the account form or in report form. -The accounting equation applies here: Assets = Liabilities + Equity -Prepared as of a point in time

Interim financial statement

Financial statements covering periods of less than one yearl usually based on one- three-, or six-month periods

Know everything except:

Intangible assets, Long term investments, Pro forma financial statements, Reversing entries, Unclassified balance sheet, For the multiple choice of this chapter, don't worry about number 5

Unearned Revenue

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Unearned revenues

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Trial Balance

List of accounts and their balances at a point in time total debit balances equal total credit balances. Adjusted Trial balance: List of accounts and balances prepared after period-end adjustments are recorded and posted.

Long-term liabilities

Long-term assets not used in operating activities: such as notes receivable and investments in stocks and bonds. includes notes receivable and investments in stocks and bonds when they are expected to be held for more than the longer of one year or the operating cycle. Land held for future expansion is a long-term investment because it is not used in operating

Statement of cash flows (theoretical point of view)

Measures cash inflows and outflows, financial statement A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period. arranged by operating, investing, and financing.

Closing process

Necessary end-of-period steps to prepare the accounts for recording transactions of the next period. The closing process involves Identify accounts for closing Record and post the closing entries Prepare a post-closing trial balance To record and post closing entries is to transfer the end-of-period balances in revenue, expense, and withdrawals (Drawings) accounts to the permanent capital account. Step 1: Close Credit Balances in Revenue Accounts to Income Summary Step 2: Close Debit Balances in Expense Accounts to Income Summary Step 3: Close Income Summary to Owner's Capital Step 4: Close Withdrawal Account to Owner's Capital

Gross margin (gross profit)

Net sales minus cost of goods sold aka gross profit

Operating cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers. the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services "Operating" refers to company operations and "cycle" refers to the circular flow of cash used for company inputs and then cash received from its outputs. The length of a company's operating cycle depends on its activities Most operating cycles are less than one year.

Current liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

Owner investment

Owner investing money, assets into the business Assets put into the business by the owner. resources such as cash that an owner puts into the company and are included under the generic account Owner Capital.

GAAP

Principles that are supported by fasb and sec Generally Accepted Accounting Principles (GAAP). Financial accounting is governed by rules and concepts known as GAAP. Aims to make information relevant, reliable, and comparable. Rules that specify acceptable accounting practices

Journalizing

Process of recording transactions in a journal

Posting

Process of transferring journal entry information to the ledger; computerized systems automate this process

Profit margin

Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue net income / total sales aka net profit margin

Current ratio

Ratio used to evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.

Revenue recognition princicple

Recognize revenue when it's earned This principle provides guidance on when a company must recognize revenue. To recognize means to record it. Recording it too early or too late will make it look more or less profitable than it really is. Three Concepts of this principle: 1) Revenue is recognized when earned. --The earnings process is normally complete when services are performed or a seller transfers ownership of products to the buyer. 2) Proceeds from selling products and services need not be in cash. --A common noncash proceed received by a seller is a customer's promise to pay at a future date, called credit sales 3) Revenue is measure by the cash received plus the cash value of any other items received.

Adjusting entries

Record adjustments to bring account balances up to date; journalize and post adjustments adjusting entries for recording accrued expenses invovled increasing expenses and increasing liabilities adjusting entries for recording accrued revenue involve increasing assets and increasing revenues

Journal

Record in which transactions are entered before they are posted to the ledger accounts aka book of original entry

Debit

Recorded on the left side, an entry that increases an asset and expense accounts, and decreases liability, revenue, and most equity accounts Dr

Credit

Recorded on the right side; an entry that decreases asset and expense accounts, and increases liability, revenue, and most equity accounts. Cr

Matching principle

Recording expenses as we also record revenue

Accounting cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (reversing entries) Refers to the steps in preparing financial statements. It is called a cycle because the steps are repeated each reporting period.3 Steps 1 through 3 usually occur regularly as a company enters into transactions Steps 4 through 9 are done at the end of a period.

Equity

Residual amount due to the owner, claim of the owner aka owner's equity or capital. the owner's claim on assets, and is equal to assets minus liabilities. this is why equity is also called net assets or residual equity. Equity for a noncorporate entity. -increases when owner investments and revenue increase -decreases with owner withdrawals and expenses

business entity assumption

Separate and distinct form the owner Means that a business is accounted for separately from other business entities, including the owner. The reason for this is that separate information about each business is necessary for good decisions. A business entity can be a proprietorship, partnership, or corporation.

Proprietorship

Sole owner Business owned by one person that is not organized as a corporation. A business owned by one person. No special legal requirements must be met to start a proprietorship. It is a separate entity for accounting purposes but is not a a separate legal entity from its owner. They have unlimited liability> (bad) Income is not subject to a business income tax but is instead reported and taxed on the owner's personal income tax return. (good)

Liabilities

Something the company owes creditors' claims on assets. These claims reflect company obligations to provide assets, products or services to others. involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events

Work sheet

Spreadsheet used to draft an adjusted trial balance, adjusting entries, adjusted trial balance, and financial statements. A widely used working paper, it is a useful tool for preparers in working with accounting information. It is usually not available to external decision makers.

Withdrawals

Taking personal amounts out Account used to record asset distributions to the owner. resources such as cash than an owner takes from the company for personal use.

Plant assets

Tangible long-lived assets used to produce or sell products and services aka property, plant and equipment (PP&E) or fixed assts

Income summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred its balance is transferred to the capital account

Expenses

The cost of doing business the costs necessary to earn revenues. -Expenses decrease equity. -Examples include costs of employee time, use of supplies, and advertising, utilities, and insurance services from others.

Revenues

The principle prescribing that revenue is recognized when earned. Gross increase in equity from a company's business activities that earn income. aka sales The amount received from selling products and services.

A company forgot to record accrued and unpaid employee wages of $350,000 at period-end.

This oversight would Overstate net income

Cost principle chapter 2

aka Cost principle or historical cost principle. prescribes that financial statement information, and its underlying transactions and events, be based on relevant measures of valuation. Usually prescribes that accounting information is based on actual cost (with a potential for subsequent adjustments to market. Cost is measured on a cash or equal-to-cash basis: If cash is given for a service, its cost is measured as the amount of cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost is measured as the cash value of what is given up or received. This principle emphasizes reliability and verifiability, and information based on cost is considered objective. For Example, a company pays $5,000 for equipment. The cost principle requires that this purchase be recorded at $5,000 even if the owner thinks it's worth $7,000.

Merchandise inventory

aka Inventory or Merchandise refers to products that a company owns and intends to sell. The cost of this asset includes the cost incurred to buy goods, ship them to the store, and make them ready for sale. aka inventory or merchandise refers to products that a company owns and intends to sell. The cost of this asset includes the cost incurred to buy goods, ship them to the store, and make them ready for sale.

Cost principle

aka measurement principle or historical cost principle. Usually prescribes that accounting information is based on actual cost (with a potential for subsequent adjustments to market.) Cost is measured on a cash or equal-to-cash basis: If cash is given for a service, its cost is measured as the amount of cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost is measured as the cash value of what is given up or received. This principle emphasizes reliability and verifiability, and information based on cost is considered objective. For Example, a company pays $5,000 for equipment. The cost principle requires that this purchase be recorded at $5,000 even if the owner thinks it's worth $7,000.

Cost of goods sold

cost of inventory sold to customers during a period. aka cost of sales is the cost of merchandise sold to customers during a period. It is often the largest single expense on a merchandiser's income statement.

A trial balance prepared at year-end shows total credits exceed total debits by $765. This discrepancy could have been caused by a) An error in the general journal where a $765 increase in Accounts Payable was recorded as a $765 decrease in Accounts Payable. b) The ledger balance for Accounts Payable of $7,650 being entered in the trial balance as $765. c) A general journal error where a $765 increase in Accounts Receivable was recorded as a $765 increase in Cash. d) The ledger balance of $850 in Accounts Receivable was entered in the trial balance as $85. e) An error in recording a $765 increase in Cash as a credit.

d) The ledger balance of $850 in Accounts Receivable was entered in the trial balance as $85.

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. -Information about revenues and expenses is taken from the Equity columns in the Summary of Transactions -Revenues are reported first on the income statement -Expenses are reported after revenues (rent and salary) --Expenses reflect the costs to generate the revenues reported -Net income (or loss) is reported at the bottom of the statement and is the amount earned in the period. --Owner's investments and withdrawals are not part of income. -Prepared for a period of time

Assets

resources a company owns or controls. These resources are expected to yield future benefits. Example include cash, supplies, equipment, and land, where each carries expected benefits. --The claims on a company's assets, what it owes, are separated into owner and non owner claims