Account I UMD Exam 1

Account Payable

"Purchase on account" Created a liability NB: Credit

Posting steps

1. Date 2. Amount entered in debit or credit column 3. Journal page number entered in the Post. Ref. column in each specific ledger account 4. Enter account number in Post Ref column in journal

Steps of recording in the journal

1. Date 2. Title of accounts affected - debit left, credit right 3. Tried description below credited account 5. Post Reference column is initially left blank Is an asset, liability, SHE, Revenue, Expense or Dividends account affected?

Errors Affecting the Trial Balance (5)

1. Difference between the debit and credit column is divisible by 10: addition error 2. Difference btwn debit and credit is evenly divisible by 9: transposition (542 vs 452) slide (542.00 vs 54.20) 3. Difference is divisible by 2: probably entered a debit as a credit or a credit as a debit 4. If not divisible by 2 or 9, review ledger to see if an account balance in the amount of the error has been omitted. ** Not all errors lead to the balance totals being unequal

Reasons for unethical behavior

1. Failure of individual character 2. Culture of greed and ethical indifference

Order of Financial Statement Preparation

1. Income Statement 2. Statement of Stockholders' Equity 3. Balance Sheet 4. Statement of Cash Flows

Steps of preparing a trial balance

1. Name of company, title trial balance, date it's prepared 2. List accounts from the ledger, enter debit and credit balances 3. total debit and credit columns of TB 4. Verify Debits = Credits

Example of accrual basis accounting

A cleaning company will record revenue after it cleans an office building, even if it is not paid for several weeks

GAAP

A collection of accounting standards, principles, and assumptions that define how financial information will be reported

Balance Sheet

A list of the assets, liabilities, and SHE as of a specific date The balances of the accounts reported on the balance sheet are carried forward from year to year. Assets Cash Supplies Land Total assets Liabilities AP SHE Common stock Retained earnings Total SHE Total Liabilities & SHE

Trial balance

A way of detecting errors that may occur when posting debits and credits from the journal to the ledger. A summary listing of the titles and balances of accounts in the ledger, which is used to verify that debits equal credits. The form listing the titles and balances fo the accounts in the ledger on a given date.

Dec. 16 Fees earned on account totaled $1,750 for the first half of December.

AR (d) 1,750 Fees Earned (c) 1,750

Difference between an account and a ledger

Account: A place where transactions are recorded Ledger: A place where accounts are maintained

Sarbanes-Oxley Act (SOX)

Act passed by Congress to monitor accountants behavior Established Public Company Accounting Oversight Board (PCAOB)

Time Period Assumption

Allows a company to report its economic activities on a regular basis for a specific period of time.

Profit

Amount received - amount paid

Business Transaction

An economic event or condition that directly changes an entity's financial condition or its results of operations (changes to the accounting equation)

Fiscal year

Annual accounting period adopted by a company (natural business year).

Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.

Asset: Office equipment (d) 1,800 Liability: AP (c) 1,800

Expanded Accounting Equation

Assets = Liabilities (AP) + Common Stock + Revenues - Expenses - Dividends

Statement of SHE & Balance Sheet

CS, RE, and total SHE at the end of the period are taken from statement of SHE and reported on the BS

Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.

Cash (c) 900 AP (d) 900

Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.

Cash - asset Fees earned - revenue Cash (d) 3,100 Fees earned (c) 3,100

Net Income =

Cash receipts (revenues) - cash payments (expenses)

Balance Sheet & Statement of Cash Flows

Cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows

Account Receivable

Claim against a customer (asset) When a customer pays on account, AR and Fees Earned are increased. When a customer pays their AR, Cash increases (D) and AR decreased (C)

Stock holders' equity is made up of:

Common stock Fees earned

Financial Accounting Definition & Who Uses It

Concerned with recording transactions using GAAP for a business or other economic unit with a periodic preparation of various statements from such records. External users: investors, creditors, customers, government

Common stock

Corporations can issue to investors as proof of their ownership rights Investments by stockholders Credit entries only - Increases cash (asset) and increases common stock (S.H.E.) for the business that issued common stock.

NB for Common stock

Credit for increases

NB for Liabilities

Credit for increases

NB for Retained Earnings

Credit for increases

NB for Revenue Accounts

Credit for increases (income statement account)

NB for Assets

Debit for increases

NB for Expense Accounts

Debit for increases (income statement account)

NB for Dividends

Debit increases (income statement account)

FASB

Develops accounting standards in the US

Dividends

Distributions of earnings to stockholders. Payment of dividends DECREASE cash and stockholders' equity

Dec. 31 Paid dividends, $2,000.

Dividends (d) 2,000 Cash (c) 2,000

Role of Ethics

Ensure the information accountants provides users will be trustworthy and useful for decision making

Dec. 6 NetSolutions paid $180 for a newspaper advertisement.

Expense increases and asset decreases Misc. expense (d) 180 Cash (c) 180

Example of cash basis accounting

Fees are recorded when cash is received from clients; likewise wages are recorded when cash is paid to employees.

Going Concern Assumption

Financial reports be prepared assuming the entity will continue to operate into the future. Report equipment, buildings, and land at their initial or historical cost (rather than liquidation or forced sale values)

SEC

Has authority over the accounting and financial disclosures for companies whose shares of ownerships (stock) are traded and sold to the public

Opportunities for Accountants

High demand from an increase in regulation of business Auditors: verify the accuracy of financial records, accounts, and systems

Correcting Entries

If an entry is made to the wrong account. then make another entry reversing the first entry and then another entry to record the correct entry. ex. Rent expense of $4,650 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Rent Expense. OR Debit Rent Expense 9,300 (4650x2) Credit Misc expense 4,650 and cash 4,650

Interrelationship of financial statements

Important in analyzing financial statements and the impact of transactions on a business. Serve as a check on whether the financial statements are prepared correctly.

Stockholders Equity

Increased by issuing common stock Increased by revenues Decreased by expenses Decreased by dividends paid to stockholders SHE = Common stock (investments) - Dividends (distributions of earnings) + Revenue - Expenses

Receipt of cash for providing services

Increases assets and equity (fees earned)

Business Entity Assumption

Limits the economics data in financial reports to that directly related to the activities fo the business. The business is viewed as an entity operate from its owners, creditors, or other businesses.

Cash account ending with a credit balance

McIntyre Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of December 31 has a credit balance of $1,850, and there is no undeposited cash on hand. (a) Assuming no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $1,850 credit balance in the cash account an asset, a liability, stockholders' equity, a revenue, or an expense? Wrote checks for more than the company had in their checking account. Considered a liability

4 Principles

Measurement - Amounts must be objective and verifiable Historical cost - Amounts of something bought don't change until another transaction occurs Revenue recognition - Revenue is recorded when the services have been performed or goods are delivered to the customer Expense recognition - Expenses are recorded in the same period as the related revenue (allows a company to report a profit or loss for the period)

Income Statement & Statement of SHE

Net income/loss from the income statement is reported on the Statement of SHE as an increase/decrease from the beginning retained earnings

If services are performed in October but payment was received the following November: Was the revenue received in October or November? What is the journal entry in Oct. and the journal entry in Nov.?

Oct entry: debit AR 7890 and credit fees earned 7890 Nov. entry: debit cash 7890 and credit AR 7890

Business

Organization in which basic resources (input) are assembled and processed to provide goods or services (outputs).

Corporation

Organized under state or federal statutes as a separate legal taxable entity

Partnership

Owned by 2+ individuals

Proprietorship

Owned by one individual

Unadjusted Trial Balance

Prepared at the ends of an accounting period before adjusting entries are made.

Posting

Process of transferring the debits and credits from the journal entries to the accounts in the ledger in the same order they are in the journal

Public Accounting

Provide services on a fee basis. Must be a CPA

Accounting principles and assumptions

Provide the framework open which accounting standards are constructed

Prepaid expense

Purchasing items ahead of time with the intent to use them in the future (asset)

Common journal terms

Received cash for services: cash (d) fees earned (c) Services provided on account: AR (d), Fees earned (c) Received cash on account: cash (d), AR (c) Purchased on account: asset account (d), AP (c) Paid on account: AP(d), cash (c) Paid cash: asset/expense account (d), cash (c) Issued CS: cash/assets (d), CS (c) Paid Dividends: dividends (d), cash (c)

Characteristics of Financial Information

Relevant: potential to impact decision making Faithful representation: information accurately reflects an entity's economic activity Comparability, verifiability, timeliness, understandability

Monetary Unit Assumption

Requires that financial reports be expressed in a single monetary unit. Provides a common measurement of the effects of economic events and transactions.

Assets

Resources owned by a business Normal Balance: Debit Ex: cash, land buildings, equipment Current asset: cash and other assets that are expected to be converted into cash or sol or used up within one year (receivables, supplies, prepaid expenses) Fixed asset: depreciate over time. Buildings, machines etc.

Fees earned

Revenue from providing services

Sales

Revenue from the sale of merchandise

Cash Basis Accounting

Revenues and expenses are reported on the income statement in the period in which cash is received or paid. Typically used in small service businesses because they have few receivables and payables

Accrual basis Accounting *

Revenues are reported on the income statement in the period in which a service has been performed or a product has been delivered. Cash may not have been received yet. Expenses are recorded when they are incurred, not necessarily when cash is paid. *Required by GAAP

Accounting standards

Rules that determine the accounting for individual business transactions

Journal

Serves as a record of when transactions occurred and were recorded

Retained Earnings

Stockholders equity created from business operations through revenue and expense transactions. RE= Revenues - Expenses - Dividends

Statement of Stockholders' Equity

Summary of changes in SHE that have occurred during a specific period of time Contains: CS, RE and total column Beginning balance Issued CS Net income (RE) Dividends (RE) End balance - Prepared after income statement because net income or loss is reported in the RE column - Prepared before the balance sheet because amount of CS and RE at the end of the period is reported on the BS - Companies may report a RE Statement if they have few CS transactions

Income Statement

Summary of revenue and expenses for a specific period of time. Prepared directly from the Adjusted Trial Balance Fees earned (credit) Expenses: listed below (debit) Total expenses: Net Income: FE-TE Net income/loss = R - E Net income increases SHE (RE) Net loss decreased SHE (RE)

Statement of Cash Flows

Summary of the cash receipts and cash payments for a specific period of time Cash flows from operating activities cash received from customers cash paid for expenses and to creditors net cash flows from operating activities (or AP) Cash flows from investing activities cash paid for acquisition of land Cash flows from financing activities cash received from issuing CS cash dividends net cash flows from financing activities Net Increase in cash Cash balance - beg Cash balance - end

Horizontal Analysis

The amount of each item on a current financial statement is compared with the same item on an earlier statement to indicate whether the company's operating performance has improved. Earlier statement is used as the base for computing the amount and % of change. Amount = Year 2 - Year 1 % = (year 2 / year 1)/year 1 HA can be performed on any of the 4 financial statements Can operations be further improved?

Liabilities

The rights of creditors are the debts of the businesses (Creditors have first rights to the assets) Current liabilities: paid with current assets within a year (payables, unearned fees) Long-term liabilities: mortgage payable

Equity

The rights of the owners

Ratio of Liabilities to Stockholders' Equity

Total liabilities/ Total SHE The lower the ratio, the better able the company is to withstand poor business conditions and to pay obligations to creditors

Arms-length Transactions

Transactions between two independent parties provide amounts that are objective and verifiable

General-purpose financial statements

Type of financial accounting report that is given to external users

Revenue Recognition Principle

Used in Accrual Accounting Revenues are recorded when earned, which is when the services have been performed or the products have been delivered to customers.

Managerial accounting Definition and objective

Uses both historical and estimated data in providing internal users (management) with information relevant to decision making Provide relevant and timely information for managers' and employees' decision-making needs

Account receivable

When a business agrees that a customer may pay for a service provided at a later date; a claim against the customer. Asset Revenue is earned even though no cash has been received

Private accounting

When accountants are employed by a business or a non-profit organization

Missing Amount from an Account On July 1, the cash account balance was $37,450. During July, cash payments totaled $115,860, and the July 31 balance was $29,600. Determine the cash receipts during July.

X = 29,600 + 115,860 - 37,450 $108,010 cash receipts

Accounting definition

an information system that provides reports to users about the economic activities and conditions of a business "Language of business"

Manufacturing business

change basic inputs into products that are sold to customers ex. cars, trucks, vans, pharmaceutical drugs

Internal user of accounting information

manager or employees

Role of accounting

provide information for managers to use in operating the business and provide information to other users in assessing the economic performance and condition of the business

Financial Accounting Objective

provide relevant and timely information for the decision-making needs of users outside of the business Financial Reports on the operations and condition of the business are useful for banks and creditors

Service business

provided services ex. transportation, entertainment

Retail business

sell products they purchase from other businesses ex. general merchandise, internet books, music, videos

Normal Balance

sum of increase is usually greater than the sum of the decreases in the account