Accounting 1

- Expanded accounting equation:

Assets = Liabilities + Owner, Capital - Owner, Withdrawals + Revenues - Expenses.

Accounting equation:

Assets = liabilities + equity

- Withdrawals:

Assets an owner takes from the company for personal use

- Revenues

CREDIT: Increase equity and are the cost of assets earned by a company's activities. Provide services, when provided, if haven't provided (unearned), Ex: Fees earned, consulting services provided, sales of products, facilities rented to others, and commissions from services

- Liabilities

CREDIT: Something payable. What a company owes its non-owners in future payments, products, or services. Creditor's claims on assets

- Owner, Capital

CREDIT: what the owner puts into the company

Accumulated deprecation

Classified as a contra-asset. it is linked to the asset as a subtraction and thus used to record the declining asset balance. prepaid expenses, also called deferred expenses, are assets. as the assets are used, their cost become expenses. common prepaid items are suppies, prepaid insurance, prepaid rent, and depreciation.

- Income Statement

Company's revenues and expenses along with the resulting net income or loss over a period of time.

- Assets

DEBIT: Provide a future benefit. Owned or controlled by a company. Ex: cash, supplies, equipment, land, prepaid, receivable, Etc. ---Increase if future benefit

- Owner, withdrawal

DEBIT: assets an owner takes form the company for personal use.

- Expenses

DEBIT: decrease equity and are the cost of assets or services used to earn revenues. Ex: cots of employee time, use of supplies and advertising, utilities, and insurance services from others.

- GAAP

Generally Accepted Accounting Principle: To make information in accounting statements relevant, reliable, and comparable.

- Revenues:

Increase equity and are the cost of assets earned by a company's activities. Provide services, when provided, if haven't provided (unearned), Ex: Fees earned, consulting services provided, sales of products, facilities rented to others, and commissions from services.

Why is accural accounting better?

It better reflects business performance thatn information about cash receipts and payments. it also increases the comparability of financial statements from one period to another. It is consistant with GAAP. It improves comparability of statements

- Financial Accounting (External) users: Lenders

Lenders, shareholders, governments, consumer groups, external auditors, customers.

- General Ledger

List of all accounts and their increases and decreases

- Managerial accounting (internal) users:

Officers, managers, internal managers, controller, budget officers.

- Unlimited Liabilities

Owners will be held responsible

- Limited Liabilities

Owners will not be held personally responsible for debt

- Assets

Provide a future benefit. Owned or controlled by a company. Ex: cash, supplies, equipment, land, prepaid, receivable, Etc. ---Increase if future benefit, decrease if used at one time.

- Internal Financial Reporting Standards:

Record what the "house" is worth

- SOX

Sarbanes-Oxley: to help curb financial abuses at companies that issue their stocks to the public.

- Financial Accounting Standards Board (FASB):

Sets both broad and specific principles.

- Liabilities

Something payable. What a company owes its non-owners in future payments, products, or services. Creditor's claims on assets.

• Adjusted Trial Balance

a list of accounts and balances prepared after adjustments are recorded.

- Trial Balance

a list of accounts and their balances at a point in time. Its purpose is to summarize the ledger accounts to simplify the task of preparing the financial statements. It also tests for the equity of the debit and credit account balances as required by double-entry accounting

- Chart of Accounts

a list of all accounts a company uses and includes an identification number assigned to each account

- Notes Receivable

a written promise to pay a definite sum of money on a future date. (longer than 1 month)

- Going-concern assumption

accounting information reflects a presumption that the business will continue operating instead of selling or closing

• Matching principle:

aims to record expenses in the same period as the revenues earned as a result of these expenses.

- Accrued liability:

amounts that are not paid yet.

Contra account

an account linked with another account, it has an opposite normal balance, and it is reported as a subtraction from that other account's balance

- Accounting

an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.

Fiscal year:

any 12 consecutive mothn used to base annual financial reports on. it is also acceptable to adopt an annual reporting period of 52 weeks

- Ethical Behavior

beliefs distinguished from right and wrong.

- Business entity assumption

business is accounted for separately from other business entities including its owner.

- Unearned Revenue

collected before it is earned, before services or goods are provided.

- Full disclosure principle

company must report the details behind financial statements that would impact users decisions

Interim financial statement

covering 1, 3, or 6 months of activity.

- Expenses

decrease equity and are the cost of assets or services used to earn revenues. Ex: cots of employee time, use of supplies and advertising, utilities, and insurance services from others.

- Balance Sheet

describes a company's financial position at a point in time (types and amounts of assets, liabilities and equity)

- Accounts Receivable

due within the next number of days. promises of payment from buyers of our products and/or services. (Credit sales, sales on credit, or sales account)

- Double entry accounting

every transaction or event must affect at least 2 accounts. One debited and one credited. Equal on both sides.

- Statement of Owners Equity:

explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time.

- Securities and Exchange Commission (SEC):

government group that establishes reporting requirements for companies that issue stock to the public

- Statement of Cash Flows

identifies cash inflows (receipts) and cash outflows (payments) over a period of time .

Prepiad Expenses:

items paid for in advance of receiving their benefits. When these assets are used, their costs become expenses.

- Corporation

legally separate from owners, responsible for acts/debts. Can conduct business with rights, duties, responsibilities, of a person. Managers are legal agents (called stock holders), are not liable for corporate acts.

- Sole Proprietorship

owned by 1 person, no legal requirements to meet a proprietorship, separate entity for accounting purposes (but it's still not a separate legal entity from its owner, tax is reported and taxed on the owner's personal income tax return.

- Partnership

owned by 2 or more people, called partners. No legal requirmebnts must be met. Must be an agreement between partners to run a business together (oral or written), unlimited liability, each partners share of profits is reported and taxed on that partners tax return, called LLC's

Time period assumption

presumes that an organization's activities can be divided into specific time periods such as a month, 3 month quarter, a six month interval or a year

- Revenue Recognition Principle

provides guidance on when a company must recognize/record revenue

Accounting (reporting) period:

provides timely information, accounting systems prepare reports at regular intervals

- Accounts Payable:

purchase of merchandise, supplies, equipment, or services made by an oral or implied promise to pay later

Accrued expenses

refers to costs that are incurred in a period but are both unpaid and unrecorded. Must be reported on an income statement of the period when incurred.

Accrued revenues

refers to revenues earned in a period that are bot unrecorded and not yet recieved in cash (or other assets) Commonly result from partially completed jobs or interest earned.

Annual financial statement

reports covering a one year period

- Cash basis of accounting

revenues are recognized when cash is received and expenses are recognized when cash is paid. Not consistent with GAAP

- Time Period Assumption

the life of a company can be divided into time: months and years.

- Equity

the owner's claim on assets. Equity is equal to assets minus liabilities

Depreciation:

the process of allocating the cost of plant assets over their expected useful lives. adjusting entries for depreciation expense involve increasing (debiting) expenses and increasing (crediting) a special account called accumulated depreciation.

• Purpose of adjusting journal entries

to bring an asset or liability account balances its proper amount. This entry also updates the related expense or revenue

- Accrual basis accounting

uses the adjusting process to recognize revenues when earned and match expenses when incurred with revenues. This means the economic efforts of revenues and expenses are recorded when earned or incurred, not when cash is received or paid. - Consistent with GAAP.

- Monetary Unit Assumption

we can express transactions and events in monetary, or monetary units.

- Account

what we use to record increases and decreases to specific assets, liabilities, capital withdrawals, revenues, or expenses.