Accounting Notes Chapter 1-6

Costs are matched with revenue in two ways:

Direct association of costs with specific revenue transactions Systematic allocation of costs over the "useful life" of the expenditure

Revenue:

The price for goods sold and services rendered during a given accounting period Increases owners' equity

The balance in Retained Earnings account represents:

The total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends

Income statement depicts

The way cash has changed during a designated period of time

Liabilities are:

Debts that represent negative future cash flows for the enterprise.

How to make a T Account

-Increases are recorded on one side of the T account, and decreases are recorded on the other side -Receipts are on the debit side -Payments are on the credit side -The balance is the difference between the debit and credit entries in the account

Perpetual inventory system

A method of accounting for inventory that records the sale or purchase of inventory in near real-time, through the use of computerized point-of-sale and enterprise asset management systems.

Periodic inventory system

A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet.

Cost principle

Accounting information is based upon actual cost incurred (historical cost)

Objectivity principle

Accounting information must be unbiased and based upon independent evidence

Liabilities include:

Accounts payable (amounts owed to creditors for assets purchased on account), taxes payable, and wages payable (amounts owed to our employees at the end of the accounting period).

Professional Organizations

American Institute of Certified Public Accountants Institute of Management Accountants Institute of Internal Auditors American Accounting Association Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Three financial statements

Balance sheet Income statement Statement of cash flows

Primary financial statements

Balance sheet, Statement of cash flows, Income statement

The entire group of accounts is kept together in an accounting record is:

Called a ledger

Types of adjusting entries

Converting assets to expenses Converting liabilities to revenue Accruing unpaid expenses Accruing uncollected revenue

Monitoring

Enables the company to evaluate the effectiveness of its system of internal control over time

The Role of Accounting Records:

Establishes accountability for assets and transactions Keeps track of routine business activities Obtains detailed information about a particular transaction Evaluates efficiency and performance within company Maintains evidence of a company's business activities

Types of accounting information

Financial, Tax, Management

Control Environment

Foundation for all other elements of internal control

Institutional features

Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board International Accounting Standards Board Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board Audits of Financial Statements Legislation

Gross profit margins:

Gross profit divided by net sales Overall gross profit margin Gross profit margins by department and products

Risk Assessment

Identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization's objectives

Accounts are:

Individual records showing increases and decreases

Information and Communication

Information systems developed to capture and communicate operational, financial, and compliance-related information necessary to run the business.

Basic Functions of an Accounting System

Interpret and record business transactions, Classify similar transactions into useful reports, Summarize and communicate information to decision makers

The equities of an entity include:

Investments by owners, withdrawals by owners, and earnings retained by the business. Investments by owners and net income increase owners' equity. Payments to owners and net losses decrease owners' equity.

Information users

Investors, Creditors, Managers, Owners, Customers, Employees, Regulators, SEC, IRS, FTC

Examples of items disclosed:

Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet Specific customers that account for a large portion of revenue Unusual transactions and related party transactions

Two main concerns:

Liquidity, Profitability

External users of accounting information

Owners, Creditors, Potential investors, Labor unions, Governmental agencies, Suppliers, Customers, Trade associations, General public

Control Activities

Policies and procedures that management puts in place to address the risks identified during the risk assessment process

Financial Information provided

Profitability, Financial position, Cash flows

Objectives of External Financial Reporting

Provide specific information about economic resources, claims to resources, and changes in resources and claims. Provide information useful in assessing amount, timing and uncertainty of future cash flows. Provide general information useful in making investment and credit decisions.

Matching Principle

Revenue should be recognized at the time goods are sold and services are rendered. Expenses should be recorded in the period in which they are used up

T accounts are:

Simplified versions of the ledger account that only show the debit and credit columns

Going-concern assumption

States that in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future

The basic accounting equation states:

That assets are equal to liabilities plus equity of a company. The equation makes sense because it states that assets must be equal to the claims against those assets.

Net income also appears on:

The Statement of Retained Earnings

Expenses:

The costs of goods and services used up in the process of earning revenue Assets are economic resources that are owned by the business and are expected to benefit future operations. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies.

Time Period Principle

To provide users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length

Net sales:

Trends over time Comparable store sales Sales per square foot of selling space

Stable-dollar principle

We will only record accounting information that can be expressed in monetary units, usually in dollars in the US

Balance sheet describes:

Where the enterprise stands at a specific date