ACCT 250 GCU, Accounting 250 GCU
When to Record Revenue Pg.161 The Amount of Revenue to Record
The revenue recognition principle requires companies to record revenue when it has been earned—but not before. Revenue is recorded for the actual selling price of the item or service transferred to thecustomer.
Accumulated Depreciation
The total amount of depreciation expensed thus far in the asset's life
Residual Value Pg.166
The value of a depreciable asset at the end of its useful life.
Internal Users
Those individuals directly involved in managing and operating the company.
External Users
Those individuals that are NOT directly involved in operating the company.
International Accounting Standards Board (IASB) Pg.33
The private organization that oversees the creation and governance of International Financial Reporting Standards (IFRS).
Financial Accounting Standards Board (FASB) Pg.31
The private organization that oversees the creation and governance of accounting standards in the United States.
Depreciation Pg.166
The process by which businesses spread the allocation of a plant asset's cost over its useful life.
Ledger Pg.91
The record holding all the accounts of a business, the changes in those accounts, and their balances.
Expenses
Cost of assets consumed or services used (cost of goods sold, selling, marketing, and administrative expense)
What are two examples of different types of liabilities?
- Notes payable- Bonds payable
Liabilities arising from expenses include:
- Accounts payable - Interest payable - Wages payable
What are the different Internal Users?
- Finance -Marketing -Management -Human Resources
What are the three principal types of business activity?
- Financing: getting outside money - Investing: purchases (assets) needed to operate - Operating: actual business operations
What are the different External Users?
- Investors - Creditors - Investors
What are the four financial statements?
1. Income Statement 2. Statement of Retained Earnings (SORE) 3. Balance Sheet 4. Statement of Cash Flows
How do you prepare financial statements?
1. Income Statement:Reports the net income or net loss of a business for specific period Revenues- Expenses = Net Income or Net Loss 2. Statement of Owner's Equity: Reports on the changes in owner capital for a specific period Capital, beginning+ Owner Contributions + Net Income - Owner Withdrawals Net Loss = Capital, ending 3. Balance Sheet: Reports on an entity's assets, liabilities, and owner's equity as of a specific period date. Assets= Liabilities + Equity, 4. Statement of Cash Flows:Reports on a business's cash receipts and cash payments during a period.Includes three sections: Cash flows from operating activities, cash flow from investing activities, and cash flows from financing activities.
Correcting Trial Balance Errors Pg.112
1. Search the trial balance for a missing account. 2. Divide the difference between total debits and total credits by 2. 3. Divide the out-of-balance amount by 9.
Straight-line Method Pg.166
A depreciation method that allocates an equal amount of depreciation each year. (Cost − Residual value) ∕ Useful life.
Trial Balance Pg.111
A list of all ledger accounts with their balances at a point in time.The trial balance summarizes the ledger by listing all the accounts with their balances—assets first, followed by liabilities, and then equity. The account balances are taken directly from the trial balance and are used to prepare the income statement, statement of owner's equity, and balance sheet. In
Journal Pg.96
A record of transactions in date order. We post from the journal to the ledger. Debits in the journal are posted as debits in the ledger and credits as credits—no exceptions.
International Financial Reporting Standards (IFRS) Pg.33
A set of global accounting guidelines, formulated by the International Accounting Standards Board (IASB).
Generally Accepted Accounting Principles (GAAP)
A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes
Double-Entry System Pg.92
A system of accounting in which every transaction affects at least two accounts.
Generally Accepted Accounting Principles (GAAP) Pg.31
Accounting guidelines, currently formulated by the Financial Accounting Standards Board (FASB); the main U.S. accounting rule book.
Examples of current liabilities:
Accounts payable, Salaries and wages payable, Notes payable, Interest payable, Income taxes payable, Unearned Revenue
Revenues
Amounts earned from the sale of products and other sources (sales revenue, service revenue, and interest revenue)
What is an account?
An account is a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period.A chart of accounts lists a company's accounts along with account numbers.
Fiscal Year Pg.160
An accounting year of any twelve consecutive months that may or may not coincide with the calendar year.
Adjusting Entry Pg.163
An entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur.
Economic Entity Assumption Pg.32
An organization that stands apart as a separate economic unit.
Investments
Another example of an investing activity (investing in another business through stocks, bonds, etc)
What can change as a result of transactions?
Assets, liabilities, and/or stockholder's equity
Time Period Concept Pg.160
Assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
Statement of Retained Earnings
Beg. R/E + Net Income - Dividends = End. R/E
Examples of long-term liabilities:
Bonds payable, Mortgages payable, Long-term notes payable, Lease liabilities, Pension liabilities
Financial Statements Pg.42
Business documents that are used to communicate information needed to make business decisions.
Current Asset examples:
Cash, ST Investment, Receivables, Memories, Prepaid Expenses
Certified Management Accountants (CMAs) Pg.30
Certified professionals who specialize in accounting and financial management knowledge. They typically work for a single company.
Materiality
Company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor
Controllers Pg.30
Compile financial statements, interact with auditors, and oversee regulatory reporting.
Property, Plant, & Equipment (PPE)
Computers, delivery trucks, furniture, buildings
Standard classification of assets:
Current Assets, Long-term Investments, PP&E, Intangible Assets
Standard classification of liabilities:
Current Liabilities, Long-term liabilities, Stockholder's Equity (common stock + end. R/E)
Intangible Assets
Do not have physical substance, Includes goodwill, patents, copyrights, and trademarks or trade names
Inventory
Goods available for sale to customers
Matching Principle Pg.161
Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period
Retained Earnings
Income retained for use in the business
How do you use financial statements to evaluate business performance?
Income statement evaluates profitability.■ statement of owner's equity studies the amount of earnings that were kept andreinvested in the company.■ Balance sheet details the economic resources the company owns as well as debts the company owes.■ Statement of cash flows shows the change in cash.■ Return on assets (ROA) = Net income / Average total assets
Long-term Investments
Investments in stocks and bonds of other corporations that are held for more than one year, PP&E, Long-term notes receivable
Common stock
Investments of assets into the business by the stockholders The term used to describe the amount paid by stockholders for shares they purchase.
Accounting Information System
Keeps track of the results of each of these business activities.
Certified Public Accountants (CPAs) Pg.29
Licensed professional accountants who serve the general public.
Plant Assets Pg.165
Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business. We record no depreciation for land, as its value typically does not decline with use.
Liquidity Ratios
Measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Solvency Ratios
Measures the ability of the company to survive over a long period of time
Profitability Ratio
Measures the income or operating success of a company for a given period of time
Earnings Per Share (EPS)
Measures the net income earned on each share of common stock., (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding
Debt to Assets Ratio
Measures the percentage of total financing provided by creditors rather than stockholders
Creditors
Party to whom amounts are owed to
Dividends
Payments to stockholders
Auditors Pg.30
Perform reviews of companies to ensure compliance to rules and regulations. audit: An examination of a company's financial statements and records.
What are the benefits of sections of a classified balance sheet?
Presents a snapshot at a point in time - To improve understanding, companies group together similar assets and similar liabilities together
Investing Activities
Purchase of resources a company needs to operate
Expense Recognition Principle
Recognize expense in the period in which efforts are made to generate revenue
Financial Accounting Standards Board, useful information should possess two fundamental qualities, which are:
Relevance, Faithful Representation
Balance Sheet
Reports assets and claims to assets at a specific point in time. - A = L + SE List assets first, followed by liabilities and stockholder's equity (Common Stock + End. R/E)
Income Statement
Reports revenues and expenses for a specific period of time. Revenues - Expenses = Net Income/Loss
Revenue Recognition Principle Pg.160
Requires companies to record revenue when it has been earned and determines the amount of revenue to record.
Monetary Unit
Requires that only those things can be expressed in money are included in the accounting records. (Ex: salaries paid)
Assets
Resources owned by a business
Financial analysts Pg.30
Review financial data and help to explain the story behind the numbers.
Accounts Receivable
Right to receive money from a customer as the result of a sale
Statement of Retained Earnings (SORE)
Shows amounts and causes changes in retained earnings during the period - Time period is the same as that covered by the income statement - Users can evaluate dividend payment practices
Economic Entity
States that every economic entity can be separately identified and accounted for. (Ex: Ford
Journalizing and posting process Pg. 97
Step 1: Identify the accounts and the account type (asset, liability, or equity). Step 2: Decide whether each account increases or decreases using the rules of debits and credits. Step 3: Record the transaction in the journal.Step 4: Post the journal entry to the ledger.Step 5: Determine whether the accounting equation is in balance.
How do you record transactions?
Step 1: Identify the accounts and the account type. Step 2: Decide whether each account increases or decreases using the rules of debits and credits. Step 3: Record the transaction in the journal. Step 4: Post the journal entry to the ledger. Step 5: Determine whether the accounting equation is in balance.
Accounting Information System
System of collecting and processing transaction data and communication financial information to decision-makers.Most businesses use computerized accounting systems.
Monetary Unit Assumption Pg.33
The assumption that requires the items on the financial statements to be measured in terms of a monetary unit.
Normal Balance Pg.93
The balance that appears on the increase side of an account.
Going Concern
The business will remain in operation for the foreseeable future
Working Capital
The difference between the amounts of current assets and current liabilities, current assets - current liabilities
The Four-Column Account Pg.109
The four-column account still has debit and credit columns, but it also adds two additional columns that are used to determine a running balance.
Accounting Pg.28
The information system that measures business activities, processes the information into reports, and communicates the results to decision makers.
Posting Pg.97
Transferring data from the journal to the ledger. We post from the journal to the ledger. Debits in the journal are posted as debits in the ledger and credits as credits—no exceptions.
Cost accountants Pg.30
Typically work in a manufacturing business. Help analyze accounting data.
Securities and Exchange Commission (SEC) Pg.31
U.S. governmental agency that oversees the U.S. financial markets.
Business systems Pg.30 analysts
Use accounting knowledge to create computer systems.
Net Loss
When expenses exceed revenues
Net Income
When revenues exceed expenses
What are the advantages of a Sole Proprietorship?
easy to set up, lower taxes, owner control
What are the advantages of a Partnership?
easy to set up, lower taxes, shared control, broader resources
What are the disadvantages of a Corporation?
harder to set up, higher taxes
What are the advantages of a Corporation?
no personal liability, easy to transfer ownership, easy to raise funds
What are the disadvantages of a Partnership?
personal liability, hard to transfer ownership
What are the disadvantages of a Sole Proprietorship?
personal liability, hard to transfer ownership
Cost principle
recording assets at historical cost
How do you analyze a transaction?
■ A transaction affects the financial position of a business and can be reliably measured. steps:1. Identify the accounts and account type (Asset, Liability, or Equity)2. Decide whether each account increases or decreases. 3. Determine whether the accounting equation is in balance.
What are the organizations and rules that govern accounting?
■ Generally Accepted Accounting Principles (GAAP) are the rules that govern accounting in the United States.■ The Financial Accounting Standards Board (FASB) is responsible for the creation and governance of accounting standards (GAAP).
Why is accounting important?
■ It's the language of business.■ Accounting is used by decision makers including individuals, businesses, investors,creditors, and taxing authoritie■ Accountants can be licensed as either a certified public accountant (CPA) or certified management accountant (CMA).
