Int Acct 2

estimates

accountants often must make estimates in order to comply with the accrual accounting model

debit

(left side) assets = increased/ debit, decreased/ credit

lesson 4

the next step in the processing cycle is to record the effect of internal events on the accounting equation. These transactions are commonly referred to as adjusting entries. Adjusting entries can be classified into 3 types : 1. prepayments, 2. accruals, 3. estimates prepayments are transactions in which the cash flow precedes expense or revenue recognition accruals involve transactions where the cash outflow/inflow takes place in a period subsequent to expense/ revenue recognition. Estimates for items such as future bad debts on receivables often are required to comply with the accrual accounting model.

credit

(right side) liabilities = increased/ credit, decreased/debit SE = increased / credit, decreased/ debit

accounting process - during period

1. obtain information about external transactions from source documents 2. analyze transactions 3. record the transaction in a journal 4. post from the journal to the general ledger accounts

accounting process - end of period

5. prepare an un-adjusted trial balance 6. record adjusting entries and post to the general ledger accounts 7.prepare an adjusted trial balance 8. prepare financial statements

accounting process - end of year

9. close the temporary accounts to retained earnings 10. prepare a post-closing trial balance

accounting equation

Assets = liabilities + OE *OE = -owner investment/ withdrawal -revenues/expenses -gains/ losses *dual affect because resources always affect both sides *SE = paid-in capital retained earnings

statement of shareholder's equity

Its purpose is to disclose the sources of the changes in the various permanent shareholders' equity accounts that occurred during the period from investments by owners, distributions to owners, net income, and other comprehensive income

income statement

The income statement is a change statement that summarizes the profit-generating transactions that caused shareholders' equity (retained earnings) to change during the period.

statement of cash flows

The purpose of the statement is to report the events that caused cash to change during the period. The statement classifies all transactions affecting cash into one of three categories: (1) operating activities, (2) investing activities, and (3) financing activities. Operating activities are inflows and outflows of cash related to transactions entering into the determination of net income. Investing activities involve the acquisition and sale of (1) long-term assets used in the business and (2) nonoperating investment assets. Financing activities involve cash inflows and outflows from transactions with creditors and owners.

lesson 5

adjusting entries are recorded in the general journal and posted to the ledger accounts at the end of any period when financial statements must be prepared for external use. after these entries are posted to the general ledger accounts, an adjusted trial balance is prepared

lesson 2

after determining the dual effect of external events on the accounting equation, the transaction is recorded in a journal. A journal is a chronological list of transactions in debit/credit form

adjusting entries

are required to satisfy the realization principle and the matching principle prepayments- transactions where cash is paid/ received before a related expense or revenue is recognized accruals - transactions where cash is paid/received AFTER a related expense or revenue is recognized estimates- accountants must often make estimates in order to comply with the accrual accounting model

permanent accounts

assets, liabilities, paid-in capital, retained earings

lesson 7

at the end of the fiscal year, a final step in the accounting processing cycle, closing, is required. the closing process serves a dual purpose: 1-the temporary accts (rev. and exp) are reduced to zero balances, ready to measure activity in the upcoming accounting period, and 2 - these temporary account balances are closed/transferred to retained earnings to reflect the changes that have occurred in that account during the period. often, an intermediate step is to close revenues and expenses to income summary; then income summary is closed to retained earnings

lesson 8

cash basis accounting produces a measure called net operating cash flow. this measure is the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers. on the other hand, the accrual accounting model measures an entity's accomplishments and resource sacrifices during the period, regardless of when cash is received or paid. accountants sometimes are called upon to convert cash basis financial statements to accrual basis financial statements, particularly for small businesses.

economic events

cause changes in the financial position of the company *can be classified as external events or internal events

internal events

do not involve exchange transaction but do affect company's financial position

external events

involve exchange between the company and separate economic entity - purchasing merch inventory for cash, borrowing cash from bank, paying salaries to employees

accrued receivables

involve situations when the revenue earned in a period prior to the cash receipt -the adjusting entry required to record an accrued revenue is a debit to an asset, a receivable, and a credit to revenue

balance sheet

is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement reporting events that occurred during a period of time, the balance sheet is a statement that presents an organized list of assets, liabilities, and shareholders' equity at a point in time. *Balance sheet items usually are classified (grouped) according to common characteristics.

statement of comprehensive income

is to report the changes in shareholders' equity during the period that were not a result of transactions with owners. A few types of gains and losses, called other comprehensive income (OCI) or loss items, are excluded from the determination of net income and the income statement, but are included in the broader concept of comprehensive income. Comprehensive income can be reported in one of two ways: (1) in a single, continuous statement of comprehensive income, or (2) in two separate, but consecutive statements

accrued liabilities

represent liabilities recorded when an expense has been incurred prior to cash payment

temporary accounts

revenues, gains, expenses, losses

lesson 1

the accounting equation underlies the process used to capture the effect of economic events. The equation ( Assets = Liaiblities + SE) implies an equality between the total economic resources of an entity (its assets) and the total claims against the entity (lib. + eq). it also mplies that each economic event affecting this equation will have a dual effect because resources always must equal claims

lesson 6

the adjusted trial balance is used to prepare the financial statements. the basic financial statements are income statement statement of comp. income statement of cash flows statement of SE the purpose of the income statement is to summarize the profit generating activities of the company that occurred during a particular period of time. a company also must report its other comprehensive income or loss items either in a single, continuous statement, or in a separate statement of comprehensive income. the statement of comprehensive income begins with net income as the first component followed by oci items to arrive at comprehensive income. the balance sheet presents the financial position of the company on a particular date. the statement of cash flows discloses the events that caused cash to change during the reporting period. the statement of shareholders' equity discloses the sources of the changes in the various permanent shareholders' equity accounts that occurred during the period.

lesson 3

the next step in the processing cycle is to periodically transfer, or post, the debit/ credit information from the journal to individual general ledger accounts. A general ledger is simply a collection of all of the company's various accounts. Each account provides a summary of the effects of all events and transactions on that individual account. The process of entering items from the journal to the general ledger is called posting. an unadjusted trial balance is then prepared