Accounting Ch 1-3

increase debits

DEAD Expenses Assets Dividends

Two things affect Retained Earnings

Net Income (or Net Loss) and Dividends

Accruals

accrued revenue & asset OR accrued expense & liability Business event or action occurs during the period (No JE is recorded) followed by End of the period (Record AJE) followed by Cash is exchanged in a subsequent period (JE made to record cash exchange)

long term liability

anything not current

trail balance won't detect...

duplicate entries unposted journals incorrect T chart entries

Revenues

increases in retained earnings that arise from the operations of the company. It is the amount earned by delivering goods or rendering services. Revenues increase income (earnings or profits)

Transaction Analysis

method used in accounting to determine how each transaction affects the various accounts in the financial statements. (Determine what account is affected, how the account is affected (increase or decrease), and its affect on the financial statements. (After each transaction is analyzed and recorded, the accounting equation must stay balanced.)

slide error

moved decimal place over... difference divisible by 9

Statement of retained earnings

summarizes the transactions which occur during A CERTAIN PERIOD OF TIME CHANGE YEAR TO YEAR (like a movie) FOR THE YEAR ENDED which affect the earnings retained in the business.

Accounting

the PROCESS used to record ECONOMIC INFORMATION about a BUSINESS ENTITY in order to generate REPORTS used by DECISION-MAKERS

"Recognizing" a revenue

the company has earned a revenue (by delivering the product or performing the service) & now can record the revenue in an entry

expense is "incurred"

the expense has occurred (~ expense helped to generate the revenue) & the company can record the expense in an entry.

Operating cycle (in terms of classified balance sheet)

time it takes the company to take its cash, buy goods or services, sell those goods or services to customers and collect the cash again.

deferrals

unearned revenues, pre payments and depreciation cash is exchanged during a period of time(JE made to record cash exchange) followed by the business event the action occurs during the period (no JE recorded) Followed by the end of the period (Record AJE) need to prep financial statement and have all transactions recorded

Company purchases on account/credit

Assets go up and Accounts payable go up (dr. asset and cr. A/P)

current asset

assets that are turned into cash within 1 year

current liability

company will pay within the year

Equity

owners claims on assets

Operating cycle

the time span it takes the company to convert cash to goods or services

Account

1. A basic storage unit for information (increases or decreases) about a particular element (asset, liability, equity, revenue, expense, or dividend). 2. Kept in the general ledger (G/L) & grouped by category: Assets Liabilities Equity Dividends Revenues Expenses 3. When a transaction (an event) affecting the company occurs, the information is recorded in the appropriate account. 4. The accounting equation must balance after each transaction is recorded

Who uses financial statements

1. External Decision Makers: shareholders, owners, creditors, regulatory agencies, etc. 2. Internal Decision Makers: primarily management

Increase Credits

CRLS Revenues Liabilities Shareholder Equity

liabilities

debtor or creditors claims on the companies assets (obligations or debts)

DR. and CR. switch

difference will be divisible by 2

Balance sheet

(statement of financial position) a SNAPSHOT of the company at a single point in time Assets=liabilities+equity

Accrued expenses and liabilities

(type = accrual): Occurs when expense is incurred (occurs) before it is paid in cash or recorded. (Examples: Employees' salaries, income taxes, interest

Accrued revenues and assets

(type = accrual): Occurs when revenue is earned (service is performed or product is delivered) before cash is received. (Examples: credit card sales, interest

Unearned revenues

(type = deferral) (also called unearned fees or unearned sales or deferred revenues): Occurs when the company receives cash in advance of performing a service or delivering goods. (This is what happens at MU with your tuition $. Other examples: customer prepayments for goods/services.)

Prepayments

(type = deferral): Occurs when the company pays for expenses before they are used, consumed, or expired. (Examples: rent, insurance, supplies, taxes)

Depreciation

(type = deferral): Systematic method to allocate the cost of an asset (e.g. buildings or equipment) to expense and thereby match the cost of the asset with the revenues that the asset helps to generate. This is done over the time period the asset is used to generate revenues (~ called the useful life of the asset).

Sole proprietorship

1 owner, simple to establish, company is not considered a separate legal entity, company is taxed through / on owner's tax return, owner is personally liable (called unlimited liability), limited ability to obtain resources, entity concept applies (keep records separate from owners), company has a limited life

Why AJEs are required

1. AJEs ensure that all revenues and expenses are recorded in the proper period. 2. AJEs ensure that asset and liability balances in the balance sheet are properly stated in the balance sheet. 3. AJEs always include a revenue or an expense (a nominal or temporary account on the income statement) AND an asset or a liability (a real or permanent account on the balance sheet). 4. AJEs affect the both the income statement and the balance sheet. 5. AJEs NEVER contain cash.

Steps in the accounting cycle

1. ANALYZE the source documents & determine which accounts are affect & how affected. (Apply rules for debits/credits to make account change occur.) 2. JOURNALIZE ~ Record the journal entry or entry in the journal (journal = book of original entry) 3. POST (transfer) the journal entry from the journal to the general ledger (G/L). (G/L is represented by our T-accounts.) 4. PREPARE UNADJUSTED TRIAL BALANCE. (List of accounts in ledger order: assets, liabilities, equity, dividends, revenues, expenses with their ending bal. Ensures total debits = total credits.) 5. PREPARE ADJUSTING ENTRIES, record them in the appropriate journal and post them to the ledger(s). 6. PREPARE ADJUSTED TRIAL BALANCE. (List of accounts in ledger order: assets, liabilities, equity, dividends, revenues, expenses) with their ending bal. Ensures total debits = total credits.) 7. PREPARE FINANCIAL STATEMENTS FORM THE ADJUSTED TRIAL BALANCE. (Prepare I/S Statement of RE Balance Sheet Statement of Cash Flows) 8. PREPARE CLOSING ENTRIES (Analyze, journalize ~ record them in the appropriate journal, and post them to the ledger.) 9. PREPARE A POST CLOSING BALANCE (List of accounts in ledger order: assets, liabilities, equity, dividends, revenues, expenses) with their ending balances. Ensure total debits = total credits. Post closing trial balance contains only permanent accounts. In post closing trial balance all temporary accounts should have $0 balances and therefore do not appear.)

What are the 3 forms of business

1. Sole proprietorships 2. Partnerships 3. Corporations

transactions...

1. can be quantified and are recorded in the accounting records. 2. are analyzed according to their effect on the accounting equation (Assets = Liabilities + Equity) 3. affect individual elements (assets, liabilities, equity, revenues, expenses, or dividends) in the accounting records. 4. are recorded as entries in the JOURNAL and these entries are called journal entries. Process of recording journal entries in the journal is called journalizing. Entries affect at least two accounts (at least one debit and one credit). Total debits = total credits in every entry. 5. information from each journal entry is then posted (transferred) from the journal to the appropriate general ledger account.

two types of equity

1. contribute (paid in) capital 2. Retained Earnings

Why do external and internal decision makers need this information

1. external users need information regarding the company's cash flows and the stewardship of management 2. internal users need information to make decisions on how to run the company, what kind of investments to make, and how to finance the company's operations

5 types of AJEs

1. prepayments 2. Depreciation 3. unearned revenues 4. accrued revenues and assets 5. accused expenses and liabilities

GAAP was developed from

1.General Accounting Principles: 2. Specific Accounting Principles

Partnership

> 1 owner, simple to establish, company is not considered a separate legal entity, company is taxed through / on owner's tax returns, owners are personally liable (called unlimited liability), somewhat limited ability to obtain resources, entity concept applies (keep records separate from owners), company has a limited life

Corporations

>/= 1 owner, a little harder to establish, company is considered a separate legal entity and it files its' own tax return (Form 1120), owners not personally liable (called limited liability, can lose investment), greatest ability to obtain resources, entity concept (keep records separate from owners), easy to transfer ownership (just sell stock), can have limited or unlimited life.

Adjusted Trial Balance

After all adjusting entries (AJEs) are recorded in the journal & posted to the general ledger accounts, a second trial balance (the Adjusted Trial Balance) is prepared. The financial statements are prepared from the Adjusted Trial Balance. Adjusted Trial Balance lists all accounts with their ending balance. Trial balance helps to detect errors and ensures total debits = total credits.

Post-Closing Trial Balance

After the closing journal entries are recorded in the journal, posted to the G/L, a post-closing trial balance is prepared. The Post-Closing Trial Balance lists all accounts with their respective ending balances. The Post-Closing Trial Balance ensures that total debits equal total credits and helps to detect posting errors. The Post-Closing Trial Balance contains only permanent accounts (since all temporary accounts have zero balances after closing).

Closing entries

All of the temporary/nominal accounts (revenues, expenses and dividends) are closed (or zeroed out) in the process of recording closing entries. transfer the current period's effects of revenues, expenses, and dividends recognized (recorded) during the period to the permanent/real account: retained earnings that holds this information. ~ CJEs set the revenues, expenses & dividend accounts to zero so they are ready for the next period's activities. CJEs transfer the net income and dividends to the Retained Earnings account.

Income statement

a summary of the revenue and expenses FOR A CERTAIN PERIOD OF TIME (like a movie) FOR THE YEAR ENDED . . . . Income Statement reports operating success (income) or failure (loss). (Also called the Profit and Loss Statement, P&L Statement, Statement of Operations) Revenue - Expenses = Net Income

company purchases on account/credit

account payable goes down and cash goes down (dr. A/P and cr. Cash)

customer purchases on account/ credit

account receivable goes up and fees earned go up (dr. A/R and cr. Fees earned)

Transaction

an economic event that affects the financial position of a company and can be recorded in the accounting records

GeneralAccounting Principals

arose through general long-term use by practioners through time

Measurement Principle (cost or historical cost principal)

assets acquired (for the most part) are recorded in the accounting records at the actual cost (e.g. cash or cash equivalent price) that was paid to obtain the asset.

Current assets

assets that the company expects to use up or consume, convert to cash, or sell within the firm's next 12 months (or operating cycle if longer). If an asset isn't classified as current, it's considered long-term. Examples include: cash, accounts receivable, and inventories. (Not an all inclusive list.)

Going-Concern Assumption

assumes that the business will continue operating in the foreseeable future

Business Entity (or Entity) Assumption

assumes that the records of the business can be kept separate from owners or entities.

Monetary Unit Assumption

assumes the company can quantify transactions or events in monetary units (in US = dollars).

Time Period Assumption

assumes the life of a company can be divided up into time periods (months, quarters, or years) to report on.

GAAP

basic rules and regulations governing how companies record and report accounting information. GAAP was developed to make accounting information useful to decision-makes/users. For information to be useful it needs to be relevant (capable of making a difference in a decision) and reliable (trusted by users)

Cost-Benefit Constraint

benefits derived from providing information to users should outweigh the cost of providing the information.

customer pays on account/ credit

cash goes up and account receivable goes down (dr. Cash and cr. A/R)

Financing Activities

cash paid or received from borrowing long-term loans (notes, bonds, mortgages), selling the company's own stock, and paying cash dividends to owners.

investing activities

cash received or paid from buying or selling long-term assets (land, building, equipment etc.), lending money to others for the long-term, buying long-term investments in stocks or bonds of OTHER companies

Operating activities

cash received or paid from primary business activities. (e.g. selling goods, providing services, cost of sales, advertising paid, paying utilities, paying salaries, interest (paid or received), paying vendors/suppliers, etc.

Full Disclosure Principle

companies must report enough information for an informed user to make a decision.

expenses

decreases in retained earnings that result from the operations of the company. Expenses are the cost of doing business. Expenses act to decrease income

Dividends

distributions to stockholders (owners) of the company's earnings or its assets.

Statement of Cash flows

financial statement that explains how a business obtained (generated receipts) and used (spent) its cash during a certain period of time (like a movie). Change from year to year Cash Inflows - Cash Outflows = Net Change in Cash (Inflow or Outflow)

transportation error

flipped numbers around... difference divisible by 9

asset

get cash. economic resources that the business owns. benefit the company in the future. The company will use to consume these assets in effort to obtain other assets.

Permanent (or real) accounts

include all asset accounts, all liability accounts and all equity accounts (~ all accounts on the balance sheet). Balances in the permanent accounts roll forward from one period to the next. Last period's ending balance becomes this period's beginning balance. Permanent accounts ARE NOT closed/zeroed out in the closing entries.

Temporary (or nominal) accounts

include all revenue, expense, (all accounts on the income statement) and dividends (not on the income statement but still is a temporary account). Temporary accounts relate to a particular period and hold that period's information about the account. At the end of each period, these temporary accounts must be closed (zeroed) out and their contents transferred to the permanent account, Retained Earnings (RE) that holds this information on the balance sheet.

long term asset

land, building, equipment. doesn't get turned into cash

Current liabilities

liabilities or debts that the company expects to pay within one year (or operating cycle if longer). If liability isn't classified as current, it's considered long-term. Examples include: A/P, Salaries Payable, Interest Payable, and Taxes Payable. (Not an all inclusive list.)

Trial balance

listing of all accounts in the general ledger, with their respective ending balance. Accounts are listed in ledger order: (Assets ->Liabilities -> Equity Dividends -> Revenues-> Expenses). The balance in the account is listed after the accounts name (first column are debit balances, second column are credit balances). The last line in the trial balance is the total for each column.

Chart of Accounts

lists the company's accounts with their respective account numbers assigned to the account

Matching Principle (Expense Recognition Principle)

match costs of generating revenues as expenses in same time period as revenue is recorded on income statement. Revenues & expenses hold hands and go together on income statement in same period.

Materiality Constraint

only information that influences the decisions of a reasonable user need be disclosed in the financial statements.

Classified Balance Sheet

organizes assets into either current or long-term assets; and organizes liabilities into current liabilities or long-term liabilities

contributed (paid in) capital

owner claims resulting from owners contributing (giving) something to the company. owners then receive a stock certificate as proof of ownership COMMON STOCK

Retained earnings:

owners' claim coming from the business being profitable. The company kept these profits / earnings. The company did not distribute the earnings back to the owner's in the form of a distribution or a dividend.

Specific Accounting Principles

passed by the Financial Accounting Standards Board (FASB), the current rule-setting body in the accounting profession. Note: The Securities and Exchange Commission (SEC) also has the authority to set GAAP.

Revenue Recognition Principle

recognize / record revenue in the period of time (e.g. month, quarter, or year) when earned (earned essentially means when service is performed or product is delivered). Company doesn't need to receive cash to record revenue).