Accounting Chapter 1-3

Income statement

Revenes, expenses, net income -communicates operating performance for a period of time -net income: total revenue and gains minus total expenses and losses -most important financial statement -first before retained earnings -covers a period of time usually a year

Entity assumption

all organizations stand apart as a separate economic unit -divisions within the same organization can also be reported separately -separate from owners

liability

an economic obligation payable to an individual or organization outside the business

what is a prepaid expense?

asset

DEALOR

dr: dea cr: lor

long term assets

expected to be held and used for longer than one year -examples: property plant and equipment

credit

give -note payable, cash

revenues

increase in retained earnings from delivering goods and services

Net working capital

measure of a company's ability to pay current debts using current assets (measure of operating liquidity) -total current assets - total current liabilities

purchased photography supplies for cash

nothing swapped one asset for another

accounts

record of an asset, liability and stockholder's equity element (including revenues, expenses, and dividends) -records all changes -cabinet example

stockholder's equity

the stockholder's ownership interest in the assets of a company

a list of all accounts with their balances

trial balance

Deferrals

(Prepayments) -putting off -a deferral is an adjustment for an item in which the business paid or received cash in advance

1. Prepaid expense

(asset account)=An expense paid in advance -initially recorded as an asset -adjusting entry: the amount of the asset used/expired during the period must be expensed

2. Unearned revenue

(liability account)=revenues paid in advance -initially recorded -cash---revenue

repaired an old photograph for a customer and billed them for the service

(service revenue, account receivable) increase asset increase stockholders equity

owner's equity

(stockholder's equity) -equity represents owner (insider) claims on assets -Paid in Capital: amounts stockholders have invested -Retained Earnings: Net income, expenses, dividends

closing entries

-Prepares the accounts for the next period - Sets temporary accounts to zero -temporary accounts: closed to retained earnings at the end of the year, include revenues, expenses, and dividends -they transfer revenues, expenses, and dividends into the retained earnings account

4 elements of an account

-beginning balance -+/-increases to the balance --decreases to the balance -=ending balance

Accumulated depreciation

-contra asset -"accumulates" amounts charged to depreciation over the asset's life -companion account to each plant asset account -use it to persevere the cost of the long term asset

1.Accured expense

-expenses are recored when incurred to match revenues, not necessarily when cash is paid -examples: salary expense and salary payable, interest expense and interest payable, utilities expense and utilities payable -expense--cash

Adjusting entries

-occur at the end of every accounting period before a company can issue its financial statements

2. Accured revenue

-revenue recognized first before cash is received -revenue that has been earned but not yet collected -examples: sales revenue and accounts receivable when billing a customer at the end of the period -revenue--cash

trial balance

-shows that debits equal credits -prepared at the end of an accounting period -facilities the preparation of the financial statements -assets listed first then liabilities and stockholder's equity

useful

1. relevant and faithfully represented 2. comparable 3. timely 4. understandable

the accounting cycle

1. source documents 2. transaction analysis 3. record in journal 4. post to ledger 5.unadjusted trial balance 6. record and post adjusting entries 7. adjusted trial balance 8. financial statements 9. close temporary accounts 10. post closing trial blanace

two purposes of the adjusting process

1.measure income 2.update the balance sheet

Expense recognition principle

AKA the "Matching Principle" -Expenses are the costs of assets used up and of liabilities created in earning revenue -Expenses need to be measure and recognized (recorded) in the same period in which the related revenues are earned, not necessarily when cash is paid

accounting equation

Assets=Liabilities + Owners Equity -must always stay in balance -stockholder's equity is paid in capital and retained earnings

adjusting entry affects what

1.revneus or expenses (to measure income) 2.asset or liability (to update the balance sheet)

what do adjusting entries never involve

CASH because cash is always kept up to date

financial statements

Income Statement Statement of retained earnings balance sheet cash flows

revenue principle

WHEN to record revenue and WHAT amount to record 1. When to record: -revenue is recorded when earned (not necessarily when cash is received) -revenue is earned when the good or service has been delivered 2. Amount to record: -cash value (i.e the price)

income statement

a financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period

accounts payable

a liability backed by the general reputation and credit standing of the debtor

time period concept

accounting information is reported at regular intervals -important to record accounting information in the correct accounting period

book value

amount reported on the balance sheet of "the books" =historical cost of plant asset-accumulated deprecation

current asset

an asset that is expected to be converted to cash sold or consumed during the next 12 months or an operating cycle whichever is longer

current ratio

another means of expressing operating liquidity -current ratio= total current assets divided by total current liabilities

historical cost principle

assets are recorded at their actual cost (the amount paid on the date of purchase) -aka the purchase price principle

paid monthly rent

assets decrease stockholder's equity decreases

paid employee salary

assets decrease stockholders equity decreases

purchased lab equipment on account

assets increase liabilities increase

owner invests cash and receives common stock

assets increase stock holder's equity increase

provided developing services and received cash

assets increase stockholders equity increases

stable monetary unit assumption

assumption that the dollar's purchasing power is relatively stable

how much in total debt does the company have?

balance sheet

what assets does the company have?

balance sheet

what is the company's financial position at the end of the year?

balance sheet

the amount of an entity's receivables as of a given date generally appear on the

balance sheet in the current asset section

Statement of retained earnings

beginning retained earnings net income cash dividends ending retained earnings -communicates what a company did with its net income during the period -retained earnings represents the cumulative earnings kept by a company

the ending balance of retained appears on

both the statement of retained earnings and the balance sheet (beginning isn't)

Journal

chronological record of transactions 1. specify each account affected by the transaction and classify by type 2. determine if the accounts are increased or decreased 3. record (journalize) in the journal following the rules of debits and credits -debits must equal credits -journal--post--ledger

Statement of cash flows

communicates generating cash and how a company generated and used cash during the period -operating activities (starts with net income) -investing activities -financing activities (includes paying dividends)

stockholder's equity

contributed to capital and retained earnings

liabilities

creditor (outsider) claims on assets -represent an obligation to pay or for performance -what other people give to support assets -wages payable, accounts payable

Balance sheet

current assets long term assets total assets current liabilities long term liabilities stockholder's equity total liabilities and stockholder's equity -illustrates the company's financial position at a point in time -snap shot -prepared as of a specific date

double entry accounting means that each transaction

debits at least one account and credits at least one account

paid the balance of the account for the lab equipment

decrease asset decrease liability

paid a dividend

decrease assets decrease stockholders equity

rules to liabilities

decrease debit increase credits

rules to owner's equity

decrease debits increase credits

expenses

decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues

dividends

distributions by a corporation to its stockholders -never effect net income because its not an expense -recorded as direct reductions of retained earnings

retained earnings

earning that have not been distributed to stockholders

assets

economic resources expected to provide a future benefit -cash, merchandise inventory, equipment, knowledge -resources consumed to make profits

current assets

expected to be used, sold or consumed within 12 months -examples: cash, accounts receivables, supplies, inventory, and prepaid expenses

what is not a current asset

furniture

Assets

future benefit -cash, accounts receivables, notes receivables, inventory, prepaid expenses, land/buildings/equipment/furniture/fixtures

GAAP

generally accepted accounting principles -accounting guidelines formulated by the financial accounting standards board that govern how accountants measure, process, and communicate financial information

collection of cash on account would

have no effect on net income or stockholder's equity because they balance

an investor would evaluate which financial statement?

income statement

how well did the company perform during the year?

income statement

what were the company's net sales for the year

income statement

rules to assets

increase debit decrease credit

increases in stockholder's equity arise from

investments in the business by owners and earning net income

the basic summary device of accounting

ledger

what is unearned revenue?

liability

balance sheet

list of an entity's assets, liability, and owners' equity as of a specific date

adjusted trial balance

lists all the accounts and their final, adjusted balances

Accounting

measures business activities, processes data into reports, and communicates results to decision makers

limited liability company/partnership

members (many) -popular form of multi owner businesses -no business income tax -no personal liability for owners

cash

money and any medium of exchange that a bank accepts at face value

collected for the photograph repair done earlier in the month

nothing

liabilities

obligation to pay or to perform -accounts payable, notes payable, accrued liabilities, unearned revenue

current liabilities

obligations/debts payable during the next 12 months -examples: long term notes payable, bonds payable

Adjusting the accounts

occurs at the end of every accounting period -needed because some account are not kept up to date during the accounting period -always involve one expense or revenue and one asset or liability

accruals

opposite of deferrals -recognize revenue/expense before receiving cash/paying cash -(1) Incur an expense before paying cash (2) Earn revenue before receiving cash

stockholder's equity

owner claims to a company's assets -common stock, retained earnings

Accounts receivable vs accounts payable

receivable -sales to customers on account or collection (the customer pays) payable -vendor purchases and pays on account (business owes to vendor)

debit

receive -cash, reduction in note payable

cash basis accounting

revenue is recognized when cash is received expenses are recognized when cash is paid (not acceptable in businesses)

accrual accounting

revenue is recognized when earned expenses are recognized when incurred (true earnings)

Net income

revenues minus expenses -revenus: inflows of resources that increase net income and retained earnings through delivering goods and services to customers -expenses: outflows of resources that decrease net income and retained earnings. Costs of doing business -dividends: distributions of assets (cash) generated by income to stockholders which decrease retained earnings -dividends are not an expense

Proprietorship

singe owner -easy to start and flexible -most common form of business -small retail stores or professional businesses -no business income tax -owners are personally liable for business debts and paying taxes

every transaction has two sides

something given something received

transactions

specific events that have a financial impact on a company that can be reliably measured

how much cash did the company generate and spend

statement of cash flows

how much cash was generated by operating activities

statement of cash flows

another name for a balance sheet is

statement of financial position

did the company declare a dividend during the year

statement of retained earnings

why did the company's retained earnings change during the year?

statement of retained earnings

amount of net income reported on the income statement also appears on the

statement of retained earnings and the balance sheet

the ending balance in retained earnings appears on the

statement of retained earnings only

Corporation

stockholders (many owners) -legally distinct from its owners -largest -ability to raise large sums of capital -creditors most protection -double taxation of profits: 1.corporate tax 2.dividends taxed

statement of retained earnings

summary of the changes in the retained earnings of a cooperation during a specific period

primary objective of financial reporting is to provide info

that is useful for making investing and lending decisions

stable monetary unit assumption

the dollar's purchasing power is stable over time -ignore inflation

continuity (going concern) assumption

the entity will continue to exist indefinitely -entity will remain in operation for the foreseeable future

Depreciation

the process of allocating the cost of a plant asset to expense (depreciation expense) over the asset's useful life -not a process of valuation -follows the expense recognition principle by matching deprecation expense to the multiple years that the asset is used to generate revenue -requires a unique adjusting entry because the plant assets accounts are not impacted by the adjusting entry

debt ratio

the proportion of a company's assets financed with debt -debt ratio=total liabilities divided by total assets

General partnership

two or more partner owners -easy to start and flexible -small retail stores or professional businesses -no business income tax -owners are personally liable for business debts and paying taxes -creditors most protection

where do expenses go in the accounting equation?

under owner's equity

where does revenue go in the accounting equation?

under owner's equity