ACCT 2101 Exam 1 (CH 1-4)

The Accounting Cycle

1. Analyze transactions 2. Journalize 3. Post to ledger 4. Prepare trial balance ---- part 1 5. Adjust 6. Prepare adjusted trial balance 7. Prepare statements 8. Close 9. Prepare post-closing trial balance 10. Reverse (optional) --- part 2

Financial Statements Communicating Information to Users

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

Adjusting Accounts

Adjusting Journal entries are recorded to bring assets, liabilities, revenue and expense accounts to their proper balances to reflect transactions not yet recorded and ensure that the Revenue Recognition and Matching Principle are followed Adjustments are necessary for transactions and events that extend over more than one period. it is helpful to group adjustments by time of cash receipts or cash payment in relation to the recognition of the related revenues or expenses

Source Documents

Any doc that provides some evidence that a transaction took place once you know it took place, analyze ex. invoice, check, purchase order, bank statement, employee earnings records

Permanent Accounts

Assets, Liabilities, Common Stock, Retained Earnings Accumulate information for present and future accounting periods. Accounting balance are carried forward to next accounting period and are NOT CLOSED

Accounting Assumptions

Going-Concern Assumption Monetary Unit Assumption Time Period Assumption Business Entity Assumption

Accounting Principles

Measurement Principle / Cost Principle Revenue Recognition Principle Matching Principle / Expense Recognition Full Disclosure Principle

Expense Recognition / Matching Principle

Record Expenses when INCURRED in the same accounting period as the revenues that are earned as a result of incurring those expenses when someone gives you a service, you record expenses - cash or not

Revenue Recognition Principle

Record revenues when EARNED when products are delivered or services are performed when we provide services, we record revenues - cash or not

Temporary Accounts

Revenues, Expenses, Income Summary, Dividend Accumulate information for one accounting period only. Account is CLOSED out at the end of the accounting period

Business Entity Assumption

a business is accounted for separately from its owner or other business entities reason for assumption is that separate information about each business is necessary for good decision proprietorship partnership corporation

Corporation

a business legally separate from its owner or owners, meaning it is responsible for its own acts and its own debts. Separate legal status means that a corporation can conduct business with the rights, duties, and responsibilities of a person. A corporation acts through its managers, who are its legal agents. Separate legal status also means that its owners, who are called shareholders/stockholders are not personally liable for corporate acts and debts.

Sole Proprietorship

a business owned by one person. The business is a separate entity for accounting purposes. However, a proprietorship is not a separate legal entity from its owner.

Partnership

a business owned by two or more people, called partners, who are jointly liable for tax and other obligations. Like a proprietorship, no special legal requirements must be met in starting a partnership. The only requirement is an agreement between partners to run a business together. The agreement can be either oral or written and usually indicates how income and losses are to be shared. A partnership, like a proprietorship, is not legally separate from its owners.

Ledger

a collection of all accounts for a company Company's size and diversity of operations affect the number of accounts needed

Securities and Exchange Commission (SEC)

a government agency that has the legal authority to establish reporting requirements and set GAAP for companies that issue stock to the public oversees proper use of GAAP by companies that raise money from the public through issuance of stock and debt

Chart of Accounts

a list of all accounts and includes an identifying number for each account

Account

a record of increase and decreases in a specific asset, liability, equity, revenue, or expense as a result of business translations information from an account is analyzed, summarized, and presented in reports and financial statements asset accounts = liability accounts + equity accounts

Accounts Receivable

a right to receive payment in the future- especially via credit card

Accounting

a system that identifies, records, and communicates reliable, relevant, and comparable information to help users make better decisions

Going-Concern Assumption

accounting information reflects a presumption that the business will continue operating instead of being closed/sold

Measurement Principle / Cost Principle

accounting information should be based on actual cost cost is measured on a cash or equal-to cash basis

Closing Process

after financial statements are prepared, the closing process readies accounts for recording the transactions and events of the next period in closing process, we must: 1. identify acts for closing 2. record and post the closing entries 3. prepare a post-closing trial balance purpose of closing process is twofold 1. it resets revenue, expenses, and dividend account balances to zero at the end of each period (which also updates the retained earnings account for inclusion on the BS). done so that these accounts can properly measure income and dividends for next period 2. helps in summarizing a period's revenues and expenses

Generally Accepted Accounting Principles (GAAP)

aims to make information relevant, comparable, and reliable relevant - information affects decisions of users comparable - information is helpful in contrasting organizations reliable - information is trusted by users

Adjusted Entries - Expected Sales Discounts

allowance for sales discounts is a contra asset account and is reported on the balance sheet as a reduction to the accounts receivable account. the allowance for sales discount account has a normal credit balance because it reduces accounts receivable which has a normal debit balance new revenue recognition rules require reporting sales at net amount expected adjusting entry estimates sales discounts for the current period's sales likely to be taken in future periods

Accrued Liabilities

amounts owed but not yet paid

Notes Payable

an obligation to make a payment at a later date with a written note/promise

Accrual Basis

applies adjustments to that revenues are recognized when services and products are delivered and expenses are incurred better reflects business performance than information about cash receipts and payments revenues are recognized when earned and expenses are recognized when incurred (whether or not cash is paid is IRRELEVANT)

Prepaid Expenses

are assets when used, their costs become expenses, we look at prepaid insurance, supplies, and depreciation cash paid prior to receiving the actual benefits - items paid for in advance of receiving their benefits

Transportation Costs

buyer and seller must agree on who is responsible for paying any freight costs and who bears the risk of loss during transit for merchandising transactions

Deferred Adjusting Entries

cash FIRST, revenue expense LATER prepaid --> cash is paid before expense is recognized unearned revenues --> cash is recorded before revenue is recognized

Unearned (Deferred) Revenues

cash received in advance of providing products or services as products or services are provided, the liability decreases, and the unearned revenues become earned revenues. adjusting entries for unearned items decrease the unearned (BS) account and increases the revenue (IS) account

Liabilities

creditors' claims on assets these claims reflect company obligations to provide assets, products, or services to others the term "payable" refers to a liability that promises a future outflow of resources A/P, N/P, T/P, W/P

Expenses

decrease equity from costs of provided products and services to customers assets used up in this process of earning Revenues

Balance Sheet

describes a company's financial position at a point in time use assets, liabilities, and common stock accounts from adjusted trial balance and retained earnings balance from statement of retained earnings

Income Statement

describes a company's profitability over a period of time due to the company's earnings activities

Merchandising Company

differs from those of a service company buys and sells products that are READY for sale

Retained earnings

earnings/income that has been kept in the business dividends revenues expenses

Accrued Expenses

expenses incurred in a period that are both unpaid and unrecorded refer to costs that are incurred in a period but are both unpaid and MUST be reported on the IS for the period when incurred

Statement of Retained Earnings

explains the changes in regained earnings over a period of times explains changes in equity from net income / net loss and from any dividends use retained earnings and dividend accounts from adjusted trial balance and net income/loss from income statement

Revenues

increase equity from sales of products and services to customers assets earned from sale of services or products business has a choice to have its revenue based on what it owns not profit

Accrued Interest Revenue

interest can yield an accrued revenue when a debtor owes money to a company if company is holding any notes/accounts receivable that product interest revenue, we must adjust accounts to record any earned and yet uncollected interest revenue

Perpetual Method

inventory system continually updates accounting records for merchandise transaction - specifically for those records of inventory available for sale and inventory sold continuously updates balance of the Merchandise Inventory account

Adjusted Trial Balance

list of all accounts and balances prepared AFTER adjusting entries have been recorded and posted to the ledger after all adjusted entries are journalized and posted, the company prepares another trial balance from the ledger accounts

Post Closing Trial Balance

list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted. it lists the balances for all accounts not closed trial balance prepared after the closing entries have been posted the purpose is to ensure that all temporary accounts have been close the only accounts on this trial should be the Permanent accounts with their balances i.e. Assets, Liabilities, and Equity accounts aim of a post closing trial balance is to verify: total debits = total credits for permanent accounts all temporary accounts have zero balances

Income Reporting

net income for a merchandiser = revenues - cost of merchandise sold and cost of other expenses from the period

Adjusting Entries - Expected Returns and Allowances

new revenue recognition rules require sellers to estimate sales returns and allowances and record them in the period of the sale this ensures that Sales and Cost of Goods Sold are not overstated an adjusting entry is prepared at the end of accounting period to record Estimated Merchandise Returns and Refunds expected to be made to buyers two accounts sales refunds payable (current liability) and inventory returns estimated (current asset) are used

Cash Basis

not consistent with GAAP revenues are recognized when cash is received and expenses are recognized when cash is paid

Accrued Service Revenue

not recorded until adjusting entries are made at the end of the accounting period earned but not unrecorded because either the buyer has not yet paid for them or the seller has not yet billed the buyer

Dividends

outflow of resources such as cash and other assets to stock holders distribution of corporations assets to shareholders reduces equity

Equity

owner's claim on assets/what the owner has invested in the business equal to assets - liabilities equal to common stock + retained earnings E = CS - D + R - E increases from owner investments and revenues decreases from dividends and expenses COMMON STOCK, RETAINED EARNINGS

Prepaid Expense

paid for something in advance before receiving the benefit

Free On Board (FOB)

point of transfer which determines who pays transportation costs (and other incidental cost of transit such as insurance)

Matching Principle / Expense Recognition

prescribes that a company record the expenses it incurred to generate the revenue reported

Financial Accounting Standards Board (FASB)

private group that sets both broad and specific accounting principles

Depreciation

process of allocating the costs of these assets over their expected useful lives recorded with an adjusting entry similar to that for other prepaid expenses buildings, equipment, vehicles (long-lived assets/plant assets) are recorded as assets when purchased straight-line depreciation expense = (asset cost - salvage value) / useful life

Revenue Recognition Principle

provides guidance on when a company must recognize revenue revenue is recognized when goods or services are provided to customers to recognize means to record it. If revenue is recognized too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less profitable than it is.

Financial Accounting

provides information primarily to External users via Financial Statements aimed at serving external users by providing them with general-purpose financial statements governed by concepts and rules known as Generally Accepted Accounting Principles

Plant Assets

refer to long term, tangible assets used to produce and sell products and services are expected to provide benefit for more than one good cost of plant assets are allocated or spread out and recorded as an expense over their expected useful lives

Merchandise Inventory

refers to products that a company owns and intends to sell. cost of this asset includes cost incurred to buy the goods, ship them to the store, and make them ready for sale

Shrinkage

refers to the loss of inventory, and it is computed by comparing a physical count of inventory with recorded amounts. a physical count is usually performed at least once annually

T account

represents a ledger account and is a tool used to understand the effects of one or more transactions left side is Dr, right side is Cr

Full Disclosure Principle

requires a company to include all information in financial statements that would impact users' decisions

Assets

resources a company owns or controls resources are expected to yield future benefits term "receivable" is used to refer to an asset that promises a future inflow of resources most accounting systems include separate accounts for the assets described below CASH, A/R, N/R, VEHICLES, SUPPLIES, EQUIPMENT, LAND, BUILDINGS, PREPAID EXPENSE

Accrued Adjusting Entries

revenue expenses FIRST, cash LATER accrued expenses --> cash is paid after expense is recognized accrued revenues including depreciation --> cash is recorded after revenue recognized

Net Income / Net Loss

revenues - expenses

Adjusting Entries

similar for merchandising companies and service companies however, a merchandiser using a perpetual inventory system also makes an adjustment to update the merchandise inventory account to reflect any loss of merchandise, including theft and deterioration

Unearned Revenue

something we have not yet earned received from customers in advance, you have an obligation to give them a benefit later

Time Period Assumption

the life of a business can be divided into distinct time periods, such as months and years

Notes Receivable

the right to receive payment in the future comes with a note, then it's a notes receivable a specific, written promise

Monetary Unit Assumption

transactions are expressed using "money" as a common denominator means that we can express transactions and events in monetary, or money, units. Money is the common denominator in business. The monetary unit a company uses in its accounting reports usually depends on the country where it operates, but many companies today are expressing reports in more than one monetary unit.

Periodic Method

updates the accounting records for merchandise transactions only at the end of a period technically advances and competitive pressures have dramatically increased the use of the perpetual system updates balance of merchandise inventory account at the end of the accounting period by taking a physical count

Accounts Payable

when you buy something on credit and make an obligation to make a payment at a later date