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).