ACCY 201 FINAL OLE MISS
steps in processing transactions
(1) Identify and analyze the transaction or event, including the source document(s) (2) apply double-entry accounting (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger. These steps would be followed by preparation of a trial balance and then with the reporting of financial statements.
when faced with an ethical concern:
- recognize it as such - analyze all options (good and bad) - choose best option after weighing all consequences
revenue recognition principle
- recognize revenue when earned - proceeded need not be in cash - measure rev. by cash received plus cash value of items received
If a company paid 38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity?
Assets would decrease 38,000 liabilities would decrease by 38,000 equity would not change
Net Income
Dividends + Revenue - Expenses Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity.
Financial statements are typically prepared in the following order:
Income statement, statement of retained earnings, balance sheet
Revenue Recognition principle
Provides guidance for managers + auditors - if rev. recognized too early then bus looks more profitable than it is - if rev. recognized too late then bus looks less profitable than it is
Revenue is properly recognized
Upon completion of the sale or when services have been performed and the business obtains the right to collect the sale price
specific principles
detailed rules used in reporting business transactions. arise from rulings by authoritative groups
The statement of retained earnings
explains the changes in equity from net income or loss, and from any dividends over a period of time.
three major business activities
financing, investing, and operating
The accrual basis of accounting
generally provides a better indication of company performance and financial condition than does the cash basis
revenue (sales)
he amount received from selling products and services
four basic financial statements
income statement, statement of retained earnings, balance sheet, and statement of cash flows
generally accepted accounting principles
intend to make information on the financial statement relevant, reliable, and comparable
general ledger
is a record containing all accounts used by the company
accounting constraints
materiality benefits exceed cost
Objectivity Concept
means that financial statement information is supported by independent, unbiased evidence other than someone's opinion or imagination. This concept increases the reliability and verifiability of financial statement information.
accounting principles
measurement (cost) principle Rev. recognition principle expense (matching) recognition principle full disclosure principle
a classified balance sheet
organizes assets and liabilities into important subgroups
equity
owner's claim on assets and is equal to assets minus liabilities
purpose of accounting
provided decision makers with relevant, reliable, comparable information
account
record of increases and decreases in a specific asset, liability, equity, revenue, or expense item
income statement
reports a company's revenues and expenses along with the resulting net income or loss over a period of time
statement of cash flows
reports on the cash inflows and outflows from a company's operating, investing, and financing activities
three basic forms of business organizations
sole proprietorship, partnership, or corporation
Double-entry accounting is an accounting system
that records the effects of transactions and other events in at least two accounts with equal debits and credits
the primary objective of financial accounting is
to provide financial statements to help external users analyze and interpret an organization's activities
debt ratio
total liabilities/total assets
notes payable
usually denoted by signing a promissory note to pay a future amount.
An approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues
Accrual Basis of Accounting
accounting assumptions
Going-concern assumption Monetary unit assumption Time-period assumption business entity assumption
Which of the following accounting principles dictates when expenses are recognized?
Matching Principle
balance sheet
describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.
ome examples of business expenses
Rent expense, utilities expense, administrative expenses, advertising and promotion expenses, maintenance expense, and salaries and wages expenses
cash basis
Revenues are recognized when cash is received and expenses are recorded when cash is paid
accrual basis
Revenues are recognized when earned and expenses are recognized when incurred.
Return on assets
a profitability measure that is useful in evaluating management, analyzing and forecasting profits, and planning activities. It is computed as net income divided by the average total assets.
measurement (cost) principle
accy is based on actual cost. actual cost is considered objective
when closing entries are made
all temporary accounts are closed but permanent accounts are not closed
resources a company owns or controls that are expected to yield future benefit are called
assets
prepaid expenses are generally
assets that represent prepayments of future expenses
general principles
assumptions, concepts, guidelines of financial statements. stem from long-term accy practices
full disclosure principle
company is required to resort the details behind financial statement that would impact a user's decisions
(matching) expense recognition principle
company must record its expenses incurred to generate revenue reported
liabilities
creditors' claims on assets that reflect obligations to provide assets, products or services to others.