INTRODUCTION TO FINANCIAL ACCOUNTING FUNDAMENTALS FINAL EXAM REVIEW

advantages of recording in a journal

(1) It discloses in one place the complete effects of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

Errors in posting

1 Omission - a transaction is not recorded at all 2 Error of commission - an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance) 3 Error of principle - an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset) (errors of principle are really a special case of errors of commission, and once again there is a debit and a credit) 4 Error of original entry - an incorrect figure is entered in the records and then posted to the correct account Example: Cash $1,000 for plant repairs is entered as $100; plant repairs account is debited with $100 5 Reversal of entries - the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice versa Example: Factory employees are used for plant maintenance: Correct entry: Debit: Plant maintenance Credit: Factory wages 6 Addition errors - figures are incorrectly added to a ledger account 7 Posting error an entry made in one record is not posted at all b an entry in one record is incorrectly posted to another Examples: cash $10,000 entered in the cash book for the purchase of a car is: a not posted at all b posted to Motorcars account as $1,000 8 Trial balance errors - a balance is omitted, or incorrectly extracted, in preparing the trial balance 9 Compensating errors - two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a fraud)

steps to preparing an income statement

1. Prepare statement heading Who, what, when 2. prepare the revenue section heading of revenue and then totaled 3. prepare the expenses section 4. Determine Net Income or Net Income

Classified Balance Sheet

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections

Transaction

A business activity that changes assets, liabilities, or owner's equity

source document

A business paper from which information is obtained for a journal entry

Non-Profit Organization (NPO)

A business whose goal is to provide a service rather than to make a profit, such as the American Red Cross.

Profit

A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Journal

A form for recording transactions in chronological order

Balance Sheet Equation

A formula stating that a corporation's assets equal the sum of its liabilities plus shareholders' equity.

General journal

A journal with two amount columns in which all kinds of entries can be recorded -Credit invoices -Miscellaneous transactions -End-of-period entires

transposition error

A mistake caused by the interchanging of digits when transferring figures from one place to another

Credit Union

A nonprofit financial institution that is owned by its members and organized for their benefit.

Creditor

A person who believes that he will be paid back the money that he loaned

Account

A record or statement of receipts and expenditures, or of business transactions.

Endorsement

A signature or stamp on the back of a check transferring ownership

Purchases journal

A special columnar journal in which are recorded the accounting entries for all transactions involving the buying of goods or services on account. -Purchase invoices

Ledger

A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place.

declining balance depreciation

A type of accelerated depreciation that reflects depreciation expense for each year based on a constant percentage of a declining balance equal to the remain (2/useful life) / (cost - accumulated depreciation)

Public Business

Agency official may enter a business that are open to the public without consent or warrant and act on observation

Balance-Column Ledger Account

An account with debit and credit columns for recording entries and a third column for showing the balance of the account after each entry is posted.

Fair Value Principle

An accounting principle stating that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). CURRENT MARKET PRICE

Business Entity Principle

An accounting principle that requires a business to maintain its own set of records and accounts that are separate from other financial interests of its owners SEPARATE FINANCES FROM BUISNESS

Full Disclosure Principle

An accounting principle that requires that a business's financial statements provide information on all the significant facts that have a bearing on their interpretation

Materiality Principle

An accounting principle that states that only items that are "material" or that "make a difference" should be presented in financial statements

Cash payments journal

An accounting record which classifies and summarizes all cash paid to other entities during a particular reporting period. -cheques issued -Bank debit memo

Audit

An audit is a systematic and independent examination of books, accounts, documents and vouchers of an organization to ascertain how far the financial statements present a true and fair view of the concern.

Revenue

An increase in owner's equity resulting from the operation of a business

Purchase Invoice

An invoice used as a source document for recording a purchase on account transaction.

Sales Invoice

An invoice used as a source document for recording a sale on account

Fixed Assets

Assets that are relatively permanent, such as land, buildings, and equipment.

The Consistency Principle

Business should apply the same accounting choices and methods year after year

Working Capital

Current Assets - Current Liabilities The amount of money that a business has available to conduct its day-to-day activities

Quick Ratio

Current Assets - Inventory divided by Current Liabilities. Assets that can be quickly turned into cash. Healthy: debts = no more than half of the ownership equity.

Current Ratio

Current Assets/Current Liabilities a measure of a firm's short-term liquidity, calculated by dividing current assets by current liabilities

Separation of duties

Distributing tasks and associated privileges among multiple people, primary objective to prevent fraud and errors

The Matching Principle

Expenses should be recognized in the same accounting period as the revenue, to which the expenses relate, was recognized.

GAAP

Generally Accepted Accounting Principles

Accrual Basis of Accounting

In which type of accounting are revenues recorded when they are earned, and expenses recorded when they are incurred, regardless of when cash is received or paid out?

IFRS

International Financial Reporting Standards

T-Account

Is a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities. A T-account has the following parts: (a) the title, (b) the left or debit side, and (c) the right or credit side.

accounting period

Is the time period cover by the financial statements.

purpose of posting

It sometimes is referred to as the book of original entry. After entries are posted to the journal, your accounting system transfers the information to the ledger, which then is used to produce your income statements and balance sheets. The ledger is referred to as the book of final entry.

Cash receipts journal

Journal used by merchandising business to record cash received from all sources. -cash -cheques received -Money orders Bank credit memo

Long-Term Liabilities

Liabilities owed for more than a year.

Expenses

Money paid out to cover the cost

How to distribute a cheque

Original to creditor copy to accounting Copy filed with the invoice

Debt Ratio

Percentage of debt used to finance assets; calculated by total debt (TD)/total assets (TA).

Accounting

Planning, recording, analyzing, and interpreting financial information.

Code of Ethics

Principles of conduct within an organization that guide decision making and behavior.

The Objectivity Principle

Reported information should be based on objective evidence. BASED ON OBJECTIVE EVIDENCE FROM SOURCE DOCUMENTS

Time Period Principle

Requires the definition and consistent use of the same accounting period

The Revenue Recognition Principle

Revenue is recognized at the time the revenue is definitely earned

Rate of Return on average owners equity

Tells how profitable an investment in a business is Average owners equity= beginning + ending OE/ 2, Net Income/Average Owners Equity x100

Double-Entry Accounting

The accounting system in which each transaction affects at least two accounts and has at least one debit and one credit. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect.

Chart of Accounts

The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart is used by the accounting software to aggregate information into an entity's financial statements. The chart is usually sorted in order by account number, to ease the task of locating specific accounts.

The Principle of Conservatism

The convention of conservatism, also known as the doctrine of prudence in accounting is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe".

Net Loss

The difference between total revenue and total expenses when total expenses are greater

transactions

The exchange of goods, services and money between members of the public and businesses.

Opening Entry

The first accounting entry in the general journal, the entry that records the beginning financial position of a business, thereby opening the books of account.

Drawings

The money the owner takes out of the business for personal use.

Merchandise turnover

The number of times a company's average inventory was sold during an accounting period, calculated by dividing the cost of goods sold by the average merchandise inventory balance.

Principle of Objectivity

The objectivity principle states that accounting will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction.

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Journalizing

The procedure of entering transaction data in the journal.

Cash control

The procedures and strategies used to protect the firm's cash.

Financial Position

The status of a business, as represented by the assets, liabilities, and owner's equity.

Depreciation

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Personal Net Worth

The total value of one's assets minus the total value of one's debt

types of trial balances

There are three types of trial balances: the unadjusted trial balance, the adjusted trial balance, and the post- closing trial balance. All three have exactly the same format. The unadjusted trial balance is prepared before adjusting journal entries are completed.

Equity Ratio

Total Equity / Total Assets * 100% - shows how much of the total company assets are owned outright by the investors and shows how leveraged the company is with debt

The Cost Principle

When an asset loses or gains value over time, assets are always recorded at the ACTUAL COST THE BUSINESS PAID.

work sheet

Worksheet: a columnar accounting form used to summarize the general ledger information needed to prepare financial statements

Bank Credit Memo

a bank document that informs the business of an increase in the business's bank account → for interest on their bank account

Bank Debit Memo

a business document utilized when the bank informs a client that a decrease has been made in their account by the bank. it will also show the reason for which the decrease has occurred

Statement of owners equity

a formal financial statement which summarizes all of the changes in owner's equity during a specific period of time

Straightline depreciation

a method in which the depreciable cost basis (original cost basis less salvage value) of an asset is apportioned equally over its estimated useful life expressed in terms of month or years. (Price - salvage price)/useful years

Trial Balance

a proof of the equality of debits and credits in a general ledger

Cash Sales Slips

a receipt or other slip of paper issued by a store or other vendor showing where a purchase was made and also the amount, date, department, etc. There are 3 copies made.

posting references

a series of abbreviations used in posting to indicate to where or from where a journal entry is posted

Sales journal

a special journal used to record only sales of merchandise on account -Sales invoices

Cash Basis Accounting

an accounting practice in which revenue is not recognized in the accounting records until received and in which expenses are not recognized until paid

Business Transaction

an economic event or condition that directly changes an entity's financial condition or its results of operations

Current Assets

cash and other assets expected to be exchanged for cash or consumed within a year

Supporting Schedules

detailed schedules prepared by the client or the auditor in support of specific amounts on the financial statements

ethical dilemma

ethical problem were something of value will be lost

Net Revenue

income minus commission, taxes, or other expenses related to income

Rate of return on Net sales

indicates the portion of business sales that are kept as profit. a high rate means a more profitable company Net income / net sales

Closing entries

journal entries used to prepare temporary accounts for a new fiscal period

Current Liabilities

liabilities due within a short time, usually within a year

Accounts Receivable collection period

measures how many days it takes to collect accounts receivable; calculated by investment in accounts receivable divided by daily sales, which is annual sales divided by 365 days in a year

Immediate listing of cash reciepts

recorded as soon as received to avoid cash stolen and sale remaining unrecorded. Sales slips are also prenumbered to be kept on file.

Time-Period Principle

requires the definition and use of the same period of time for the accounting period

Owner's Equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets

The Continuing Concern Concept

the assumption that a business will continue forever until it is known that it will not

Matching Principle

the fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period