Financial Accounting - Concepts

Bank reconciliation: NSF checks

"Non-sufficient Funds" checks, or checks that bounced. Typically the bank knows that the check bounces and the company doesn't.

What are the criteria required to recognize revenue? When is revenue typically recognized?

*Persuasive evidence* of an arrangement must exist *Delivery* must have occurred or *services been rendered* The seller's *price to the buyer must be fixed* or *determinable* *Collectability* should be reasonably assured.

Working Capital = ?

= Current Assets - Current Liabilities

Current Ratio = ?

= Current Assets / Current Liabilities

Expense

A cost that can be directly related to revenue. For example, buying assets isn't an expense because it did not directly result in earnings. Paying wages, however, is an expense, since that labor was needed to operate. For clarity, it also includes things like rent, insurance, taxes, repairs, etc.

Working Capital

A measure of Liquidity, equaling current assets minus current liabilities

What is Financial Accounting?

A specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

Equity

A stock or any other security representing an ownership interest. Includes Common Stock and Retained Earnings

Credit

An accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned in the right column of the journal entry.

What do we mean by "adjusting journal entries"?

Adjusting accounts based on portions of transactions during a given time period. Includes things like changes to prepaid assets, interest receivable and payable, depreciation, unearned revenue, payroll, accrued expenses, etc.

Debit

An accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry.

What is the Accounts Receivable turnover ratio?

An activity ratio measuring how efficiently a firm uses its assets. Calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period. = Credit Sales / Avg. Accounts Receivable

Current Ratio

An alternative measure of liquidity that allows comparisons to be made between different companies. It is equal to Current Assets divided by Current Liabilities.

Notes attached to the Financial Statement

An integral part of the financial statements that clarify and expand on the information presented in the financial statements.

Liability

An obligation and it is reported on a company's balance sheet. Includes Current Liabilities and Long-term Liabilities

Accounting Equation

Assets = Liabilities + Equity

What is the purpose of internal controls?

Assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

Bank reconciliation: deposit in transit

Cash deposits made by the company that the bank has not yet processed. These would appear on the company statement but not the bank statement.

Bank reconciliation: outstanding checks

Checks the company has written to pay for expenses that the recipient has not yet redeemed. Ergo, the company knows about these reductions but the bank doesn't.

What are accounts receivable?

Debts owed to the firm by clients or customers for goods/services paid for on account

Accounting Equation: Effect of paying off a credit with cash

Decrease liabilities (accounts payable), decrease assets (cash)

Assets

Economic resources of a company. Includes Current Assets (Cash, Accounts Receivable, Inventories); Property, Plant, & Equipment (less depreciation); and Intangible Assets, Long Term Investments

How do you calculate the adjusting entry for bad debt allowance under the aging method?

Estimated $ uncollectible - Existing Allowance Balance = Bad Debt Expense This does take the existing balance in Allowance into account

How do you reconcile a bank statement?

Identify any additions and subtractions on the company statement that the bank would not know about and apply them to the bank statement. Identify any additions and subtractions on the bank statement that the company would not know about and apply them to the company statement.

What is the matching principle?

In *accrual accounting,* the principle that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs.

Accounting Equation: Effect of purchasing assets with credit

Increase assets (purchased goods), increase liabilities (accounts payable). No cash was spent at this time, so assets DO increase instead of staying the same

Bank reconciliation: interest

Interest applied to the company's bank account. The bank knows but the company doesn't.

How do you calculate units-of-production depreciation?

Multiply the number of hours of usage or units of actual production by the depreciation cost per hour or unit, which results in the total depreciation expense for the accounting period.

Net Income = ?

Net Income = Revenue - expenses

How do you calculate the adjusting entry for bad debt allowance under the percentage of sales method?

Net Sales x Estimated% = Bad Debt Expense Adjusting entry does not account for existing balance in Allowance account

Accounting Equation: Effect of purchasing assets with cash

No effect - cash (asset) is spent to acquire assets of equal value, so equation is satisfied.

What's the difference between a note and account receivable?

Notes receivable are long term debts that include a promissory note.

Long-term Liabilities

Obligations expected to be fulfilled after more than one year or one operating cycle, whichever is longer. Includes Notes Payable, etc. THERE ARE OTHER EXAMPLES

Current Liabilities

Obligations expected to be fulfilled within one year or one operating cycle, whichever is longer. Includes Accounts Payable, Salaries Payable, Unearned revenue

What does "on account" mean?

On credit

Retained Earnings

Retained earnings equals your company's net income or loss, minus any stockholder dividends. Because retained earnings is an equity account, it normally has a credit balance. Therefore, you increase the retained earnings balance with a credit and decrease its balance with a debit.

Net Income

Revenue minus expenses

What are some examples of internal controls?

Segregation of Duties Dual-Signature Company Checks Bank Reconciliations Purchase Order Authorization

Liquidity

The ability for a firm to pay its obligations as they become due.

What is the "Allowance method" for dealing with noncollectable accounts.

The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated bad debts expense.

What is the purpose of financial accounting?

The purpose of *accounting in general* is to provide the information that is needed for sound economic decision making. The main purpose of *financial accounting* is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities.

What is "net realizable value" (AKA "book value")?

The value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.

Current Assets

Those "economic resources" that are reasonably expected to be converted to cash within one year or one operating cycle, whichever is longer. Includes Cash, Accounts Receivable, Inventories

What is an "Accounting Transaction" (AKA "Business Transaction")?

an economic event that initiates the accounting process of recording it in a company's accounting system.

Bank reconciliation: bank fees

charges from the bank. The company doesn't know about them prior to reconciliation.

How do increases *and* decreases to *assets* behave in regard to debits and credits?

↑ to Assets: recorded as *debit* ↓ to Assets: recorded as *credit*

How do increases *and* decreases to *equity* behave in regard to debits and credits?

↑ to Equity: recorded as *credit* ↓ to Equity: recorded as *debit*

How do *increases* to *expenses & revenues* behave in regard to debits and credits?

↑ to Expenses: recorded as *debit* ↑ to Revenue: recorded as *credit*

How do increases *and* decreases to *liabilities* and equity behave in regard to debits and credits?

↑ to Liabilities: recorded as *credit* ↓ to Liabilities: recorded as *debit*