Acct 200 KU
Certified Public Accountant
CPA; company must hire a CPA who checks the info provided by company when they release their financial statements
Asset accounts
Cash, Accounts Receivable, Notes Receivable, Merchandise Inventory, Office Supplies, Prepaid Expenses, Furniture/Fixtures& Equipment, Building, Land.
Owners Equity accounts
Common Stock, Retained Earnings, Capital, Dividends THIS INCLUDES SERVICE REVENUE
Financial Accounting Standards Board
FASB; presently the group that creates accounting standards; 7 member board and its staff create the acct rules which are called "generally accepted accounting principles"
Expenses
Rent expense, Advertising expense, salary expense, wage expense, utility expense, tax expense, and interest expense; decreases in owners equity that occur as a result of receiving goods or services from another entity that occur as a result of receiving goods or services from another entity during the operation of business
Security and Exchange Commisson
Result of stock market crash in 1929; series of legislation; regulate the sales of any type of investment that is sold to a large number of unrelated individuals (ownership interests and bonds).
Norwalk Agreement
Signing of a memorandum of understanding in 2002 between FASB and IASB to work hard to reach agreement about the modifications necessary for the two systems to converge.
Revenue
an increase in retained earnings
Transaction
any event that must be recorded.
indirect method
asks to start from the income statement listing for each item and explain why it is different from the corresponding item in the operating activity section of the statement of cash flows
Account Receivable
asset; money that is owed to the supplier by the grocer is called this by the supplier.
Note Receivable
asset; written agreement documenting the exact amount and timing of payment the supplier would call this note receivable
permanent (or real) accounts
cumulative in nature and need to be maintained from one period to the next; represent company's assets, liabilities, and oe
liabilities and oe t chart
debit decreases, credit increases
Asset t chart
debit increases, credit decreases
expenses and dividends t chart
debit increases, credit decreases
period expenses
types of expenses that include things like rent, salary, and utility expenses that might be associated with a large number of products.
direct method
used to prepare the statement of cash flows, requires looking at cash T account. then reorganizing info in this acct into the appropriate format
Reliability or Objectivity Concept
when accountants indicate that they have a reliable number they are implying that the number can be objectively determined using a consistent technique; the idea is that anyone using the same approach would determine the same value.
contra-accounts
when accounts have the opposite normal balance
contra-asset
when accounts have the same normal balance
account format
when assets and liabilities are listed side by side
audited financial statement
when business releases financial statement and it conforms to the GAAP the CPA signs the doc
Net loss
when expenses exceed revenues
Net Income
when revenues exceed expenses
accrued expense
the accumulation of an expense prior to its being paid; example includes salary expense; sweat first and company pays you later; liability only satisfied when company pays you
Owners Equity
the amount left over after the owners used the business assets to pay off all the liabilities; residual claim against assets of the business
Retained Earnings
the amount of earnings that remain in the company (retained for use by the company); increases when a company provides a good or service to a customer in return for immediate or future payment; dividends also reduce retained earnings
Paid in capital
the amount of money invested in the company by the owners; also called contributed capital; common stock
stable monetary unit concept
the assumption that inflation is so small that it can be safely ignored when doing accounting evaluation; investors can compare financial results over dif time periods since a dollar is assumed to be the same at any point in time.
depreciation expense
the consumption of long-lived assets
adjusted trial balance
the ending account balances for all ledger accounts once the adjusting entries have been completed
double entry accounting
the fact that at least two entries must be made for every transaction
The Big Four
the four biggest accounting firms int he US; their size substantially dwarfs all other such firms.
Common Stock
the most common form of stock
audit
the procedure for checking financial reports
market to market accounting
the process of changing the acct records to reflect the perceived market value of the pig
accounting cycle
the process of keeping track of an entity's economic activities for a single period
posting
the process of transferring the information in the journals to the appropriate ledger accounts; transferring the info from the journal to the ledger.
Accounting
the process or system which provides the people giving out cash with historical financial and economic information
operating cycle
the time needed for a company to acquire assets to be ultimately delivered to customers and to receive payment from those customers.
Current Cost
the worth of something today; alternative to historical cost concept; other common terms used for this are market value or current value.
reversing entries
they reverse the associated adjusting entries; done strictly for convenience and to ease the burden of calculations in the next period; not required and never done before the financial statements are completed.
operating activities
those activities that relate to the primary type of business in which the entity is engaged - activities that generate cash as a result of things related to revenues or expenses; interest or dividends received are included under operating activities
current assets
those assets that are expected to be sold, consumed, or converted to cash within the longer of one year or one operating cycle; cash, accounts receivable, notes receivable, prepaid expenses, and inventory
adjusting entries
those entries that assign revenues and expenses to the correct period when no trigger event has caused them to be recorded during the period; allow accountant to modify the value of the related assets and liabilities
accrued revenues
those revenues that are earned by a company before they receive payment
What is GAAP's purpose?
to standardize financial statements so that they can be compared to one another, to provide info about the aggregation of these transactions into a small et of reported numbers.
working capital
total current assets - total current liabilities; represents how much in extra current resources a company has available.
current ratio
total current assets/total current liabilities
debt ratio
total liabilities/ total asset; one simple measure of the long term capability of a firm
quick ratio
(cash+short term investments+net current receivables) / total current liabilities
What are the 2 uses for accounting?
1. Investing (deciding whether to give $ to someone else) 2. Evaluating Performance (keeping track of how the business or individual or group of individuals are doing once they received the money)
Type of Business Entities
1. Sole Proprietorship 2. Partnership 3. Corporation
steps of accounting process
1. source documents 2. transaction analysis 3. journalizing 4. posting 5. unadjusted trial balance 6. analyzing, journalizing and posting adjusting entries 7. adjusted trial balance 8. closing 9. post closing and trial balance and financial statements 10. reversing
Liability accounts
Accounts Payable, Notes Payable, Other payables such as taxes payable, wages payable, salaries payable
CORP EQ
Assets = Liabilities + (paid in capital + retained earnings)
Fundamental Accounting Equation Equation
Assets = Liabilities + Owners Equity
Debit and credit
DEBIT MEANS LEFT, CREDIT MEANS RIGHT
Generally Accepted Accounting Principles
GAAP; accounting rules created by the FASB; company must follow these rules when releasing financial statements; US GAAP leans toward the historical cost concept
International Accounting Standards Board
IASB; international group that develops the IFRS
International Financial Reporting Standards
IFRS; International GAAP; IGAAP; international accounting system with the goal of providing value accounting info that can be compared across companies no matter what country it may originate. Created by the International Accounting Standards Board (IASB); leans toward current cost as being more relevant frequently referred to as the economic value concept
4 types of formal acct reports that go into financial statement
Income Statement, Statement of Changes in retained earnings, balance sheet, statement of cash flows.
Finance
Learning about the investment process
Characteristics of Corporation
Legal entity, continuous life and transferable ownership interests, separation of ownership and management, stockholders control, stockholders limited liability, taxes, government involvement
Creditor
Lender; people or businesses who have lent money to another entity
2 Components of Shareholders Equity
Paid in Capital, Retained Earnings
Expense
a decrease in retained earnings resulting from a business activity whereby a company consumes an asset that they already own or receives a service from some other entity
Chart of Accounts
a list of the accounts used by the company. Each account is assigned a unique number.
trial balance
a listing of the ending debit and credit balances for all the company's accounts
general journal
a record of both debits and credits associated with each specific transaction kept in chronological order; entry shows date of transaction, title of debited account first with the title of credited account on the next line indented and then short description on the 3rd line.
Ledger
all pages of accounts that are combined into a book.
accumulated depreciation
an account that keeps track of all the depreciation that has occurred for the equipment over the time that it has been owned by the company; equipment and accumulated depreciation accounts are always tied together; shown under asset
Relevance concept
accountant will only record info that is relevant to the economic performance of the company
Statement of Cash flows
accountants categorize every transaction that affected cash as on that resulted from normal business operating activities, investing, and financing.
temporary (or nominal) accounts
accounts that have nonzero balances that we don't want to be there anymore.
types of accruals
accrued revenues, accrued expense
financing activities
activities whereby a company acquires or repays the capital it needs to begin or sustain its business; examples include selling stock in the company itself and borrowing money for the company; dividends paid by company are financing activities...interest paid on debts of the company is operating
periodicity concept
businesses can and should report economic information on a regular periodic basis and the financial reports made on this periodic basis should make sense.
accrual accounting
businesses recognize economic events as they occur regardless of the actual flow of cash; actual cash flow can either precede or follow the recordable event
Interest
motivation for making loans, return of the money plus a bit extra.
Examples of Assets
cash, merchandise waiting for sale, buildings, and equipment.
prepaid expenses
category of assets that are expected to get used up relatively quickly; supplies purchased in advance and used later, rent, insurance, or property taxes
work sheets
columnar document which lists down the left side all the accounts and their unadjusted trial balances as either debit or credits; helps organize the acct process from the unadjusted trial balance through the prep of financial statements
depreciation
consumption of assets that have longer lives than prepaid expenses; buildings and equipment
Taxes
corp are obliged to pay taxes which are not incurred by the other forms of ownership; separate taxes are applied to the corp itself. DOUBLE TAXATION
Legal Entity
corp makes special application to specific satiate and state grants a charter to the business giving it permission to be a corp. Business exists apart from its owners and has right to sell property, enter agreements,
double taxation
corp pays a return to investors in the form of dividends and then these investors also may pay taxes on the same earnings. drawback to corporation form of ownership
Account
created or opened for any accounting item about which we wish to keep economic records.
revenue concept
describes when and how much to record in the accounting information system; transaction should be recorded when the money has been earned by virtue of having delivered the goods or services under a written or implied agreement with the customer.
board of directors
determine the overall direction of a corporation and its specific long term objectives; they also appoint the corporate officers who manage the corp on daily basis
Dividends
earnings paid to the owners of a company as a return on their investment
Liabilities
economic claims against the business assets that can be made by parties outside the business
Assets
economic resources that are expected to be of some future benefit to the business.
long term assets
equipment, furniture, buildings, land, and non current portion of notes receivable
closing
everything is going to be neatly organized when you get to the beginning of the next period
normal balance
refers to the side, either debit or credit, where increases in the account are generally found; the zero is always shown on the normal balance side of the t chart
Investors
generally speaking, the people giving out the cash. Make investments in order to receive some future gain, usually monetary.
Government Involvement
governments tend to watch the process of buying and selling stock fairly closely.
Partnership
has two or more owners; partnership would be viewed as a separate entity from any of the owners but law does not view like that. can wind up being responsible for liabilities that were incurred in the name of partnership but to which they did not agree.
Stockholders Control
have no power over the operation of the company other than the election of the board members, they have no say in day to to day operations
income summary
in making closing entries, for each income statement account, an entry is made that is the exact opposite of the balance in that account
current receivables
include accounts receivable, adjusted for accounts that may never be paid; also called acid test ratio
short term investments
investments that can be sold quickly and easily such as stocks of major companies that are bought through public stock exchanges on a daily basis
journal reference
keeps track of the journal and page number where the entry came from
Account Payable
liability; no formal document, merely the understanding that payment will be made
Note Payable
liability; when one company owes money to another entity as expressed in a formal, written manner
report format
lists assets on top of liabilities and owners equity
Investments
loans or acquisition of ownership rights
reasonably assured
means something that you believe will happen with a pretty high level of certainty
Corporation
most complex form of ownership since it involves creating a separate legal entity
Balance Sheet
most straightforward of the accounting reports; lists assets, liabilities, and owners equity at a specific point in time.
current liabilities
obligations that must be satisfied within one year or one operating cycle; accounts payable and other payables, unearned revenue
unearned revenue
occurs when a business collects funds from its customers in advance of performing a service or providing the product; unearned rent is also called unearned rent revenue
Sole Proprietorship
owned by single individual who usually manages the operation of the business. Owner is liable for any debts or obligations incurred by the business. important to keep business accounting and owner acct separate.
stockholders or shareholders
owners of corporation who own specific portion of the company depending on their number of shares
Stock
part of legal entity; pieces of paper that the way ownership interest in a corporation is indicated
stockbrokers
people that expedite the buying and selling of stock
Types of deferrals
prepaid expenses, depreciation, unearned revenue
IFRS approach
principles based; must be probable
Financial Statements
provided by business entities; Investors' primary source of information regarding investment decisions; set of documents which result from the acct process
matching concept
provides guidance regarding the recording of expenses; says that expenses should be recorded in the same time period that any revenue associated with those expenses is generated; expenses should be "matched" with the revenue they are creating.
Statement of changes in retained earnings
provides synopsis of changes that impacted retained earnings during a period.
investing activities
purchases of sales of land, equipment, and machinery are all examples; related to the productive assets of the company.
liquidity
refers to how rapidly an asset can be converted into cash or how soon a liability will have to be satisfied.
deferral adjusting entry
revenue or expense follows the associated cash flow
accrual adjusting entry
revenue or expense precedes the associated cash flow
FASB approach
rules based; must be reasonably assured
Shareholders or Stockholders equity
same as Owners Equity except for the form of ownership as a corporation
Entity Concept
separating the business affairs from the personal affairs of the owner
Revenues
service revenue, rent revenue, interest revenue; increases in owners equity created by providing the business's goods or services to customers in return for present of future economic benefits.
Continuous life & transferable ownership interests
shareholders have the right to transfer shares of stock to other people with help of stockbrokers
probable
situation where more than 50% of evidence leans that way
Stockholders limited liability
stockholders are not personally responsibly for debts of the corporation; they can lose the amount they have invested but nothing more
Separation of ownership and management
stockholders periodically vote to choose the people who should oversee the operation of the business, called the board of directors. They decide the people who manage the business for day to day basis
Historical Concept
suggests using the historical cost of an object as its value; if pig was worth 50 dollars and 1 year has passed, they would still say its worth 50 dollars
Income statement
summarizes the revenues and expenses during a particular period of time. contains the net income. net income is the bottom line. ALSO contains heading that is name of business, type of financial report. and time period or date in question
