Principles of Accounting Module 4

long-term assets: accumulated depreciation

1. a contra asset account to depreciable assets such as buildings, machinery, and equipment -this account shows the total depreciation taken for the depreciable assets 2. on the balance sheet, companies deduct the accumulated depreciation (as a contra asset) from its related asset

long-term assets: accumulated amortization

1. a contra asset account to intangible assets

worksheet

1. a sheet of paper with columns or a computer spreadsheet (like Excel) on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements 2. normally, they save these worksheets to document the end-of-period entries 3. only an accounting tool and not part of the formal accounting records 4. worksheets may vary in format 5. accountants prepare worksheets each time financial statements are needed: monthly, quarterly, or at the end of the accounting year 6. columns can include: trial balance, adjustments, adjusted trial balance, income statement, statement of stockholder's equity, and balance sheet 7. each set of columns has a debit and a credit column

accrual basis of accounting

1. accountants use the accrual basis of accounting to record revenues and expenses in accordance with GAAP 2. record revenues when the company makes a sale or performs a service, regardless of when the company receives the cash 3. under the accrual basis of accounting, expenses are matched to the revenues that are recorded, whether or not the company has paid for those expenses, yet, in cash or not

computerized accounting systems consist of

1. accounting software, computer files, computers, computer software, records, procedures, and equipment used to perform accounting function, security, and internal controls, journals and ledgers, input screens, related peripheral equipment such as printers

adjustments

1. adjustments bring the accounts to their proper balances before accountants prepare the income statement, statement of stockholder's equity, and balance sheet 2. you enter these adjustments in the Adjustments columns of the worksheet 3. you cross reference the debits and credits of the entries by placing a key number or letter to the left of the amounts 4. adjustments are needed because accrual accounting follows the matching and revenue recognition principle 5. we are either correcting a mistake or we are moving things from the balance sheet to the income statement 6. updating certain accounts before we close the books

adjusted trial balance column

1. after adjustments, compute the adjusted balance of each account and enter these in the Adjusted trial balance columns 2. next, extend all accounts having balances to the adjusted trial balance columns 3. note carefully how the rules of debit and credit apply in determining whether an adjustment increases or decreases the account balane 4. some account balances remain the same because no adjustments have affected them 5. now, total the adjusted trial balance debit and credit columns -the totals must be equal before taking the next step in the worksheet 6. when the trial balance and adjustments columns both balance but the adjusted trial balance columns do not, the most probable cause is a math error or an error in extension 7. now, extend all of the revenue and expense account balances in the adjusted trial balance columns to the income statement columns -since revenues carry credit balances, extend them to the credit column expenses to the debit column -then, subtotal each column -net income recorded in debit column, net loss would be entered in the credit column to make the columns balance

Post-closing trial balance

1. after you have completed the closing process, the only accounts in the general ledger that have not been closed are the permanent balance sheet accounts 2. because the accounts contain the opening balances for the next accounting period, debit balance totals must equal credit totals 3. the preparation of a post-closing trial balance serves as a check on accuracy of the closing process and ensures that the books are in balance at the start of the new accounting period 4. a post-closing trial balance is a trial balance taken after the closing entries have been posted

current assets: accounts receivables

1. also called trade accounts receivable 2. amounts owed to a business by customers

current liabilities: salaries payable

1. amounts owed to employees for services rendered

current liabilities: accounts payable

1. amounts owed to suppliers for goods or services purchased on credit 2. generally due in 30 or 60 days and do not bear interest 3. in the balance sheet, the accounts payable amount is the sum of the individual accounts payable to suppliers shown in a subsidiary ledger or file

the role of an accounting system

1. an accounting system is a set of records and the procedures and computer equipment used to perform the accounting functions 2. manual systems consist of journals and ledgers on paper 3. the accounting system enables a company's accounting staff to supply relevant accounting information to meet those needs

note

1. an unconditional written promise to pay another party the amount owed either when demanded or at a certain specified date, usually with interest (a charge made for use of the money) at a specified rate

steps of the accounting cycle

1. analyze transactions by examining source documents resulting from a management decision or an event 2. journalize transactions in the general journal 3. post entries to the respective accounts in the general ledger prepare a trial balance of the unadjusted accounts and begin the trial balance worksheet 4. prepare a trial balance of the unadjusted accounts and begin the trial balance worksheet 5. journalize and post adjusting journal entries, prepare adjusted trial balance, and complete worksheet 6. prepare the financial statements 7. journalize and post closing entries 8. prepare the post-closing trial balance

long-term assets: leasehold improvements

1. are any physical alterations made by the lessee to the leased property when these benefits are expected to last beyond the current accounting period

current liabilities: notes payable

1. are unconditional written promises by the company to pay a specific sum of money at a certain future date -may arise from borrowing money from a bank, from the purchase of assets, or from the giving of a note in settlement of an account payable -generally, only notes payable due in one year or less are included as current liabilities

current assets: note receivable

1. arises -when a company makes a sale and receives a note from the customer, -when a customer gives a note for an amount due on an account receivable, or -when a company loans money and receives a note in return

long-term assets

1. assets that a business has on hand or uses for a relatively long time

current assets

1. assets that a business is able to convert to cash within the next year or the next operating cycle, whichever is shorter 2. note that on a balance sheet, current assets are in order from most liquid to least liquid

the pegboard system

1. by creating one document and aligning other records under it on a pegboard, companies could record transactions more efficiently

bookkeeping machines and computers

1. computers eventually outdid book keeping machines 2. accounting information systems: organize financial data

long-term assets: intangible assets

1. consist of the noncurrent, nonmonetary, non physical assets of a business -rights granted by governmental bodies, such as patents and copy rights

classified balance sheet

1. contains the same major categories, but importantly breaks up assets and liabilities into current and non-current assets and liabilities 2. the classified balance sheet aids in the analysis of the financial position of companies

long-term assets: copyright

1. creative work protection

current liabilities

1. debt due within one year or one operating cycle, whichever is longer 2. the payment of current liabilities normally requires the use of current assets 3. balance sheet lists current liabilities in the order they must be paid; the sooner the liability must be paid, the earlier it is listed

long-term liabilities

1. debts such as a mortgage payable and bonds payable that are not due for more than one year

steps for completing a worksheet

1. enter the titles and balances of ledger accounts in the trial balance column 2. enter adjustments in the Adjustments columns 3. enter adjusted account balances in the Adjusted trial balance column 4. extend adjusted balances of revenue and expense accounts from the adjusted trial balance columns to the income statement columns 5. extend any balances in the capital accounts to the statement of stockholder's equity columns (note: some worksheets may not include this column) 6. extend adjusted balances of asset, liability, and capital stock accounts from the Adjusted trial balance columns to the balance sheet columns

special journals and subsidiary ledgers

1. example of special journals -a sales journal to record all credit sales - a purchases journal to record all credit purchases -a cash receipts journal to record all cash receipts -a cash disbursements journal to record all cash payments

special journals

1. group together similar transactions -used for frequent and recurring transactions such as sales, purchases, cash receipts, and cash disbursements -as opposed to the general journal which is used for non recurring transactions

current assets: cash equivalents

1. highly liquid, short-term investments -ex. T-bills, short-term notes maturing within 90 days, certificates of deposit, and money market funds

closing the books

1. in accounting, we often refer to the process of closing as closing the books 2. the comparison with the worksheet serves as a check that all revenue and expense items have been listed and closed 3. as a result of closing the revenues and expenses, the total revenues and expenses have been transferred to the income summary account

current liabilities: taxes withheld from employees

1. include federal income taxes, state income taxes, and social security taxes withheld from employee's pay checks

current assets: cash

1. includes deposits in banks available for current operations at the balance sheet date plus cash on hand consisting of currency, undeposited checks, drafts, and money orders -first current asset to appear

unclassified balance sheet

1. includes three major categories: assets, liabilities, and stockholder's equity

stockholder's equity: paid in capital

1. including common stock and retained earnings 2. shows the capital paid into the company as the owner's investment

long-term assets: goodwill

1. intangible value attached to a business, evidenced by the ability to earn more than competitors

current liabilities: interest payable

1. interest that the company has accumulated on notes or bonds but has not paid by the balance sheet date because it is not due until later

simple journal entries

1. involve one debit and one credit

how the post-closing trial balance differs from the adjusted trial balance

1. it excludes all temporary accounts since they have been closed 2. it updates the retained earnings account to its proper ending balance

compound journal entries

1. journal entry for these transactions involves more than one debit and/or credit

long-term liabilities: bonds payable

1. long-term liabilities and are evidenced by formal printed certificates sometimes secured by liens (claims) on property 2. maturity dates should appear on the balance sheet for all major long-term liabilities

business transactions

1. measurable events that affect the financial condition of a business -these events must have caused a measurable change in the amounts and the accounts included in the accounting equation assets = liabilities + stockholder's equity

statement of stockholder's equity column

1. next, complete the statement of stockholder's equity columns -enter net income in the credit of the Stockholder's equity column

balance sheet column

1. now extend the assets, liabilities, and capital stock accounts in the Adjusted Trial Balance columns to the Balance Sheet columns -assets: debits; liability and capital stock amounts as credits 2. note that the ending retained earnings amount determined in the statement of SE columns appear again as a credit in the Balance Sheet Columns -the ending retained earnings amount is a debit in the statement of stockholder's equity columns to balance this column -retained earnings is a credit in the balance sheet columns because it increases stockholder's equity and increases in stockholder's equity are credits 3. when the balance sheet column totals do not agree for total debits and total credits on the first attempt, work backwards through the process used in preparing the worksheet -re-total the two balance sheet columns to see if you made an error in addition -re-total the statement of retained earnings column and determine whether you entered the correct amount of retained earnings -re-total the income statement columns and determine whether you entered the correct amount of net income or net loss for the period in the appropriate income statement and the statement of retained earnings columns

the functions of accountants

1. observing, identifying, and measuring economic events 2. recording, classifying, and summarizing measurements 3. reporting economic events and interpreting financial statements

determining adjusted entries

1. often it is difficult to discover all the adjusting entries that should be made 2. the following steps are helpful: -examine adjusting entries made at the end of the preceding accounting period. the same types of entries are often necessary, period after period -examine the account titles in the trial balance --> ex. if there is an account titled trucks, an entry must be made for depreciation expense and accumulated depreciation -examine various business documents to discover other assets, liabilities, revenues, and expenses that have not yet been recorded -ask the manager or other personnel specific questions regarding adjustments that may be necessary 3. after all the adjusting entries are entered in the adjustments columns, total the two columns -the totals of these two columns should be equal when all debits and credits are entered properly

current liabilities: dividends

1. payable, or amounts the company has declared payable to stockholders, represent a distribution of income

cross-indexing

1. placing (1) the account number of the ledger account in the general journal (2) the general journal page number in the ledger account 2. accountants place the number of the general journal page from which the entry was posted in the posting reference column 3. aids the tracing of any recorded transaction, either from general journal to the general ledger account or from general ledger to the general journal

current assets: prepaid expenses

1. rent, insurance, supplies that have been paid for in advance but all the benefits have not yet been realized (or consumed) from these expenses

long-term assets: construction in progress

1. represents the partially completed stores or other buildings that a company plans to occupy when completed

the closing process

1. revenue, expense, and dividend accounts are nominal (temporary) accounts that are merely subclassifications of the real (permanent) account, retained earnings 2. the closing process at the end of the financial year transfers -the balances in the revenue and expense accounts to a clearing account called income summary and then to retained earnings, and -the. balance in the dividends account to the retained earnings account 3. the end-of-year closing process reduces revenue, expense, and dividends account balances to zero so they are ready to receive data for the next accounting period 4. accountants perform this end-of-year closing process once a year, at the end of the financial year

current liabilities: unearned revenues

1. revenues received in advance 2. liability to perform the agreed services or other contractual requirements or. to return the assets received

long-term assets: patent

1. right to use an invention solely by the creator

long-term assets: leaseholds

1. rights to use rented property for several years

accounting cycle

1. series of steps performed during the accounting period (some throughout the period and some at the end) to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements

unearned service revenue

1. services to be performed at a future date 2. unearned service revenue is a liability because, if the services are never performed, the money has to be refunded

stockholder's equity: retained earnings

1. shows the cumulative income of the company less the amounts distributed to the owners in the form of dividends

stockholder's equity

1. shows the owner's interest in the business -this interest is equal to the amount contributed plus the income left in the business

trial balance

1. some accountants use the trial balance columns on a worksheet instead of preparing a separate trial balance 2. some include those accounts with balances and zero balances or just the ones with balances 3. list zero balance accounts to (1) show its relative position among the accounts and (2) indicate that December 20xx is the 1st month of operations for this company (from example) 4. next, you enter the balances of the ledger accounts in the trial balance columns 5. the accounts are in order, of how they appear in the general ledger: -assets, liabilities, stockholder's equity, dividends, revenues, and expenses 6. then, total the columns 7. if the debit and credit column totals are not equal, an error exists that must be corrected before you proceed with the worksheet

posting to ledger accounts

1. t account is synonymous with a ledger 2. postings can be made by summarizing entries in a journal, or by directly recording individual transactions to their respective general ledger account 3. a journal entry is like a set of instructions

current assets: marketable securities

1. temporary investments, like short-term ownership of stocks and bonds of other companies

introduction to the module

1. the accounting cycle is a series of 8 steps performed throughout the accounting period to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements 2. understanding the steps of the accounting cycle will help you to understand financial accounting information and make informed financial decisions

posting (2)

1. the carrying out of these instructions from the journal 2. the process of transferring the information in the general journal to the ledger accounts 3. posting is always from the journal to the ledger accounts

common adjustments

1. the common adjustments are prepaid expenses, depreciation, accrued expenses, accrued revenues, and deferrals (unearned revenues) 2. using an asset, you do so by using an expense 3. prepaid expenses such as rent and insurance should be adjusted to reflect what has been used in the current period 4. adjustments for depreciation should be made using the accumulated depreciation account 5. accrued expenses include transactions such as receiving a utility bill for the month but not paying it until the following month 6. accrued revenue is revenue that is performed on accounts receivable, and unearned revenues are the recognition of revenue that has already been paid to us in cash at an earlier date 7. worksheet preparers often provide brief explanations at the bottom for the keyed entries (optional); can provide useful information

source document

1. the evidence that business event has occurred -sales ticket, check, and so on 2. important because they are the ultimate proof of business transactions

income summary account

1. the income summary account is a clearing account used only at the end of an accounting period to summarize revenues and expenses for the period 2. after transferring all revenue and expense account balances to income summary, the balance in the income summary account represents the net income or net loss for the period 3. closing or transferring the balance in the income summary account to the retained earnings account results in a zero balance in the income summary 4. also closed at the end of the accounting period is the dividends account containing the dividends declared, or paid, by the board of directors to the stockholders -we close the dividends account directly to the retained earnings account and not to income summary because dividends have no effect on income or loss for the period

the matching concept

1. the matching of expenses to revenues in the period that revenues are recorded

journalizing

1. the process of entering the effects of a transaction in a journal 2. then, the information is transferred, or posted, to the proper accounts in the ledger

posting

1. the process of recording in the general ledger accounts the information contained in the journal 2. note: the transaction date in both the general journal and in the general ledger is the same. -in the general ledger the same date is used even if the transaction posts several days later

current liabilities: sales taxes payable

1. the taxes a company has collected from customers but not yet remitted to the taxing authority

current liabilities: income taxes payable

1. the taxes paid to the state and federal governments by a corporation on its income

operating cycle

1. the time it takes to start with cash, buy necessary items to produce revenues (such as materials, supplies, labor, etc), sell services or goods, and receive cash by collecting the resulting receivables

posting can be made at these times

1. the time the transaction is journalized 2. the end of the day, week, or month 3. as each journal page is filled

closing the books: dividends account

1. transferring the balance of the dividends account to the retained earnings account by crediting the account and debiting on the retained earnings

closing the books: income summary

1. transferring the balance of the income summary account to the Retained Earnings account -to show either a net income or net loss

closing the books: expense accounts

1. transferring the balances in the expense accounts to a clearing account called income summary by crediting the expense account and debiting the income summary

closing the books: revenue accounts

1. transferring the balances in the revenue accounts to a clearing account called income summary by debiting the revenue account and crediting the income summary

long-term assets: property, plant, and equipment

1. useful lives of more than one year 2. acquired for use in the business rather than resale 3. termed plant assets or fixed assets -land: ground the company uses for business operations -buildings: structures the company uses to carry on its business -office furniture -office equipment

long-term assets: long term investments

1. usually consists of securities of another company held with the intention of -(1) obtaining control of another company -(2) securing a permanent source of income for the investor -(3) establishing friendly business relations 2. does not include those made for short term investment -ex. stocks or bonds of other corporations

current assets: interest receivable

1. when a company has earned but not collected, interest by the balance sheet date

using the worksheet to prepare financial statements

1. when the worksheet is completed, all of the necessary information to prepare the income statement, statement of stockholder's equity, and balance sheet is readily available 2. all information can come from the columns 3. the statement of stockholder's equity is sometimes called the statement of retained earnings -the information you need to prepare the statement of stockholder's equity can be taken from the statement of stockholder's equity columns 4. to prepare this statement, start by entering the capital stock amount at the beginning of the period, add any issuances of stock in the period, then use the beginning retained earnings account balance, add the net income, then subtract the dividends -carry the ending retained earnings balance forward to the balance sheet 5. the statement of stockholders' equity rolls the income, expenses, and dividends into the retained earnings account

long-term liabilities: notes payable

1. with maturity dates at least one year beyond the balance sheet date are long-term liabilities

Module 4

The accounting cycle and accounting information systems