Studied by 5 people
What is accounting?
the language of business- it measures and reports finical data
What are the two types of accounting users
external and internal
External Accounting Users
-finical accounting -conveying info to external parties (ex. investors)
Internal Accounting Users
-managerial accounting -conveying info within a single company
What is the order of a financial statement?
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
What is on the income statement?
Net income (revenues - expenses)
What is on the statement of retained earnings?
Computes equity for balance sheet (Beginning balance of retained earnings + Net Income - Dividends)
What is the balance sheet
Overall financial position (Assets= Liabilities + Equity)
What is GAAP?
Generally Accepted Accounting Principles -requires info to have relevance and faithful representation (free from bias and no fudging)
FASB
Financial Accounting Standards Board
Who created GAAP?
FASB
Who provides accounting authority?
SEC (Securities and Exchange Commission) which is a US gov agency
Who does GAAP apply to?
US only
Who sets the international standards?
IASB
What is IASB?
International Accounting Standards Board
What is the name for the international standards?
International Financial Reporting Standards (IFRS)
Are GAAP and IFRS the same?
No- they are similar but have slight differences
What are the different types of business entities?
Flow through and separate
Flow through business
all finances, taxes, legal etc. flows from company to owner -able to come after owners personal bank account
Business types that are flow through
sole proprietor and partnership
Separate Business
Not personally responsible for legal entities
Business types that are separate
corporations and limited liability companies
What is the simple accounting equation?
Assets = Liability + Equity
Assets
what company owns/controls - expected to produce benefits in the future
Liabilities
outside claims on company assets (ex. money from lenders and/or creditors)
Equity
owner claims on company assets
Expanded Accounting Equation
Assets= Liabilities + Contributes Capital + Retained Earnings Assets= Liabilities + Common Stock - Dividends + Revenues - Expenses Dividends + Expenses + Assets = Liabilities + Common Stock + Revenues (DEA=LCSR)
How do the 4 parts of the financial statement connect?
Income statement gives you net income which is used in the statement of retained earnings statement of retained earnings calculates your equity which is used in the balance sheet
Complete transaction analysis: Chas Taylor invests $30,000 cash into a new company and received common stock
cash debited common stock credited
Complete transaction analysis: A company buys $2,500 worth of supplies and pays in cash
supplies debited cash credited
Complete transaction analysis: Company pays $1000 in rent and $700 in salaries
Salaries expense debited Rent expense debited Cash credited
Complete transaction analysis: Company purchased $7100 of supplies on credit
supplies debited accounts payable credited
Complete transaction analysis: Company provided services and received $4200 cash immediately
cash debited service revenue credited
Return on Assets
= net income/ average total assets (beginning of year assets + end of year/ 2)
tells you how well your assets are doing
want a high %
Accounting Cycle
ID Transaction
Analyze Transaction using accounting equation
Journal entry
Post Journal Entry to ledger
Prepare and analyze trial balance and financial statements
What is a general ledger?
record of all accounts used by a company
Asset Accounts
-cash -accounts receivable -notes receivable
prepaid accounts -supplies -equipment -buildings -land
Liability Accounts
-accounts payable -notes payable -accrued liabilities -unearned revenue (ex. customer pays for services before reciving them)
Equity Accounts
-Common stock -Revenues -Dividends -Expenses
T account
used to show the effects of a transactions on specific accounts
How are debits and credits shown within a T-account
Debit on let credit on right
Double Entry accounting
requires every entry to affect at least two accounts and one has to be debited and the other has to be credited
Do individual t accounts have to balance?
No but overall ledger does
Trial Balance
list all ledger accounts (t accounts) and their balance at a point in time
Debt Ratio
= total liabilities/ total assets
evaluates level of debt risk -higher number indicates a greater probability that a company will not be able to pay off debts in future
Time Period assumption
a company's financial information can be divided into specific time periods (months, quarters, years)
10Qs
Quarterly reports (required by SEC)
10Ks
Annual reports (required SEC)
Calendar Year
Jan 1 to Dec 31
Fiscal Year
any consecutive 12 month period (ex. July 1 to Jun 30)
Accrual Method
Revenues are recorded when performance obligation is completed and expenses are recorded when incurred (ex. prepaid expense would be recorded at $100/month for 24 months)
Cash Method
Revenues are recorded when cash is received and expenses are recorded when cash is paid (ex. prepaid expense would be recorded as $2,400 all at once)
Which method are publicly traded companies required to use?
accrual
Revenue Recognition Principle
requires that revenue be recorded when the goods or services are provided to customer and at an amount expected to be received from customers
simply receiving cash doesn't mean you can recognize it as revenue yet
Expense Recognition Principle
Requires expenses to be recorded in the same accounting period as the revenues that are recognized as a result of those expenses
In its first year of operations, Grace Company reports the following: Revenue of $60,000 ($52,000 cash received from customers); Expenses of $35,000 ($31,000 cash paid toward expenses). Find the net income under both methods.
Accrual: 60,000 minus 35,000 = 25,000 Cash: 52,000 minus 31,000 = $21,000
When do accounts have to be adjusted?
when transactions overlap time periods (ex. began in December but not completed till January)
What are the four types of adjustments?
Deferred Expense, Deferred Revenue, Accrued Expense, Accrued Revenue
Deferred Expense
aka prepaid expense -assets paid for in advance of receiving their benefits -ex. prepaid insurance, prepaid rent, and supplies
once benefit is received, and adjusting entry must be made
Deferred Revenue
aka unearned revenue -cash received in advance of providing products or services -once revenue is earned adjusting entry must be made
Accrued Expense
costs that we have received the benefit of before paying for them
ex. accrued salaries
Accrued Revenue
revenues that we earned but have not been paid for yet or providing services but getting paid later
Deferred Revenue Entries
Journal: Cash/ unearned rev Adjusting: Unearned revenue and revenue
Deferred Expense Entries
Journal: Prepaid expense/ cash Adjusting: Expense and prepaid expense
Accrued Revenue Entries
Adjusting: Accounts receivable / rev Journal: Cash/ accounts receivable
Accrued Expense Entries
Adjusting: Expense/ Account payable Journal: account payable/ cash
What accounts are always involved in an adjusting entry?
expense / revenue
Where does adjusted trial balance fall in the order of financial statement documents?
General Ledger Trial Balance ADJUSTED TRIAL BALANCE Financial Statement
What does the closing process do?
reset some account balances to zero to ensure they don't blend together throughout different periods -helps summarize a period's revenues and expenses in the income summary
What is the income summary?
temporary account which equals net income or loss for a period
What types of accounts are temporary?
revenues, expenses, income summary, dividends
What types of accounts are permanent?
assets, common stock, retained earnings, liabilities
The closing process only applies to what type of accounts?
temporary
Steps to closing process
Revenue to income summary
Expenses to income summary
Income summary (rev - exp) to retained earnings
Dividends to retained earnings
what is the post-closing trial balance?
list of permanent accounts and their balances after closing entries (total debits must equal total credits)
What is a classified balance sheet?
have specific titles and classifications for accounts for oganization
What are examples of classified balance sheet organization titles?
current assets, non current assets, etc.
what is the difference between current and non current accounts?
when they need to be paid
profit margins
= net income/ net sales
shows how much of your income is from sales
current ratio
= current assets/ current liabilities -helps assess the company's ability to pay debts in near future -want a higher number (< 1 may not be able to cover debt)
Note 
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