First accounting exam

chapter 1,2,3 terms

net income (income statement)

net income = revenues - expenses

decision makers who use accounting

1. individuals

2. investors and creditors

3. regulatory bodies (irs)

entity assumption

organization stands apart from other organizations and individuals as a separate economic unit

Continuity assumption

entity will continue to operate for the foreseeable future

historical cost principle

assets should be recorded at their actual cost on date of purchase s

stable monetary unit assumption

assume the dollars purchasing power is stable over time

Accounting equation (both sides must be equal)

assets = liabilities + stockholders Equity

assets - liabilities = SE

Current Assets

cash and equivalents

accounts receivable

inventories

supplies

Long term assets

property, plant, and equipment

Current liabilities

accounts payable

income tax payable (anything “payable”

Long term liabilities

long term debt

Equity

paid in capital (Stockholders investment in business and common stock)

Retained earnings (Amt of earned income kept for use in business)

Components of Retained earnings

revenues

expenses

dividends

Income statement/statement of operations

revenues - expenses = net income (how well did we perform this year)

statement of retained earnings

beg ret earnings + net income (net loss) - declared dividends = end ret earnings (why did ret earnings change)

Balance sheet (comp. financial position)

assets = liabilities + SEba

balance sheet

reports 3 items:

1. assets

2. liabilities

3. SE

evaluate business decisions ethically

1. economic decision

2. legal

   1. ethical

transaction

event that has a financial impact on business (something given; something received in return)

Accounts receivable

30 day credit typically; owed to company by its customers

dividends and expenses

on the right side of acct equation; the normal balancing for them is debits (+) and credits (-) unlike the rest who are credits

normal balance liabilities

credit

SE Normal balance (cmn stock + Ret earn)

credit

Normal Dividends balance

debit

Normal revenues balance

credit

Normal expenses balance

debit

accrual accounting

records impact of transactions when they occur; records revenue when earned and expenses when incurred

Cash basis accounting

records only cash transactions (cash receipts and cash payments); ignores important info, incomplete financial statements

Time period concept

ensures that accounting information is reported at regular intervals (1yr);n

Revenue Principle

deals with 2 issues:

1. when to record (recognize revenue

2. what amount of revenue to record

• When we earn revenue, we credit it

Expense recognition principle

2 steps

1. identify all expenses incurred during the period

   1. measure the expenses and recognize them in the same period in which any related revenues are earned

categories of adjusting entries

deferrals

accruals

depreciation

deferrals

an adjustment for payment of an item or receipt of cash in advancea

accruals

the opposite of a deferral (record expense when it occurs before paying cash)

depreciation

allocates the cost of a plant asset to expense over the assets useful life

Prepaid expense

expense paid in advance (normal assets is debit)

accrued expense

Liability that arises from an expense that has not yet been paid (not recorded daily/weekly but rather at the end of the period as an adjusting entry)

Accrued revenue

revenue that has been earned but not yet collected

unearned service revenue

liability created when a company receives cash before earning the revenue

adjusting process

2 purposes

1. measure income

2. update the balance sheet

revenue/expenses — measure income

assets/liabilities — update the balance sheet

Trial balance

summarizes all accounts and their final balances after all adjusting entires have been journalized and posted

Close the books

prepares the accounts for the next periods transactions

closing entries set temporary accounts back to zero

temporary accounts

revenues

expenses

dividendspe

permanent accounts

assets

liabilities

stockholders equity

Curent ratio

total current assets divided by total current liabilities. (optimal is 1.2 to 1.5)

debt ratio

total liabilities divided by total assets