ACC 211 Exam #1 Study Guide

Conceptual Framework of Accounting

an information and measurement system where financial information is recorded from business activities

4 fundamental accounting principals

Principles: revenue recognition, expense recognition, historical cost, full disclosure

Assumptions: economic entity, going concern, monetary unit, time period

4 basic accounting assumptions

economic entity: the business is treated as a separate unit from it’s owners.

going concern: assumes a business will continue to operate indefinitely without forcing liquidation.

monetary unit: all business transactions are recorded using a single currency.

time period: The Time Period Example divides the long life of a business into artificial, equal segments like months, quarters, or years

Constraints: materiality, cost-benefit, conservatism

Accounting Constraints

Materiality: only significant facts matter

Cost Benefit: information must be worth the price

Conservatism: When in doubt, choose a safer path

Know definitions, purposes, and how each affects financial reporting

Financial reporting is the formal process of documenting, organizing, and communicating an organization's financial activities, performance, and health to internal and external stakeholders.

Such as income statement, balance sheet, statement of cash flow, statement of stakeholders equity.

Business Transactions and Transaction Analysis

a process where financial events are evaluated to determine their effect on the accounting equation.

Steps: Identify documents, determine account affected, classify account types, apply debit and credit rules.

Identify and define accounts affected by a transaction

Assets, Liabilities, Equity, Revenue, and Expenses are affected by transactions.

You can identify them by finding an event, spotting accounts, and classifying them.

Determine whether each account increases or decreases

depends on the type of account whether credit or debit applies

Debits (Left): Increases , Credit (Right): Decreases

Classify accounts as assets, liabilities, equity, revenues, or expenses

Assets: what you own/ property

Liabilities: what you owe

Equity: net value of the business

Revenue: the amount of money the business brings in

Expenses: the amount of money you spend to keep the business running

Demonstrate transaction effects using T-accounts or

increase/decrease tables.

Assets: debits increase, credits decrease

Liabilities: debits decrease, credits increase

Expenses: debits increase, credits decrease

Revenue: debits decrease, credits increase

Owner’s Equity: debits decrease, credits increase

Financial Statements

A financial statement is a formal written record that summarizes the financial activities, performance, and position of a business

Income Statement Equation

Revenue - Expenses

Statement of Retained Earnings: beginning retained earnings + net income – dividends

Beginning Retained Earnings + Net Income - Dividends

Balance Sheet: unclassified and classified formats

Unclassified: has the basic assets, liabilities, and owner’s equity, does not separate short term and long term items. It is easier and faster to prepare. Best for internal reviews and small businesses.

Classified: Organizes financial data into specific sub-headings for deeper analysis. Splits assets into current assets, long-term investments, property, plant, and equipment (PP&E), and intangible assets. Separates liabilities into current (due within one year) and long-term obligations. Preferred by external users, lenders, and large corporations for evaluating liquidity and financial health.

Understand how the statements connect to one another.

All statements share data lines where the bottom of the line reports to the other.

1. income statement

2. statement of retained earnings

3. balance sheet

4. statement of cash flows

Cash Flow Statement

a financial report that shows how much cash moves into and out of a business during a specific period

Operating activities

are daily business tasks and core transactions a company performs to produce and sell it’s good and services such as cash flows, cash outflows, and operational cost.

Investing activities

are the section of a company's cash flow statement that reports cash spent or generated from buying and selling long-term assets

Financing activities

are business transactions that involve the flow of cash and funds between a company and its owners, investors, or creditors

Account Classifications

Accounts are classified using two main frameworks: the Modern Approach (based on the accounting equation) and the Traditional Approach (based on the double-entry system)

Know where each account appears in the financial statements

Balance sheet accounts : (assets, liabilities, equity)

Income statement accounts: (revenue, expenses)

Double-Entry Bookkeeping

an accounting system where every financial transaction is recorded in at least two accounts as an equal and opposite debit and credit

Assets increase with …

Debit

Liabilities and Equity increase with….

Credit

Expenses increase with…

debit

Revenues increase with …..

credit

Where do you record transactions

General Journal

Where do you post transactions

General Ledger

What is the accounting cycle

The accounting cycle is an eight-step systematic process that a business uses to record, process, and report its financial transactions over a specific period

Analyzing Transactions

the foundational first step in the accounting cycle where you evaluate a business event to determine its effect on the accounting equation

Journalize

second step in the accounting cycle where a business records its financial transactions in a chronological log called a journal

Posting to ledger

the process of transferring debit and credit amounts from the general journal into individual accounts in the general ledger

Prepare unadjusted trail balance

a list of all general ledger accounts and their balances compiled at the end of an accounting period before any adjusting entries are made

recording adjusting entries

Adjusting entries are journal entries recorded at the end of an accounting period to update asset, liability, revenue, and expense accounts so they match the accrual basis of accounting.

prepare adjusted trail balance

a complete list of all general ledger account names and their updated balances after posting adjusting entries. It proves that total debits equal total credits before you build your financial statements.

Prepare financial statements

Preparing financial statements in financial accounting follows a specific sequence using data from an adjusted trial balance

Close temporary accounts

To properly close a temporary (nominal) account in accounting, you must reset its balance to zero at the end of the period by transferring revenues, expenses, and dividends to permanent equity accounts like Retained Earnings or Capital

Prepare post-closing trial balance

A post-closing trial balance is a list of all permanent accounts and their ending balances after closing entries are posted. It proves that total debits equal total credits and confirms that all temporary accounts have a zero balance before the new period starts

Trial Balance

A trial balance is an internal accounting report that lists all general ledger accounts and their balances at a specific point in time to confirm that total debits equal total credits

Purpose of adjusting entries

• Ensure revenues and expenses are recorded in the

correct period

• Ensure account balances are accurate before preparing financial statements

Types of Adjusting Entries

• Prepaid expenses: convert assets to expenses

• Unearned revenues: convert liabilities to revenues

• Accrued expenses: record expenses incurred but not yet paid

• Accrued revenues: record revenues earned but not yet received

Recording Adjusting Entries

• Identify accounts needing adjustment

• Write correct journal entries

• Post to ledger

• Show effects on financial statements

Adjusted Trial Balance

• Purpose: verify updated balances after adjustments

• Used to prepare financial statements

• Know how it differs from the unadjusted trial balance.

Closing Process

• Close revenues to Income Summary

• Close expenses to Income Summary

• Close Income Summary to Retained Earnings

• Close dividends to Retained Earnings

• Purpose: reset temporary accounts and update retained earnings.

Classified Balance Sheet

• Current assets • Long-term assets • Current liabilities •

Long-term liabilities • Equity section • Know how to prepare the full classified format.