Financial Accounting Midterm

3 types of businesses

Service, Merchandising, Manufacturing

Different in Internal and External users of financial statements

internal are managers or owners while external are creditors or investors

GAAP

Generally Accepted Accounting Principles

4 Accounting Principles

measurement principle, historical cost principle, cost principle, revenue recognition principle

measurement principle 

amounts we use in accounting must be reasonable

historical cost principle

assets should be recorded at their original purchase price, not their current market value

cost principle

Assets are recorded at their original purchase cost

revenue recognition principle

Revenue is recognized when it is earned, not when cash is received

4 forms of business entities

Sole proprietorship, partnership, cooperation, LLC

Difference between ethics and morals

Morals come from within us, imposed on un by whatever field we are in

Difference in Cash and Accrual Based Accounting 

with cash basis we don’t have to follow revenue recognition principle, but GAAP is required with accrual based accounting

Difference in perpetual and periodic inventory

Perpetual is keeping track of it as we go, periodic is once a period

The Accounting Equation

Assets = Liabilities + Stockholders’ Equity

Prepaid Expenses

Prepaid expenses are payments made in advance for goods or services that will be received or used in the future

Unearned revenue

money received by a business before it has delivered goods or services.

Dividends

Return of Profit, a distribution of earnings to stockholder’s of the business

4 primary financial statements

income statement, retained earning statement, balance sheet, statement of cashflow

What accounts belon on the balance sheet

assets, liability, equity, revenue, expense

what accounts have a normal credit balance

liabilities, equity, revenue

Chart of Accounts

listing of all accounts. order: assets, liabilities, equity, revenue, expense

Net Income

Revenue minus expenses

Sole Proprietorship

Taxed on the owner’s personal return

Managers

internal users of financial statements

Publicly traded

Companies whose stock is sold or traded to the public

Ethics

external rules or principles guiding conduct in a specific field or group

Morals

Internal/Personal sense of right and wrong often shaped by religious beliefs/value, etc

Assets

have a normal debit balance

Liabilities

have a normal credit balance

GAAP

a collection of accounting principles, standards, and assumptions

Creditors

External users of financial statements

Private accountants

employed by companies, government, and not for profits to do accounting internally

Public Accountants

employed within an accounting firm providing general accounting, audit, tax, advisory services to other businesses

What accounting measures

profitability over a period of time, equity at a specific time, financial performance

Asset accounts

land, equipment, cash, prepaid expenses, accounts receivable

Liability account

unearned revenue, accounts payable, wages payable

Examples of revenue

fees earned

Which financial statement is like a snapshot of a specific date

balance sheet

what account types appear on the balance sheet

assets, liabilities, stockholders equity

which accounts appear on the income statement

expenses, revenue

What accounts are in assets

cash, prepaid insurance, land

what accounts are in liabilities

accounts payable, unearned revenues, loans payable

what accounts are in stockholder’s equity

common stock, retained earnings, dividends

what accounts are in revenue

fees earned, sales, rental revenue

what accounts are in expenses

rent expense, wages expense, utilities expense

normal balance for cash

debit

normal balance for fees earned

credit

normal balance for accounts receivable

debit

normal balance for office equipment

debit

normal balance for rent expense

debit

unadjusted trial balance can be used

to help detect errors in posting from the journal to the account ledger

to look for errors in the unadjusted trial balance

compare the debits to the credits to see if they are equal

what is a method to discover errors in the unadjusted trial balance if the balance totals are not equal

if the difference ends in 0 re add the columns

if the trial balance totals are equal, does that prove that there are no errors

no