Procopy concepts Principles of financial accounting chapter 2

Historical Cost

The amount paid (or exchanged) on the transaction date is used to initially record the elements

Revenue Recognition

Record revenue only when its measurable, realizable or realized, and has been earned

Matching Principle

records the expenses when the expense is incurred to generate revenues

Full disclosure

Must provide users with information that could impact a decision

Unit of Measure

measurements are in monetary units ($$)

Separate Entity

activities of a business separate and distinct from its owners

Periodicity

Financial life of a company can be reported in shorter time periods ( usually month end, quarter end, and year end)

Continuity

Entity will not be going out of business in the near future

Relevant

Information provided would impact a decision

Reliable

Can be independently verified to be accurate

Comparable

Similar accounting methods have been applied across different companies

Consistent

Within a company, similar accounting methods have been applied over time

Cost/Benefit

benefits to providing the information to the users should outweigh the costs to provide it.

Materiality

determination that relatively small amounts (if omitted or recorded incorrectly) would not affect or impact a decision

industry practices

acceptable industry specific practices that deviate from normal GAAP principles

Conservatism

When alternative accounting valuations can be used, the amount that is least likely to understate liabilities and/ or expenses, should be used

The T account

The simplest way to begin analyzing transactions. It is a pictorial view of each account, has an account title, a debit side (left), and credit side(right)

The operating cycle

Time it takes for a company to pay cash to suppliers, sell goods or services to customers, and collect cash from its customers

Revenues

Increases in assets or settlement of liabilities from ongoing operations of a business. When revenues are earned, usually assets (cash or accounts receivable increase).

Expenses

Decreases in Assets or increases in liabilities from ongoing operations incurred to generate revenues

Interest

Interest or dividends earned on an investment (interest income) or interest incurred on a liability (interest expense)

Other Gains

Increases in assets or decreases in liabilities from transactions not included in general operating activities

Other losses

Decreases in assets or increases in liabilities from transactions not included in general operating activities.

Income taxes

Last expense listed before computing net income. Sole proprietorships and partnerships do not pay separate taxes or list this as an expense (because included on their personal income tax return) but corporations do incur separate income tax expenses.

Earnings per share

Required to be included on income statement of corporations, used to benchmark the profitability and performance of a corporation. Not included for sole proprietorships or partnerships.

Earnings per share formula

Net income/ Average number of common shares outstanding

Cash is received at the time of the sale

Debit: cash Credit: Sales Revenue

Cash is received after the sale

A. Record the sale: Debit: Accounts Receivable Credit: Sales Revenue B. When the cash is collected: Debit:cash Credit: Accounts receivable

Cash is received in advance of the sale

A. When the cash is received: Debit: cash Credit: Unearned revenue B. When the revenue is earned: Debit: Unearned revenue Credit: Sales Revenue

Percentage of Completion

Recognized on long term contracts for % completed during the period

At completion of production (before sale)

Precious metals with immediate marketability of quoted prices interchangeability

Installment sales method (after period of the sale)

Only appropriate when collectability of receivable cannot be reasonably assured.

Matching Principle

Costs incurred to generate revenues in a given period must be recorded in that period (regardless of when the cash is paid).

Cash is paid at the same time the expense is incurred

Debit: Expense Credit: cash

Cash is paid before the expense is incurred to generate the revenue

Debit: supplies Credit:cash

Cash is paid after the cost has been incurred to generate the revenue

Debit: Expense Credit: Payable

Accrual accounting

Revenues and expenses are recognized when transaction causes them to occur. Revenues recognized when realized or realizable and have been earned; expenses recognized when they have been incurred. Required under GAAP.

Cash Basis accounting

revenues recognized when receive the cash, expenses recognized when paid. Does not necessarily accurately reflect assets or liabilities as of a certain date. NOT GAAP.

First Step in accounting cycle

Analyze the transaction: Determine the effects of the transaction and what accounts of affected.

second step in accounting cycle

Apply the rules of double entry (debits=credits)

Third step in accounting cycle

Record the entry in the general journal. The general journal is a chronological listing (date order) of each transaction, and what accounts are debited and credited.

Fourth step in accounting cycle

Post the entry to the general ledger. Keep track of each account balance.

Fifth step in accounting cycle

At each month end, subtotal each account (called "footing the accounts") and prepare a trial balance, to make sure all debits=credits

Sixth step in accounting cycle

Prepare financial statements: income statement, statement of retained earnings, Balance sheet, and then statement of cash flows

Seventh step in accounting cycle

Prepare an adjusted trial balance to ensure all debits=credits

Eighth step in accounting cycle

prepare financial statements: Income statement, statement of retained earnings, balance sheet, and then statement of cash flows

Ninth step in accounting cycle

At year end, prepare closing entries to close all income statement accounts (called nominal accounts) into retained earnings (or owner's equity account).

Investing Activities

Cash inflows and outflows related to non-current assets and investments (asset portion of the balance sheet)

Financing activities

Cash inflows and outflows related to debt and equity.