Financial Accounting Chapter 1-4 Rutgers-Wasserman

Account

individual accounting record of increases and decreases in a specific asset, liability, or stockholder equity item

Debit

left side of account, debit balance shows if account debit amounts total more than credits

Credit

right side of account, credit balance shows if account credit amounts total more than debits

Cash

increase in cash= debit

decrease in cash= credit

Liabilities

increase= credit

decrease= debit

L

Stockholder's Equity

common stock:

increase= credit

decrease= debit

Retained Earnings

increase= credit

decrease= debit

RE

Dividends

increase= debit

decrease= credit

D

Revenues

increase= credit

decrease= debit

R

Expenses

increase= debit

decrease= credit

E

3 basic recording process steps

1. analyze transaction for effects on accounts

2. enter transaction into journal

3. transfer journal info to appropriate accounts in the ledger

Journal

"book of original entry", shows debit and credit effects on specific accounts, two amount columns, date, account title/explanations

Journal Contributions

1. discloses in one place the complete effects of a transaction

2. provides a chronological record of transactions

3. helps to prevent or locate errors due to ease of debit/credit comparison

Journalizing

companies make separate journal entries for each transaction

Complete Journal Entry

1. date of transaction

2. accounts and amount debited and credited

3. brief explanation of the transaction

Simple Journal Entry

involves only one debit and one credit

Compound Journal Entry

entry that requires three or more accounts

General Ledger

contains all the asset, liability, and stockholders' equity accounts of a company

T-form account

debit, credit, and balance columns

Posting

transferring journal entries to the ledger accounts

Posting steps (ledger)

1. appropriate column for accounts debited with date, journal page, debit amount,

2. do same for credit

3. account numbers are placed in reference column of journal for each post

Chart of Accounts

lists accounts and account numbers that identify their location in the ledger

Trial Balance

list of accounts and their balances at a given time, shows equality of debits and credits after posting, may uncover errors in journalizing and posting

Trial Balance Steps

1. List the account titles and their balances in appropriate debit or credit column

2. total debit and credit columns

3. prove equality of the two columns

Trial Balance Limitations

trial balance may balance despite balance, posting, and journalizing errors, does not prove that company has recorded all transactions or that the ledger is correct

Dollar Sign use

not used in journals or ledgers, only in trial balance and financial statements

Interim Period

monthly and quarterly time periods

Fiscal Year

accounting time period exactly one year in length

Calendar Year

January 1-December 31

Accrual-basis accounting

companies record transactions that change a company's financial statements in the periods at which the events occur, revenues recognized when service is performed

Cash-basis accounting

companies record revenue when they receive cash, not in accordance with GAAP

Revenue Recognition Principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

performance obligation

when a company agrees to perform a service or sell a product to a customer, when this is completed revenue is recognized

Expense Recognition Principle

dictates that expenses(efforts) be matched with revenues(results)

Adjusting Entries

ensure that the revenue recognition and expense revenue principles are followed, includes one income statement account and one balance sheet account

Deferrals

expenses or revenues that are recognized at a date later than the point when the cash was originally exchanged. includes pre-paid expenses and unearned expenses

Prepaid expenses

expenses paid in cash before used or consumed, expire with passage of time or through use

Unearned expenses

cash received before services are performed

Accruals

include accrued revenues and accrued expenses

accrued revenues

revenues for services performed but not yet received in cash or recorded

accrued expenses

expenses incurred but not yet paid in cash or recorded

prepaid expenses adjustment

increase= debit

decrease= credit

to an asset account

Supplies adjustment

debit to an asset account, recognized at end of accounting period

insurance adjustment

must be paid in advance, increases debit in asset account

depreciation

process of allocating cost of an asset to expense over its useful life, allocation concept not valuation

Contra Account

discloses both the original cost of the equipment and the total cost that has been expensed to date (depreciation)

Book Value

difference between cost of any depreciable asset and its related accumulated depreciation

unearned revenues

is a liability, opposite of prepaid expenses

increase= credit

decrease=debit

to a liability account

accrued revenues adjustment

increase= debit + credit

to a revenue account and asset account

accrued expenses adjustment

increase= debit to expense account and credit to liability account

Accrued interest

without adjustment, liabilities and interest expense are understated, and net income and stockholder equity are overstated

Adjusted Trial Balance

new trial balance after company has journalized and posted all adjusted entries

Full disclosure principle

companies disclose all circumstances and events that would make a difference to financial statement users

cost constraint

deciding whether companies should be required to provide a certain type of information, accounting standard setters consider this

Accounting

three activities: identifies, records, and communicates the economic events of an organization

Internal users

managers, supervisors, financial directors, etc. who use accounting data to plan, organize, and run business

Managerial Accounting

provides internal reports to help users make decisions about their companies

External users

people and organizations outside a company who want financial information about the company, ex investors and creditors

Investors (owners)

use financial information to decide whether to buy, hold, sell ownership in company

Creditors (ex suppliers/bankers)

use financial information to evaluate risks of granting credit or lending money to company

Sarbanes-Oxley Act (SOX)

intent to reduce unethical corporate behavior, top management must certify accuracy of financial info, more severe penalties, more oversight of board of directors

Generally Accepted Accounting Principles (GAAP)

general list of ethics that are widely followed and accepted by accounting departments in all companies

Financial Accounting Standards Board (FASB)

primary accounting standard-setting body in US

Securities Exchange Commission (SEC)

agency of US gov. that oversees financial markets and accounting standard-setting bodies, relies on FASB to develop accounting standards that companies must follow

International Accounting Standards Board (IASB)

many countries adopt standards from this, called International Financial Reporting Standards (IFRS)

Convergence

effort to reduce differences between GAAP and IFRS

Relevance (in relation to GAAP)

financial info is capable of making a difference in a decision

Faithful Representation (in relation to GAAP)

number and descriptions match what really existed or happened

Historical Cost Principle

dictates that companies record assets at their costs, record when purchased and over time

Fair Value Principle

states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability), used for certain investment securities that have market info readily available

Monetary Unit Assumption

requires that companies include in the accounting records only transact data that can be expressed in monetary terms

Economic Entity Assumption

requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities

Proprietorship

business owned by one person who receives any/all profit, suffers any/all losses, and is liable for any/all debts

Partnership

owned by more than one person, company transactions kept separate from personal activities of owners

Corporation

business organized as a separate legal entity under state law and having ownership divided into transferrable shares of stock

Basic Accounting Equation

Assets= Liabilities + Stockholder's Equity

Assets

resources a business owns, used to carry out production and sales, capacity to provide future services/benefits

Liabilities

claims against assets (existing debts and obligations)

accounts payable, notes payable, salaries and wages payable, sales and real estate taxes payable

Stockholder's Equity

consists of common stock and retained earnings

Common Stock

total amount paid in by stockholders for the shares they purchase

Retained Earnings

determined by revenues, expenses, and dividends

Revenues

gross increases in stockholder's equity resulting from business activities involved with earning income, usually results in an increase in an asset

Expenses

decreases in stockholder's equity that result from operating the business, cost of assets consumed or services used in process of earning revenues

Dividends

distribution of cash or other assets, reduce retained earnings, but not an expense

Transaction

business economic event recorded by accountants

External Transaction

involve economic events between company and an outside enterprise

Internal Transaction

economic event that occurs entirely within one company

If an asset is increased...

1. Decrease in another asset

2. increase in a specific liability

3. Increase in stockholder's equity

Income Statement

presents revenues and expenses and results in net income/loss for a specific period of time, does not include investment and dividend transactions between stockholders and the business in measuring net income

Retained Earnings Statement

summarizes change in RE for specific period of time, first shows beginning of RE amount then comes out net income and dividends

Balance Sheet

assets, liabilities, and stockholders' equity at a specific date

Cash Flow Statement

provides info on cash receipts and payments for a specific period of time

Cash Flow Statement Reports

1. cash effects of a company's operations during a period

2. investing activities

3. financing activities

4. net increases/decrease in cash

5. cash amount of end of period

Worksheet

a multiple column form used in the adjustment process and in preparing financial statements, not a permanent accounting record

5 steps in preparing a worksheet

1. prepare a trial balance on the worksheet

2. enter adjustments in adjustments column

3. enter adjusted balances in adjusted trial balance columns

4. extend ATB amounts to appropriate financial statement columns

5. total statement columns, compute net income/loss, complete worksheet

keying

companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements

"closing the books"

at the end of the accounting period, the company makes the accounts ready for the next period

temporary accounts

relate only to a given accounting period, includes all income statement accounts and dividends accounts, are all closed at end of period

permanent accounts

relate to one or more future accounting periods, consist of all balance sheet accounts, balances carried over to next accounting period

closing entries

formally recognize in the ledger the transfer of net income and dividends to retained earnings