Accounting Exam 1 (Chapters 1 & 2)

Assets

Economic resources

Liabilities

Financing from Creditors

Stockholders' Equity

Financing from Stockholders

Income Statement

reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period

Income Statement Equation

Revenue - Expenses = Net Income

Accounting Equation (Balance Sheet)

Assets = Liabilities + Stockholders' Equity

Statement of Stockholders' Equity

reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

Statement of Stockholders' Equity Equation

Beginning retained earnings + Net Income - Dividends = Retained Earnings

Balance Sheet

Reports the financial position (economic resources and sources of financing) of an accounting entity at any point in time (Snapshot)

Three Steps of Accuracy assurance

1) System of Controls
2) External Auditors
3) Board of Directors

Accounting

the art of recording, classifying and summarizing transactions, in terms of money, and interpreting the results.

Flow of Accounting Info

1) People make decisions
2) Business transactions occur
3) Businesses prepare reports to show the results of their operations

Transaction

is any event that both affects the financial position of the business entity and can be reliably recorded

Elements of Cash Flows

1) Operating Activities
2) Investing Activities
3) Financing Activities

Notes to Financial Statements

1) Descriptions of the key accounting rules that apply to the company's statements
2) Additional detail supporting reported numbers
3) Relevant financial information not disclosed on the statements

Luca Pacioli

Published the first elements of double entry bookkeeping in 1494

Securities Act of 1933, Securities and Exchange Act of 1934

Established the Securities and Exchange Commission (SEC) which has been given broad powers to determine measurement rules of financial statements.

GAAP

Generally Accepted Accounting Principles. Monitored and enforced by the FASB

FASB

Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP

External Auditors

An Audit is an examination of the financial reports to ensure that they represent what they claim and conform with GAAP

IFRS

International financial reporting standards. Reviewed and enforced by the International Accounting Standards Board (IASB)

Materiality

Accounts for small amounts in the most cost effective way, even if not technically correct.

Conservatism

Do not overstate assets or revenue and not understate liabilities or expenses

Separate Entity

Activities of the business are separate from activities of owners

Continuity

The entity will not go out of business in the near future

Unit-of-Measure

Accounting measurements will be in the national monetary unit ( i.e. $ in the US)

Historical Cost

Cash equivalent cost given up is the basis for the initial recording of elements

Principles of Transaction Analysis

Every transaction affects at least two accounts (duality of effects).

The accounting equation must remain in balance after each transaction

The T - Account

Account Title (Top)
Debit (Left Side) Credit (Right Side)

Rules of Debit and Credit ( Assets )

Debit ( + )

Credit ( - )

Rules of Debit and Credit ( Liabilities )

Debit ( - )

Credit ( + )

Rules of Debit and Credit ( Stockholders' Equity )

Debit ( - )

Credit ( + )

Journal Entry

1) Reference (Letter, number, date)
2) Account Title
-Debited accounts on top
-Credited accounts on bottom
3) Amounts
-Debited amounts on the left
-Credited amounts on the right

Recording Transactions in the Journal (Step 1)

Identify the transaction and specify each account affected

Recording Transactions in the Journal (Step 2)

Determine whether each account tis increase or decreased by the transaction. (Use the rules of debits and credits)

Recording Transactions in the Journal (Step 3)

Enter the transaction in the journal, including a brief explanation for the entry.

Current Ratio

Current Assets / Current Liabilities

Classified Balance Sheet

In a classified balance sheet assets and liabilities are classified into two categories - Current and Noncurrent

Current assets

Those to be used or turned into cash within the upcoming year

Noncurrent assets

Those that will last longer than ONE year

Current Liabilities

Those obligations to be paid or settled within the next 12 months with current assets.

Accounting Cycle (During the Period)

1) Analyze Transactions
2) Record Journal entries in the general journal
3) Post amounts to the general ledger

Accounting Cycle (At the End of the Period)

1) Prepare a trial balance to determine if debits equal credits
2) Adjust revenues and expenses and related balance sheet accounts (re-record in journal and post to ledger)
3) Prepare a complete set of financial statements and disseminate it to users
4) Close revenues, gains, expenses, and losses to Retained Earnings (record in journal and post to ledger)