Accounting 02

In-class quizzes

Revenue

Assets received for selling a product or performing a service.

Shareholder’s Equity

Owners’ claim to assets (assets - liabilities)

Assets

Things of value the business owns (economic resources)

Liabilities

Debts or obligations (creditor’s claim to assets)

Expenses

Costs incurred to generate revenues

Accounts receivable

Amounts owed to your company by its customers

Common Stock

Shares of ownership issued in exchange for cash received

Retained Earnings

Income not distributed to shareholders

Accounts Payable

Amounts your company owes suppliers or vendors

Dividends

Distribution of assets to shareholders

Going Concern Assumption

Company will continue operating and is not on verge of being closed or sold

Monetary Unit Assumption

Only record transactions expressed in currency (yen, euro, dollar, etc)

Time Period Assumption

Company’s activities broken into time periods and reports prepared for those periods

Business Entity Assumption

Business transactions tracked separately from other businesses & owners

Cost Principle

Assets generally valued at acquisition price rather than current market value

Revenue Recognition Principle

Revenue recorded when earned (service performed/product delivered) not when cash is received

Matching Principle

Record expenses in same period as the revenues they generate

Full Disclosure Principle

Must report information that would impact user’s decisions

Formula for balance sheet

Assets = Liabilities + Shareholder’s Equity

Formula for Income statement

Revenues - Expenses = Net Income

Formula for Retained Earnings

Beginning retained earnings + net income - dividends = Ending Retained Earnings

General Journal

Chronological record of transactions with all debits & credits in one place

General Ledger

Compilation of individual accounts

What type of account is unearned revenue?

Liability

What type of account is prepaid rent?

Asset

Account used when shares are issued in exchange for cash or other assets

Common Stock

What does a “Debit” mean in accounting?

left side

What does “Credit” mean in accounting?

right side

How do you INCREASE an asset account?

DEBIT

How do you DECREASE an asset account?

CREDIT

How do you INCREASE a liability account?

CREDIT

How do you DECREASE a liability account?

DEBIT

How do you record revenues earned?

CREDIT

How do you record expenses incurred?

DEBIT

How do you record dividends?

DEBIT

How do you INCREASE common stock?

CREDIT

How do you DECREASE retained earnings?

DEBIT

Cash Basis of Accounting

Recognizing revenue when cash is received and expenses when cash is paid

Accrual Basis of Accounting

Recognizing revenues when earned and expenses when incurred

Adjusting Entries

Used to update accounts as time passes

Closing Entries

Used to update retained earnings and set temporary accounts back to zero

Depreciation

Allocating the cost of an asset to an expense account over that asset’s useful life

Fiscal Year

Any consecutive 12 months

Time Period Assumption

Company’s activities divided into time periods

Long-lived assets used to operate the business

Plant Assets (aka fixed assets, property plant & equipment, and PPE)

Current Assets

Assets expected to be converted to cash or used up within one year

Current Liabilities

Liabilities due in the next year

Long-term Investments

Assets expected to be held for more than 1 year & NOT used to operate the business

Intangible Assetss

Exclusive rights and privileges to noncurrent assets without physical substance

Long-term Liabilities

Debts due after more than one year

Unearned Revenue

Account used when cash is received before services are performed

Accumulated Depreciation

Account showing total amount of depreciation taken over the life of asset so far

Formula to calculate Book Value

Original cost - accumulated depreciation =

Formula to calculate annual depreciation

(Cost - salvage value)/ expected life in years =

Formula to calculate interest expense

Amount borrowed x annual interest rate x portion of year expired =

Trial Balance

Statement prepared to verify debits equal credits

Contra Assets

Reduce the value of other assets

What accounts are temporary?

R.E.I.D = Revenues, Expenses, Income Summary, Dividends

Cost flow method which typically results in the lowest net income and taxes

LIFO

Cost flow method historically used for expensive & unique items

Specific Identification

Cost flow method commonly reflecting physical flow of inventory

FIFO

Cost flow method most accurately reflecting performance in periods of rising prices

LIFO

Cost flow method that “smooths out” changes in price

Weighted Average

Cost method rarely reflecting physical flow of goods

LIFO

Cost flow method banned under IFRS because it allows manipulation of net income

LIFO

LIFO Reserve

Required disclosure of difference between LIFO & FIFO inventory valutions

FOB Shipping Point

Ownership and obligations pass when the public shipper accepts goods

FOB Destination

Ownership and obligations pass when the buyer receives goods

Conservatism

If accountants doubt an item’s value, they understate assets and net income

Inventory Turnover Ratio

Shows how quickly a company sells its inventory (the number of times per year)

Lower of cost or market

Inventory shown at lower of acquisition price or current replacement

Consignment

When another party tries to sell your goods at their store

Represents a deviation from cost principle due to conservatism

Lower of cost or market

Steps required to calculate cost of goods sold using the PERIODIC METHOD

Beginning Inventory

+Net Purchases

=Cost of Goods Available

-Ending Inventory

=Cost of Goods Sold

Steps to Multi-Step Income Statement

Sales

-Sales Discount

-Sales Returns & Allowances

=Net Sales

-Cost of Goods Sold

=Gross Profit

-Operating Expenses

=Operating Income

+/-Other gains, losses, rev. & exp.

=Pretax Net Income

-Tax Expense

=Net Income

Headings & Categories on a Classified Balance Sheet

Assets

Current Assets

Long-term Investments

Plant Assets

Intangibles

Liabilities

Current Liabilities

Long-term Liabilities

Equity

Internal Controls

Policies and procedures to protect assets & ensure reliable accounting

Bank Reconciliation

Resolving the difference between the bank statement and our checkbook or cash account

Outstanding Checks

Checks that we’ve recorded but the bank hasn’t deducted from our account yet.

Deposits in Transit

Deposits we’ve recorded but the bank hasn’t yet added to our account

NSF (non-sufficient funds)

How the bank refers to bounced checks (deposits that don’t clear)

Items we recorded, but the bank hasn’t recorded appear on the…

Bank Side of Reconciliation

Items the bank recorded, but we haven’t recorded appear on the…

Book Side of Reconciliation

After completing a bank reconciliation, you journalize items on the…

Book Side of Reconciliation

Petty Cash

Account used for making small cash payments

Cash Short/Over

Account used when too much or too little cash is on hand

Cash Equivalents

Treasury bills, money markets, and commercial paper

Collusion

When two or more individuals work together to get around internal controls

Internal Control Principals

Adequate Record Keeping

Divide responsibility for related transactions (segregation of duties)

Establish Responsibility

Physical/Technological Controls

Separate record keeping from custody of assets

Separate record keeping from custody of assets is violated when

The accountant signs checks or makes deposits

Establish Responsibility is violated when

Two people use the same cash register simultaneously

Adequate record keeping is violated when

Copies of checks, purchase orders & invoices aren’t kept; checks are not prenumbered

Physical/Technological Controls is violated when

Doors unlocked, safes, cash registers, time clocks or electronic sensors aren’t used

Divide responsibility for related transactions (segregation of duties) is violated when

The same person authorizes purchases and receives goods

Notes Recievable

Account used to record promissory notes owed to us

Allowance for Doubtful Accounts

Account showing the amount of A/R estimated uncollectible

Direct write-off method

Bad method that violates the matching principle and overstates assets

Allowance method

Bad debt method required by GAAP

The income statement approach uses % of sales (% of credit sales) to calculate…

Bad Debt Expense

The Balance Sheet approach uses % of A/R (aging method) to calculate…

Desired allowance for doubtful accounts