ACC 200: Business Structures, Financial Statements, and Accounting Cycle

Sole Proprietorship

Owned and controlled by one person; simple to establish

Partnership

Two or more owners; border skills and resources

Corporation

Separate legal entity, easier to transfer ownership/raise funds, no personal liability, income taxes are higher

Revenue

Amounts generated from the sale of goods or performance of services

Expenses

Costs consumed, or services used in the process of generating revenue

Net Income

Exists when revenues exceed expenses

Net Loss

Exists when expenses exceed revenues

Income Statement shows what?

Success of the business during a period, past net income provides information for predicting future earnings, lists the companies revenue, followed by its expenses for a specific (ex. a month)

Retained Earnings Statement shows…

How much income was distributed to owners and how much was retained

Dividends do what…

Decrease retained earnings, represent the portion of net income distributed to owners

Balance Sheet

A picture at a point in time of what a business owns and what it owes

Assets are listed…

in order of liquidity

Liabilities are the…

Claims of creditors

Stockholder's Equity are the

Claims of owners

Basic Accounting Equation

Assets = Liabilities + Stockholder's Equity

Net income (Retained Earnings)

Increases retained earnings

Net loss (Retained Earnings)

Decreases retained earnings

Retained earnings ending balance represents

cumulative net income retained to allow for further expansion

Simple to establish

Sole Proprietorship, Partnership

No personal legal liability

Corporation

Tax advantages

Sole Proprietorship

Common stock

Results when a company sells new shares of stock

Retained earnings

Is the net income retained in the corporation

Net Income statement

Is an add to retained earnings statement

What is needed in preparing the balance sheet?

Ending balance in retained earnings

Cash amount on the balance sheet equals...

the end of the period of cash reported on the statement of cash flows

Classified Balance Sheet does what?

It improves user's understanding & group similar assets and similar liabilities together based on economic characteristics

Standard Classifications are what?

Current assets, long-term investments, property, plant and equipment, and intangible assets

Current assets

Assets a company expects to convert cash or use up within one year or the operating cycle whichever is longer

Operating Cycle

Average time it takes to purchase inventory, sell it on account, and then collect cash from customers (most often one year)

Common types of Current assets

Cash, Investments, Receivables, Inventories, Prepaid expenses

Investments are…

Such as short-term U.S government securities

Accounts receivable

Receivables that are expected to be collected

Notes receivable

Receivables that are formal written promises to pay

Interest receivable

Interest that is owed to the company

Long-term assets consist of

land or buildings that a company is not currently using in its operating activities

Property, Plant and Equipment

Assets with relatively long useful lives that are currently used in operations

Plant assets

Land, buildings, equipment, delivery vehicles, furniture

Reporting property, plant and equipment

Reported on the balance sheet at book value; cost less accumulated depreciation

Depreciation

Systematic allocation of cost to expense over several years

Accumulated depreciation

Total amount of depreciation that the company has expensed thus far in the asset's life

How to calculate book value…

Cost - accumulated depreciation

Historical cost principle record what?

Companies record assets at the cost to acquire the asset at the time of the asset is purchased.

Intangible Assets

Assets that do not have physical substance.

Current Liabilities

Obligations the company is to pay within the next year or operating cycle, whichever is longer.

Accounts payable

Liabilities that represent amounts owed to suppliers for goods and services purchased on credit.

Notes payable

Written promises to pay a certain amount of money at a future date.

Salaries & wages payable

Liabilities for salaries and wages owed to employees for work performed.

Interest payable

Liabilities for interest that has accrued but has not yet been paid.

Income taxes payable

Liabilities for income taxes that are owed to the government.

Long-term obligations

Obligations a company expects to pay after one year.

Long-term debt

Debt that is not due to be paid within one year.

Stockholders' Equity

The residual interest in the assets of the entity after deducting liabilities.

Liquidity indicates what/what is the relationship?

the ability to pay obligations expected to become due within the next year or operating cycle. Relationship between current assets and current liabilities

How to calculate working capital…

Current assets - current liabilities.

Current ratio

Current assets / current liabilities.

How to calculate earnings per share

Net income - preferred dividends / weighted average common shares outstanding.

Accounting Cycle

Basis of accounting information system implemented primarily through a computerized accounting system.

Electronic data processing (EDP) contains…

It contains the same concepts and principles regardless of manual or computerized.

Accounting transactions

Economic events that require recording in financial statements. Occurs when assets, liabilities or stockholder's equity items change because of some economic event.

Analyzing Transactions

Process of identifying the specific effects of economic events based on accounting equation. They must always balance. Each transaction has a dual effect.

Tabular Analysis

Used to demonstrate the effect that each transaction has on financial statements.

Services performed on account

Means that services will be paid later; revenue is recorded when services are performed.

Summary of transactions

Summarizes the transactions to show their cumulative effect on the basic accounting equation. Includes the first transaction number in the first column on the left. Right most column shows the specific effect on any transaction that affects revenues or expenses.

Debit and Credit Procedures

Debits must equal credits, providing equality as the basis for the double entry accounting system.

Double entry system

Requires two-sided effect of each transaction recorded in appropriate accounts. Provides a logical method for recording transactions. Helps ensure the accuracy of the recorded amounts and helps detect errors.

Debits

Increase assets, decrease liabilities, decrease common stock, decrease retained earnings, increase dividends, decrease revenue, increase expenses.

Credits

Decrease assets, increase liabilities, increase common stock, increase retained earnings, decrease dividends.

Normal balances

The side where increases are recorded. Expenses DECREASE stockholders equity & revenues INCREASE stockholders equity

The Journal

An accounting record in which transactions are recorded in chronological order.

Journalizing

Process of entering transaction data in the journal.

Posting

The procedure of transferring journal entry amounts to ledger accounts.

Trial Balance

Prepared at the end of the accounting period to prove that debits equal credits after posting.

Procedures for preparing trial balance

List account titles and their balances in the order they appear in the ledger, total the debit and credit columns, and verify equality.

assets = ...

liabilities + stockholders equity

how do you list a balance sheet?

assets first, followed by liabilities and s.e.

what are the types prepaid expenses

insurance and supplies