BA 220 Notes 2

the flow of accounting information

1. people make decisions

2. business transactions occur

3. companies report their results

accounting cycle

a holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on the financial statements

1. Source Documents

2. Journals

3. Ledger

4. Trial Balance

5. Financial Statements

Accounting cycle

1. financial transaction

2. general journal

3. general ledger

4. trial balance (help us prepare our financial statements)

5. financial statements (end of the period)

accounting:

1. double-entry system

2. records dual effects of each transaction

   1. at least two accounts in each transaction

      1. *every transaction effects two items

journal

chronological record of transactions

3 steps

1. specify each account affected by the transaction and classify by type

2. determine if each account is increasing or decreasing

   1. record in the journal

the accounting equation

expresses the basic relationship of accounting

assets=liabilities + stockholders’ equity

Own=owe + owners claim

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\*Equity can go up and down (draw) also affected by net income (revenue-expenses)

an account is the

record of all the changes in a particular asset, liability, or stockholders’ equity during a period

assets

are economic resources that are expected to produce a benefit in the future

liabilities

are debts owed to people and organizations outside of the business (creditors)

equity

(also called capital, owners’ equity, or stockholders’ equity for a corporation) represents the owners’ claims

assets

\-economic resources that provide a future benefit

any liquid or non-liquid asset such as:

cash

bills

accounts receivable

inventory

property (non-liquid asset)

equipment

liabilities

financial obligations such as:

accounts payable

wages

rent

utilities

bank debt

deferred tax liability

long-term debt

equity

what’s left after subtracting liabilities from assets

common stock

owner draws

retained earnings

accounts recievable

promise for future cash for goods or services

notes recievable

amounts other parties must pay the business because they signed a promissory note

prepaid expenses

expenses paid in advance, such as insurance

\-you know your going to pay for rent in 2 years in advance so an asset you can use in the future

inventory

goods the company sells to customers

cash

money including bank account balances, paper currency, coins, etc

stockholders equity

the stockholders claims to the assets of the company

the type of account determines how to

record increases and decreases

assets

up (debit +), down (credit, -)

liabilities

down (debit, -), up (credit, +)

stockholders’ equity

down (debit, -), up (credit, +)

increases with debit

D-dividends

E-expenses

A-assets

L-losses

Increases with credits

G-gain

I-income

R-revenues

L-liabilities

S-shareholders’ equity

Equity

owners: revenues-expenses

Revenues

\-increase stockholders’ equity

\-result from delivering goods/services

expenses

\-decrease stockholders’ equity

\-cost of operating the business

His sales and expenses will affect the?

Equity (owners) the money he put in

assets

debit +

credit -

liabilities

debit -

credit +

common stock

debit -

credit +

retained earnings

debit -

credit +

dividends

debit +

credit -

revenues

debit -

credit +

expenses

debit +

credit -

rules of debit and credit

assets=liabilities + stockholders’ equity

Flow of accounting Data

1. transaction occurs

2. transaction analyzed

3. transaction entered in the journal

   1. amounts posted to the ledger accounts

T-Account

is a tool used to represent an account. A graphical representation

Left side: debit, Right side: credit, Top: Account name

\-record of increases and decreases in a specific asset, liability, equity, revenue, or expense

Trial balance

1. lists all accounts with their balances

2. assets listed first, then liabilities and stockholders’ equity

3. shows that debits equal credits

4. usually prepared at the end of the period

5. facilitates preparation of the financial statement

trial balance

assets-debit balance

accounts receivable-debit

supplies-debt

land-debit

accounts payable-credit

liabilities-credit balance

stockholders’ equity overall-credit

common stock-credit

dividends-debit

service revenue-credit

rent expense-debit

salary expense-debit

utilities expense-debit

the adjusted trial balance

summarizes all accounts and their final balances after all adjusting entries have been journalized and posted

depreciation of plant assets

1. plant assets are long-lived tangible assets, such as land, buildings, furniture, and equipment

2. depreciation is the process of allocating cost to expense for a long-term plant asset

   1. decline in usefulness

   2. spread the cost of the plant asset over its useful life

   3. exception: Land-does not decline in usefulness

straight-line depreciation method

\-divide cost of the asset by its useful life

\-Alladin Travel Inc. Equipment: cost: $24,000, useful life: 5 years

annual depreciation=24,000/5 years=4,800 per year

monthly depreciation

Book value

cost of the plant asset minus accumulated depreciation

introduction

financial statements are the end products of the accounting process, which reveals the financial results of the specific period and financial position as on particular date. It is the basic and formal annual report through which a business communicates financial information to its various user groups

what are financial statements?

balance sheet, cash flows, income statements, equity

Advantages of financial statements

1. to determine the ability of a business to generate cash

2. to determine whether a business has the capability to pay back its debts

3. to derive financial ratios from the statements that can indicate the condition of the business

   1. to investigate the details of certain business transactions

disadvantages of financial statements

1. they can be fraudulently manipulated


1. they are entirely historical in nature, and so can be misleading when used to project the future results of a business

income statement (statement of operations)

\-summarizes revenues and expenses

\-covers a period of time

\-reports net income (excess of revenues over expense)

\-net income increases retained earnings (B/S)

\-net loss will decrease retained earnings (B/S)

Statement of Owner’s Equity

(statement of retained earnings)

\-reconciles beginning and ending balances of the owners’ equity accounts (capital stock, retained earnings)

\-links the income statement and the balance sheet

Balance sheet (statement of financial position)

shows the financial condition of an entity as of a particular date

\-assets: the resources of the business

\-liabilities: the debts of the business

\-equity: the owners’ interest in the business

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the accounting equation

assets=liabilities + owners’ equity

statement of cash flows

\-covers the same period as the income statement

\-3 sections


1. cash flows from operating activities


1. cash flows from investing activities and more

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dividend does not go into

income statement

auditor’s opinion

-audit is conducted by CPA’s

-the audit report is the formal statement of audit opinion

1. unqualified opinion

2. qualified opinion

3. adverse opinion

   1. disclaimer of opinion

class presentation

-public company: microsoft

1. select a public corporation (e.g. Micr

2. 5 slides

   1. what they sell

fraud

1. intentional misrepresentation of facts

2. for the purpose of persuading another party to act in a certain way

3. causes injury or damage

   1. common examples include: insurance fraud, check forgery, medicare fraud, credit card fraud, and identity theft

Misappropriation of assets

employee fraud

\-committed by employees

\-theft of money or inventory

\-bribery and kickback schemes

\-overstate expense reimbursements

fraudulent financial reporting

committed by managers

\-false and misleading journal entries

\-receive investors and creditors

Know the Fraud triangle

\-A framework for spotting high-risk fraud situations

Motive, Opportunity, Rationalization

(Know the examples of each category)

Internal Control

1. primary way to prevent, detect, and correct fraud

2. internal control is a plan of organization and procedures implemented to accomplish 5 objectives:

   1. safeguard assets

   2. encourage employees to follow company policy

   3. promote operational efficiency

   4. ensure accurate, reliable accounting records

   5. comply with legal requirements

control enviornment

\-tone at the top

\-code of ethics

risk assessment

\-identify business risks

\-establish procedures to deal with risks

information system

\-means by which accounting info enters and exists

\-accurately track assets, profits, & losses

Control Procedures

\-means by which companies gain access to the 5 objectives of internal controls

monitoring of controls

\-usually programmed into technology

\-internal and external auditors

Smart Hiring Practices (good internal controls)

1. background checks

2. training and supervision

3. competitive salaries

   1. clear employee responsibility

separation of duties

1. asset handling

2. record keeping

3. transaction approval

Comparison and Compliance Monitoring

\-operating and cash budgets

\-audit

adequate records

\-details of business transactions

\-hard copy documents or electronic

\-prenumbered documents

limited access

1. limited access employees have to assets based on job responsibilities

2. lock and key

3. physical access controls

   1. password and encryption

proper approvals

1. management’s general or specific approval

   1. management may delegate approval to specific department

2. purchasing department

   1. only buy from approved vendors

      1. based on competitive bids

safeguard assets

1. important documents in fireproof vaults

2. burglar alarms and security cameras

3. loss prevention specialist

   1. mandatory vacations and job rotation

evaluate internal controls over cash receipts and cash paments

cash requires specific internal controls because it is easy to steal and convert to other forms of wealth

cash receipts over the counter

point of sale terminals

1. provide control over cash receipts

2. record sale, cost of item sold, and reduction to inventory

3. effective inventory control

customer issued a receipt as proof of purchase

-sales associate turns in cash drawer at end of shift

1. combined with other cash an deposited

accounting department

Teded note

some of the fraud doesn’t even register to the perpetrator

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rationalization

\-how have the consequences for fraud developed and changed over time?

documents used to control a bank account include:

1. deposit ticket

2. check

3. bank statement

4. bank reconciliation (compare what bank gave us and ours)

EFT

Electronic Funds Transfer

NSF

Non Sufficient Funds=Charge

Bank side

1. add- deposits in transit

2. subtract- outstanding checks

3. add or subtract- bank errors

book side

1. add- bank collections

2. electronic funds transfers

3. service charge

4. interest revenue

5. NSF checks

6. cost of printed checks

7. book errors