1. people make decisions 2. business transactions occur 3. companies report their results
2
New cards
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. financial transaction 2. general journal 3. general ledger 4. trial balance (help us prepare our financial statements) 5. financial statements (end of the period)
4
New cards
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
5
New cards
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
6
New cards
the accounting equation
expresses the basic relationship of accounting
assets=liabilities + stockholders’ equity
Own=owe + owners claim
\ \*Equity can go up and down (draw) also affected by net income (revenue-expenses)
7
New cards
an account is the
record of all the changes in a particular asset, liability, or stockholders’ equity during a period
8
New cards
assets
are economic resources that are expected to produce a benefit in the future
9
New cards
liabilities
are debts owed to people and organizations outside of the business (creditors)
10
New cards
equity
(also called capital, owners’ equity, or stockholders’ equity for a corporation) represents the owners’ claims
11
New cards
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
12
New cards
liabilities
financial obligations such as:
accounts payable
wages
rent
utilities
bank debt
deferred tax liability
long-term debt
13
New cards
equity
what’s left after subtracting liabilities from assets
common stock
owner draws
retained earnings
14
New cards
accounts recievable
promise for future cash for goods or services
15
New cards
notes recievable
amounts other parties must pay the business because they signed a promissory note
16
New cards
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
17
New cards
inventory
goods the company sells to customers
18
New cards
cash
money including bank account balances, paper currency, coins, etc
19
New cards
stockholders equity
the stockholders claims to the assets of the company
20
New cards
the type of account determines how to
record increases and decreases
21
New cards
assets
up (debit +), down (credit, -)
22
New cards
liabilities
down (debit, -), up (credit, +)
23
New cards
stockholders’ equity
down (debit, -), up (credit, +)
24
New cards
increases with debit
D-dividends
E-expenses
A-assets
L-losses
25
New cards
Increases with credits
G-gain
I-income
R-revenues
L-liabilities
S-shareholders’ equity
26
New cards
Equity
owners: revenues-expenses
27
New cards
Revenues
\-increase stockholders’ equity
\-result from delivering goods/services
28
New cards
expenses
\-decrease stockholders’ equity
\-cost of operating the business
29
New cards
His sales and expenses will affect the?
Equity (owners) the money he put in
30
New cards
assets
debit +
credit -
31
New cards
liabilities
debit -
credit +
32
New cards
common stock
debit -
credit +
33
New cards
retained earnings
debit -
credit +
34
New cards
dividends
debit +
credit -
35
New cards
revenues
debit -
credit +
36
New cards
expenses
debit +
credit -
37
New cards
rules of debit and credit
assets=liabilities + stockholders’ equity
38
New cards
Flow of accounting Data
1. transaction occurs 2. transaction analyzed 3. transaction entered in the journal
1. amounts posted to the ledger accounts
39
New cards
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
40
New cards
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
41
New cards
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
42
New cards
the adjusted trial balance
summarizes all accounts and their final balances after all adjusting entries have been journalized and posted
43
New cards
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
44
New cards
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
45
New cards
Book value
cost of the plant asset minus accumulated depreciation
46
New cards
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
47
New cards
what are financial statements?
balance sheet, cash flows, income statements, equity
48
New cards
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
49
New cards
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
50
New cards
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)
51
New cards
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
52
New cards
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
\ the accounting equation
assets=liabilities + owners’ equity
53
New cards
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
\
54
New cards
dividend does not go into
income statement
55
New cards
auditor’s opinion
\-audit is conducted by CPA’s
\-the audit report is the formal statement of audit opinion
1. select a public corporation (e.g. Micr 2. 5 slides
1. what they sell
57
New cards
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
58
New cards
Misappropriation of assets
employee fraud
\-committed by employees
\-theft of money or inventory
\-bribery and kickback schemes
\-overstate expense reimbursements
59
New cards
fraudulent financial reporting
committed by managers
\-false and misleading journal entries
\-receive investors and creditors
60
New cards
Know the Fraud triangle
\-A framework for spotting high-risk fraud situations
Motive, Opportunity, Rationalization
(Know the examples of each category)
61
New cards
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
62
New cards
control enviornment
\-tone at the top
\-code of ethics
63
New cards
risk assessment
\-identify business risks
\-establish procedures to deal with risks
64
New cards
information system
\-means by which accounting info enters and exists
\-accurately track assets, profits, & losses
65
New cards
Control Procedures
\-means by which companies gain access to the 5 objectives of internal controls
66
New cards
monitoring of controls
\-usually programmed into technology
\-internal and external auditors
67
New cards
Smart Hiring Practices (good internal controls)
1. background checks 2. training and supervision 3. competitive salaries
1. clear employee responsibility
68
New cards
separation of duties
1. asset handling 2. record keeping 3. transaction approval
69
New cards
Comparison and Compliance Monitoring
\-operating and cash budgets
\-audit
70
New cards
adequate records
\-details of business transactions
\-hard copy documents or electronic
\-prenumbered documents
71
New cards
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
72
New cards
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
73
New cards
safeguard assets
1. important documents in fireproof vaults 2. burglar alarms and security cameras 3. loss prevention specialist
1. mandatory vacations and job rotation
74
New cards
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
75
New cards
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
76
New cards
Teded note
some of the fraud doesn’t even register to the perpetrator
\ rationalization
\-how have the consequences for fraud developed and changed over time?
77
New cards
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)
78
New cards
EFT
Electronic Funds Transfer
79
New cards
NSF
Non Sufficient Funds=Charge
80
New cards
Bank side
1. add- deposits in transit 2. subtract- outstanding checks 3. add or subtract- bank errors
81
New cards
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