MGMT 120A Ch 2 Notes

Income statement

REVENUES - EXPENSES = NI

aka P&L statement or Statement of operations

Statement of owners equity aka stmt of stockholders’ equity, statment of shareholders’ equity, STATEMENT OF RETAINED EARNINGS

NET INCOME FROM INCOME STATMENT IS USED IN THIS

owners equity = sole proprietorship/partnership
shareholders’ equity/stmt of retained earnings = corporation

Balance sheet

aka statment of financial position

a list of company’s assets, liabilities, and owners equity

Assets

resources ownerd by the business that are expected to be of benefit in the future
cash, a/r, inventory, equipment, land, etc

Prepaid expenses:
cash
marketable securities (s/t investments)
a/r

short term n'/r
Inventory

prepaid expenses

Noncurrent assets:

tools and equipment
building
land

Liabilities

outsider/creditor claims


a/p
n/p
accrued expenses

unearned rev

Owners equity

insider/owner claims

capital (if it is a sole proprietorshuip/partnership), common stock , paid in capial in excess of par-common
retained earnings

Statement of Cash Flows

what are the three sections

summary of cash receipts and payments

3 sections:

1. operating activities

2. investing activities

3. financing activities

Accrual vs Cash basis accounting

Cash Basis:

• records only cash receipts and cash payments

• there are no a/r, a/p, and DEPRECIATION

• only very small businesses use cash basis

Accrual Basis:

• more complex

• records the effect of each transaction AS IT OCCURS

• includes a/r, a/p, and DEPRECIATION

• most businesses use

Cash Basis Accounting

• records only cash receipts and cash payments

• there are no a/r, a/p, and DEPRECIATION

• RECORD JEs ONLY WHEN CASH IS RECEIVED

• only very small businesses use cash basis

• relatively simpler compared to accrual

Accrual Basis Accounting

• more complex than cash basis

• records the effect of each transaction AS IT OCCURS

• includes a/r, a/p, and DEPRECIATION

• most businesses use

ACCOUNTING CYCLE

1. business transaction (identifying and analyzing)

2. journalizing

3. posting to ledger

4. (unadjusted trial balance)

5. adjustments/adjusting journal entries

6. adjusted trial balance

7. financial statements preparation

8. closing entries

9. post-closing entries

journal

a record used to document the effects of transactions in chronological order

ledger

the record holding all accounts

trial balance

a list of all accounts and their balances

USED TO CHECK THE ACCURACY OF THE LEDGER

double/dual entry accounting

accounting is based on this system
means: acocunting based on the fact that there is always a debit and a credit

T account

form of an account resembling a T with Dr. on left and CR on right

Increases and decreases in accounts

asset:

• dr: increase

• cr: decrease

liability:

• dr: decrease

• increase

OWNERS EQUIY/STOCKHOLDERS EQUITY:

• Capital (contributions)

  • dr: decrease

  • cr: increase

• Drawings (aka withdrawals)

  • dr: increase

  • cr: decrease

• Revenues (fees earned, sales, sales rev, rev)

  • dr: decrease

  • cr: increase

• Expenses

  • dr: increase

  • cr: decrease

Straight line depreciation

(cost of asset - salvage value) / expected useful life

double declining rate

100%/useful life = straight line

straight line x 2 = DDR
beginning period book value x DDR = depreciation for that time period (aka for that year)

Sum of years digits

cost - salvage value = book value

sum of year’s digits = [n(n+1)]/2

(remaining life/SYD) x (book value for that period) = depreciation of that period

Accrued expense

when a business incures expenses in period but has not yet paid out cash (creates a liability)

wage EXPENSE » wage PAYABLE » cash

employees are paid immediately (eployees earn and receive 5k today)

NO WAGES PAYABLE

dr wages expense 5k
cr cash 5k

employees earn wages but are paid later (accrued wages) (employees earn 5k in december but their poaycheck comes in January)

dr wage expense

cr wage payable

dr wage payable

cr cash

you record when cash is sent

earned = expense

not paid yet = payable

paid = cash


wage EXPENSE » wage PAYABLE » cash

accrued revenue

when a business earns revenue but hasnt collected cash (creates an asset)




service REVENUE » Acct RECEIVABLE » cash

earn revenue first, get paid later (Accrued rev) you provide 1k of services today but customer pays in 1 month

dr: account receivable 1k

cr service rev 1k

dr: cash 1k

cr: accoutn receivable 1k

get paid first, earn rev later (unearned rev) customer pays 1k upfront for serivce oyull receive in one month

dr cash 1k

cr unearned rev 1k

dr unearned rev

cr service rev 1k

cash » unearned rev » rev

Closing entires and post closing trial balance