Accounting Basics: Balance Sheet, Income Statement, and Key Concepts

Balance Sheet

ASSETS = LIABILITIES + STOCKHOLDER'S EQUITY

Income Statement

Revenue - Expenses = Net Income

Statement of Retained Earnings

Beginning Balance Retained Earnings + Net Income - Dividend = Ending Balance Retained Earnings

asset (A)- Cash

Coins and currency classified as an

liability (L)- Accounts Payable (AP)

Amounts K Swiss owes to suppliers of watches classified as a

asset (A)- Accounts Receivable (AR)

Amounts K Swiss can collect from customers classified as an

liability (L)- Notes Payable (NP)

Amounts owed to bank for loan to buy building classified as a

asset (A)- Land

Property on which buildings will be built classified as an

stockholders' equity (SE)- Dividend

Amounts distributed from profits to stockholders classified as

20,000

If cash is $35,000, accounts payable is $15,000 how much is owner's equity

(25,000)

If assets decreased $20,000 and liabilities increased $5,000 how much does owner's equity change?

45000

During May, ABC Company reported sales of 70,000, accounts receivable of 10,000, cost of goods sold of 15,000, wages expense of 10,000, and wages payable of 2,000. What is the net income of May?

Rules of Debit/Credit

Derived from the basic accounting equation Assets = Liabilities + Stockholders' Equity

Expanded Accounting Equation

Assets = Liabilities + Common Stock + Revenue - Expenses - Dividends

Dividends, Expenses, Assets

Debits increase, Credits Decrease

liabilities, common stock, and revenue

Credits increase, Debits Decrease

Normal Balance for Accounts Receivable

Normal Dr or Cr? Dr; Increases? Dr; Decreases? Cr

Normal Balance for Accounts Payable

Normal Dr or Cr? Cr; Increases? Cr; Decreases? Dr

Normal Balance for Deferred Revenue

Normal Dr or Cr? Cr; Increases? Cr; Decreases? Dr

Normal Balance for Rent Expense

Normal Dr or Cr? Dr; Increases? Dr; Decreases? Cr

Dan collected $6,000 from corporate customers for carwashes given in January what accounts are effected?

Cash (Increase), Accounts Receivable (Decrease)

Dan sold gift cards for car washes for $500

Cash (Increase), Unearned Revenue (Increase)

Dan bills a customer $190 for services provided between February 25th and February 28th. The bill is to be paid in March.

Accounts Receivable (Increase), Service Revenue (Increase)

Dan pays $500 to employees for work done last month

Wages Payable (Decrease), Cash (Decrease)

Dan pays $1,000 for February Rent

Rent Expense (Increase), Cash (Decrease)

Asset

Amount of resources owned by a business

Liability

Amount the company owes to creditors

Stockholder's Equity

Owner's claim to the business resources

Revenue

Sales of goods or services to customers

Expense

The cost of doing business necessary to earn revenue

Dividends

The distribution of a company's earnings to its stockholders as a return on investment

What is Reported on the Income Statement?

Revenue (income) and expenses and profit (Net Income)

What is reported on the balance sheet?

Assets, liabilities, and stockholders equity

what is reported on the statement of cash flows?

Report of where the company's cash came from and how it was

What is reported on the statement of stockholder's equity?

Profit and money taken out of the business by owners (dividends)

What are the six types of accounts

Assets, Liabilities, Stockholder's Equity, Revenue, Expense, Dividend

What does Debit mean in accounting?

the left side

What does Credit mean in accounting

The right side

What are temporary accounts?

Revenues, expenses, and dividends

What happens during closing?

Temporary accounts are closed out to retained earnings

What is the difference between accrual basis accounting and cash based accounting?

Accrual- revenues are recorded under the period earned regardless of when cash is received, Cash- revenues are recorded when cash is received regardless of when revenues/expenses are incurred

What are adjustments?

Entries made at the end of the accounting period to report revenues and expenses in the correct period and assets and liabilities to the appropriate amounts

What is the revenue recognition principle?

Recognize revenue when it is earned

What is the matching principle?

Record expenses when it is incurred

What are permanent accounts?

Assets, liabilities, equity

How do you close accounts?

1. Debit revenues to zero out and credit RE

2. Credit Expenses to zero out and debit RE

3. Credit dividends to zero out and debit RE

What account is inventory?

Asset

What is an inventory accounting system?

A method of keeping track of the cost of inventory on hand and the cost of inventory that has been sold

What is perpetual inventory system?

Updates inventory perpetually

What is a periodic inventory system? 

Updates inventory records periodically

Walmart recieves 10,500 of bikes purchased on account

Inventory increases, accounts payable increases

What is FOB shipping point

Buyer pays for transportation of goods

FOB Destination

Seller pays for transportation of goods

FOB Shipping point account title

Merchandise Inventory

FOB Destination account title

Freight-Out

Walmart pays $200 cash to a trucker who delivers the $10,500 of bikes to one of its stores

Cash decreases, Inventory increases

Purchase Returns and Allowances

When goods purchased from a supplier arrive in damaged condition or fail to meet specifications, the buyer can
(1) return them for a full refund or
(2) keep them and ask for a cost reduction, called an allowance

Walmart returned some of the bikes to the supplier and recieved a 500 dollar reduction in the balance owed

Inventory decreases, accounts payable decreases

What does 2/10, n/30 mean?

The purchaser gets a 2% discount if they pay in the first ten days, the full amount is due in 30 days

FOB Shipping point transaction recordings

The sale is recorded when the goods leave the seller’s shipping department

FOB Destination point transaction recordings

The sale is recorded when the goods reach their destination

Suppose Wal-Mart’s warehouse store (Sam’s Club) sells printer paper on account to a local business for $1,000 with payment terms of 2/10, n/30. The paper cost Sam’s Club $700

Accounts receivable increases, Sales revenue increases

Inventory decreases, COGS increases

What is the formula for the gross profit percentage?

Gross Margin (Gross Profit) = Net sales – COGS

Gross Margin percentage = Gross Margin/ Net sales

What does the gross profit percentage tell you?

% of each dollar left after you subtract out product cost

A higher percentage is better. The company with the higher gross margin

percentage is pricing its products higher

What are the goals of inventory management?

Maintain quality of inventory, minimize the cost of goods sold

What happens when inventory is sold?

Once inventory is sold, it will be removed from inventory and transferred to the expense account in income statement as COGS

What is specific identification?

Identifies the specific item that was sold

What is FIFO

FIRST IN FIRST OUT = Assumes that the costs of the first goods purchased (first

in) are the costs of the first ones sold (first out)

What is LIFO?

LAST IN FIRST OUT = Assumes that the costs of the last goods purchased (last in)
are the costs of the first goods sold (first out)

What is weighted average cost?

Costing assumption that uses the weighted average unit cost

of the goods available for sale for both cost of goods sold and ending inventory

What is the inventory equation?

Beginning inventory + Inventory purchased = Goods available for sale - Ending Inventory = Cost of Goods Sold

What happens when prices rise?

FIFO produces higher inventory value, LIFO produces lowest inventory value, highest COGS, and lowest gross profit

What happens when prices decline? 

LIFO produces higher inventory value, FIFO produces lowest inventory value, highest COGS, and lowest gross profit

Causes for inventory to fall below its recorded cost?

1. It is easily replaced by identical goods at a lower cost

2. it has become outdated or damaged

What is the lower cost or market - LCM rule?

When inventory is written down from cost to market because market is lower than cost, appears as a loss on the income statement

What is the formula for inventory turnover rate?

Cost of goods sold / Average inventory

What is the formula for days to sell?

365 / Inventory turnover ratio

What is the formula for average inventory?

Beginning inventory + Ending inventory / 2