ACCT 201 first exam

What is accounting?

measure and communicate information about the entity

external users

financial accounting

internal users

managerial accounting

Sole Proprietorship

Partnerships

unlimited liability and single taxation

corporate form

limited liability and double taxation

operating

core activities: sales, purchases, advertising, administration

investing

long term assets: purchase of land, building, equipment, patents, investments

Finacning

transactions with owners: issuance of stock, taking loans, making dividend payments

Accounting Equation/ Balance Sheet

Assets = Liabilities + Owner's Equity

assets

resources that firms owns or controls that provide future benefits (investments)

liabilities

obligations that require future sacrifice of resources (financing)

Owner's Equity

residual claim on company's assets

revenue

assets inflows from provision of goods/ services to customers

expenses

resources used up during the period in generating revenues

Income Statement

net income = revenue - expenses

GAAP (Generally Accepted Accounting Principles)

set of rules

asset/liability measurements

revenue/expense recognition

FASB (Financial Accounting Standards Board)

rule makers

independent body in the private sector

SEC (Securities and Exchange Commission)

rulemaking authority

created by congress

enforces compliance with GAAP

Step 1 of the Accounting Cycle

Use source documents to identify accounts affected by external transactions

Step 2 of the Accounting Cycle

Analyze the impact of the transaction on the accounting equation.

Step 3 of the Accounting Cycle

Assess whether the transaction results in a debit or a credit to the account balance

Step 4 of the Accounting Cycle

Record the transaction

Step 5 of the Accounting Cycle

Post the transaction to the T account in the general ledger

Step 6 of the Accounting Cycle

Prepare the Unadjusted trial balance

Step 7 of the Accounting Cycle

Record and post unadjusting entries

Step 8 of the Accounting Cycle

Prepare adjusted trial balance

Step 9 of the Accounting Cycle

Prepare financial statements (is,ss, bs, scf)

Step 10 of the Accounting Cycle

Record and post closing entries

Step 11 of the Accounting Cycle

Post closing trial balance

In a classified balance sheet, long term assets used in the normal course of business are known as

property, plant, and equipment

An adjusted trial balance includes

- lists of all accounts and their balances at a particular date after updating account balances

- is used to prepare the financial statements

- includes balances for revenues, expenses, and dividends

In a classified balance sheet, liabilities are separated into two categories based on

The length of time until the obligation is expected to be satisfied-less than one year versus more than one year

Which of the following is NOT a characteristic of adjusting entries

reduce the balances of revenue expense and dividend accounts to zero

Retained Earnings

Beg RE + NI - Div = End RE

DEAD

Debits increase Expenses, Assets, and Dividends

Liabilities, Common Stock, Retained Earnings, Revenues

Credit Increases, Debit decreases

Accrual Basis Accounting

Revenues are recorded in the periods in which the events occur, even if cash was not exchanged. Expenses are recognized when incurred, even if cash wasn't exchanged

Cash Basis Accounting

Record revenue at the time cash is recieved and record expense at the time they pay out cash. Cash-basis accounting is not in accordance with GAAP

Deferrals

Cost or revenues that are recognized at the date later than the point when cash was originally exchanged

Prepaid expenses

expire either with the passage of time or through usage

Unearned revenues

are recorded when cash is received before services are performed

accured revenue

are revenues for services performed but not yet recorded at the statement date

accrued expenses

are expenses incurred but not yet paid or recorded at the statement date

Interest

principal Rate time

temporary accounts

related to a gi)ven accounting period (revenue, expenses, and dividends

permanent accounts

are carried forward into future accounting periods (assets, liabilities, and stockholders equity)

If total assets increase

then liabilities and stockholders' equity also increase by the same

Received cash in advance for delivery of 6,000 units in March, $78,000

Cash 78,000

Unearned revenue 78,000

Receive cash from customers for services to be provided next month, $2,300

Cash. 2,300

Deferred Rev 2300

End of period adjusting entries

always involve at least one real (asset or liability) account and one nominal (rev or exp) account

adjusting entry will NEVER involve

Cash

current assets

- converted into cash or used up within ONE YEAR or one operating cycle

- decreasing order of liquidity

current and long term liabilities

- are paid or sacrificed within ONE year or one operating cycle

- increasing order of maturity