finacct C1->4

accounting

identifies, records, communicates, Bookkkeeping

internal Users

company sectors: finance, human resources, marketing, management, etc

external users

investors/creditors: investors depend on the company if it is financially strong, and creditors choose companies which they know can pay them back

GAAP

generally accepted accounting principles: standards accepted and universally practiced

standard setting bodies

FASB, IASB, SEB

financial statements

balance sheets, income statement, (for now)

historical cost principle

dictates that company report

assets at their costs (measuring principle)

fair value principle

assets AND liabilities should be reported at their fair values

choose one

can you choose both Fair Value or Historical Cost

assets

resources owned by business which provides future service/benefit (cash, supplies, prepaid insurance)

liabilities

claims against assets (debt/obligations) money owed to creditors

stockholder equity

ownership claims on total assets

monetary unit assumption

accounting records must only record transaction data expressible in monetary terms

economic entity assumption

activities of an entity is to be separate from the activities of the owner or other owned entities

propieitorship

owned by one person, often is manager/operator, owner receives any loss or any profit and is liable for all debts

partnership

owned by 2 or more people, often retail related business, generally has limitless personal liability, partnership agreement

corporation

ownership divided into shares of stock, seperate legal entity organized under state corporation law, limited liability

income statement

header, statement type, for a certain time period which can be a quarter/year, including revenues, income and net income —> for the month/year ended

statement of retained earnings

you need income statement, but after that you include previous retained earnings, net income and dividends to conclude with the current end of period retained earnings —> for the month/year ended

balance sheet

need statement of retained earnings, include the assets, liabilities, and then equity which includes only common stock and retained earnings (no point of revenues/expenses as they have been denoted by profit/loss) → specific date

dividends expenses assets

usually debit balance (on the left)

liabilities equity revenues

usually credit balance (on the right)

debit balance

sum of debit > sum of credit

credit balance

sum of debit < sum of credit

double entry system

each transaction must affect both credit and debit on different accounts to cancel out

ledger

includes the date, description, reference, debit, credit and balance after each transaction

trial balance

includes assets, liabilities and equity in a proper order first value has dollar sign the debit and credit side should both equal the same towards the end

still balanced

a trial balance can or cannot be balanced after: unjournalized transactions, correct entry posted twice, correct entry not posted, wrong account, transaction amount issues, only wrong if it DOES not cancel out

time period assumtion

accountants divide economic life of a business into cycles of time periods (years, months, quarters)

interim periods

months and quarters

fiscal year

accounting time period of a year

calendar year

jan 1 to dec 31st

accrual basis accounting

transactions recorded in time period which they occur, revenue recognized after performed, expense recognized after incurred

cash basis accounting

revenues are recorded when cash is received, expenses are recorded when cash is paid, does NOT follow GAAP

revenue recognizing principle

recognize revenue in the time period where performance obligation is satisfied

expense recognizing principle

match expenses with revenues in the period where the company makes efforts to generate those revenues

adjusting entries

helps insure revenue and expense recognizing principles are acknowledged, neccesary as trial balance may not be up to date, required before any company prepare financial statements, includes one balance sheet and one income statement account

defferals

expenses/revenues recognized at a later date than when the cash is exchanged

prepaid expenses

expenses which expire through the passage of time debit to an expense account and credit to an asset account eg.

insurance expense 400

prepaid insurance 400

depreciation

buildings/equip/vehicles that provide services over many years (assets) allocating cost of asset over time period of useful life does not attempt to record actual change in value of asset, contra asset account (credit), appears after account it offsets on balance sheet debit to deppreciated expense and credit to accumulated dep or [account] dep

book value

difference between depreciable asset cost and accumulated depreciation

unearned revenue adjustments

cash which is recieved for a job that is not complete yet, these are adjusted over the time period to represent the work that is done for the revenue, so you would have to debit unearned revenue while crediting service revenue

accrued revenues

revenues for services performed that have not been recieved in cash or recorded, debit an asset and credit a liability performed service = debit account recievable credit-service revenue, then recieves cash = debit cash credit acct recievable

accrued expenses

expenses that have not been paid and recorded to adjust increase debit on expense increase credit on liability typically payable of same account

steps to close accounts

close out revenues to income summary, close out expenses to income summary, close out income summary to retained earnings, close out dividends to retained earnings

permanent accounts

assets, liability, equity

temporary accounts

revenue, expenses,dividends

current assets

assets that the company hopes to converr to cash or use up during the year/operating cycle

operating cycle

avg time it takes to purchase inventory, sell on acct, collect cash from customers

intangible assets

long lives assets with no physical substance

property plant and equipment

long useful lives. currently used in operations

accumulated depreciation

total amount of depreciation expended thus far in assets life

long term investments

land/buildings not currently in use for later purposes, investment in stocks/bonds of other companies, long term notes recievables should all be covered over the year

current liabilities

Obligations needed to be paid by company during year or operating cycle (whichever longer)

notes payable --> accounts payable --> payables by amts

liquidity

ability to pay obligations expected to be due within the next year

long term liabilities

obligations due after a year