account review: chapter 1-4

Ethics in Acounting

1. Pressure

2. Rationalization

3. Opportunity

Users of Accounting: Internal Users

Senior Management

Purchasing Managers

Production Managers

Marketing Managers

R&D Managers

HR Managers

Users of Accounting: External Users

Shareholders

Lenders/Creditors

External Auditors

Board of Directors

Regulators - ex. IRS, SEC

Suppliers

Customers

Non-managerial Employees

Nonexecutive Employees

Donors to Non-Profit Organizations

Revenue Recognition Principle

Recognize revenue when goods or services are provided at the amount expected

Expense Recognition (Matching) Principle

Report expenses in the same period as the revenue they generate

Types of Business Entities

Chart of Accounts

A LIST of all accounts with their account #s

General Ledger

Is a collection of ALL accounts with their balances

Trial Balance

A list of all ledger accounts & their balance at a point in time; total DR balances = total CR balances

Account Balance

Is the difference between DRs & CRs with including the beginning balance

Asset Accounts (Balance Sheet - Permanent Accounts)

Cash

land

buildings

equipment

supplies

prepaid rent

notes receivable

accounts receivable

Current Assets

Current assets are expected to be sold, collected, or used within one year ( or the companies operating cycle, whichever is longer)

Ex: cash

short-term investments

account receivable

short-term notes receivable

Merchandise inventory

prepaid expense

Plant Assets

Plant assets are tangible, long-lived assets used to produce or sell products and services

Ex: equipment, machinery, buildings, land

Also called property, plant, and equipment (PP&E) or fixed assets

Liabilities Accounts

Balance sheet = Permanent Accounts

Wages payable

Accounts payable

Accrued Liabilities ( aka Accrued Expense)

Unearned Revenue

Notes Payable

Current Liabilities

Current liabilities are liabilities due within one year ( or the company’s operating cycle if longer)

Ex: accounts payable

wages payable

taxes payable

interest, payable

unearned revenues

Equity Accounts

Balance Sheet Accounts = Permanent Accounts

Owner’s capital

Revenues

Owners withdraws

Expenses

All Balance Sheets are __1__ accounts and are __2__ at the end of the period ( expect for __3__)

1. Permanent

2. Not closed

3. Owners withdrawals

Typical B/S accounts

Cash

accounts receivable

prepaid expenses

inventory

supplies

equipment

land

accounts payable

accrued liabilities

notes payable

deferred revenue

wages payable

taxes payable

owner’s capital

All income statement accounts are __1__ and are __2__ at the end of the period

1. Temporary

2. Closed

Income statement

1. Temporary account

2. CLOSED

3. Revenues

4. Expenses

5. Income summary

6. Withdrawals

Balance Sheet

1. Permanent account

2. NOT CLOSED

3. Assets

4. Liabilities

5. Owner’s equity

Debits and Credits system

Accounting equation

Assets = Liabilities + Owners Equity - Owners Withdrawals + Revenue - Expenses

Net income = ?

Net loss = ?

1. Credit

2. Debit

Accounts with normal balance of Debits

1. Assets

2. Expenses

3. Owners withdrawals

Accounts with normal balance of credit

1. Liabilities

2. Owners Equity

3. Revenue

Prepaid rent is considered an …

ASSET

Statement of Owners Equity Ex

Income Statement, Statement of Owner’s Equity & Balance Sheet

Balance Sheet and Income Statement (demonstration only)

Journalized Transactions

Prepaid Insurance

Prepaid Expenses

Adjusting for Supplies - Part 1

Adjusting for Supplies - part 2

Deferral of Revenue

Unearned revenue, aka deferred revenue is cash received in advance of providing products for services

As products or services are provided, unearned revenue becomes earned (regular) revenues on the income statement

Deferred Revenue Ex

Depreciation

Instead of expensing the cost of a plant asset (equipment, buildings, vehicles, etc.) in the year it is purchased we spread out the cost of their expected useful lives. This is called depreciation.

Straight-Line Depreciation Ex & Formula

Adjusting for Depreciation Ex

Trial Balance Ex

All the debits and all the credits should equal each other

Balance Sheet Ex

The collection of all accounts and their balances is called a(n)

Ledger (general ledger)

A company’s list of all ledger accounts with an identification number assigned to each account is called a …

chart of accounts

True/ false

Income summary is a temporary account only used for the closing process

True

True/false

revenue and expense accounts are temporary accounts that begin each accounting period with zero balance

True

True/false

closing entries result in permanent account balances being transferred into net income or net loss for the period ending

False

True/false

Closing entries are only required when a business is shutting down

False

True/false

Plant assets are tangible assets that are both long lived and used to produce or sell products and services

True

True/false

the worksheet is a required report made available to external decision makers

False

True/False

on a worksheet, if the debit total exceeds the credit total of the income statement columns, a net loss is indicated

True

True/ false

an expense account is normally closed by debiting income, summary and crediting the expense account

True

True/false

the account receivable account is normally closed by debiting it

False

revenue and expense account, which are closed at the end of which counting period, are …

Temporary accounts

how to find net income (loss)

Revenue - expense = net income (loss)

On a classified balance sheet in order to find Equity:

Capital = o.w capital + revenue - W.D. - expenses

Balance sheet TIP

All the numbers go in the left column expect for the TOTALS