Accounting Course Pack

Accounting provides ____ tools for business

Foundational

Financial accounting information is mainly used by:

External:

• Investors

• Lenders/creditors

• Professional community

Internal:

• Management

Investors or Stockholders

Use financial information to make decisions about their investment in a company

Lenders and creditors

use financial information to determine if a company is creditworthy (banks)

Managers

Use financial information to operate business and make important decisions regarding strategy & growth

The Securities & Exchange Commision (SEC)

Enforces accounting standards

The Financial accounting standards board (FASB)

Write standards known as GAAP (Generally accepted accounting principles

Protects investors

KCQ: Financial information is only for external users

False

There are a vast number of different types of financial accounting information provided to and used by lenders, lenders/creditors, and management. examples include:

financial statements, budgets, forecasts, analytical reports, tax returns, press releases

Financial accounting information can generally be found within

• SEC Filings (10-k) annual report on what they did this year

• Newspapers & media outlets

• Internal accounting systems

Financial information is used continously, with some key reporting dates including:

• Month-end & quarter-end

• year end

companies report their financial information through the development of

Financial Statements

The 4 basic financial statements

1. Balance sheet

2. Income statement

3. Statement of Retained Earnings

4. Statement of Cash Flows

The balance sheet

A = L + SE

The balance sheet (Statement of financial position) reports a comapny’s asset, liability, and stockholders equity balances at a specific point in time.

Think of it as a snapshot of financing of 1 date 1 time we had

Assets (A)

resources owned by the company

• ex: cash, inventory, equipment

Liabilities (L)

Obligations or debts owed by the company

ex: loans, bills

Stockholders Equity (SE) represents

Contributed Capital (CC) & Ending Balance of Retained Earnings (REsmallE)

The basic accounting equation is

A=L+SE And must always be in balance.

The income statement

the income statement (profit and loss statement) reports a company’s financial performance over a period of time.

R-E=NI

Revenues

are increases to Net income and represent amounts expected to be received (Anytime a company makes a sale)

Expenses

decreases net income and represents amounts expected to be paid

ex: buying blank shirt as a msu shirts seller

Net income

Revenues - expenses, “ bottom line”

The statement of retained earnings

The statement of retained earnings (or stockholders equity) reports all increases and decreases to stockholder’s equity accounts over a period of time.

Retained earnings is the sum of:

Net income which Increases retained earnings

MINUS dividends, which decrease retained earnigns

Transaction

a transaction is an event that has an economic impact on the business and must be recorded.

Events can be classified as:

External: which involve an exchange between a company and an outside party

Internal: which occur within the company and have direct financial impact.

Account name examples for “Assets”

cash, equipment, inventory, property, accounts recievable

Account name examples for “liability”

Accounts payable (like a bill), notes payable

Account name examples for “ stock holders equity ”

Stock, retained earnings

Account name examples for “revenue ”

sales revenue

Account name examples for “expense ”

cost of goods sold, rent expense, wages expense, insurance expense

Journal entries

Once account types and names are identified, transactions are recorded in the accounting system through the creation of journal entries

Double-Entry Accounting System

Journal entries follow the Double-Entry Accounting System, which requires at least two accounts to be recorded.

Companies create their own _____ to summarize the accounts

they will use in their journal entries.

chart of accounts

debits go on the ____ side of a journal entry

Left

Normal Debit balance accounts are increased with a ____ and decreased with a ______

debit , credit

Normal credit balance accounts are increased with a ____ and decreased with a ______

credit ; debit

Normal debit balance accounts

Assets and expenses

Normal credit balance accounts

Liabilities, revenues, stockholders equity.

T Account

a T account is a summary of transactions for each amount , all t accounts are summarized in the general ledger.

ending balances

are calculated by summing the debits and credits and reporting the net greater amount in the appropriate column,

Trial balance

a trial balance is a listing of all accounts in the general ledger with their balances (Either debit or credit). While it is useful for ensuring the equality of debits and credits, the trial balance is not used for financial analyisis

Adjusting journal entries

represents entries that need to be made to ensure the accuracy of financial statements.

Examples include:

• prepaid items

• Unearned revenues

• receivables adjustments

• payables adjustments

Revenue recognition principle

states that revenues must be recorded when they are earned

the expense recognition principle

states that expenses must be recorded when they are incurred

incurred means to use it, consume it, or have it happen, ex: MSU incurrs utility expense to have lights on.

ex: utilities

We follow the ______ basis of accounting, which recognizes transactions as they occur, regardless of when cash exchanges hands.

accrual

• idc what goes on w/cash (ill put in JE) but does not matter when it gets to bank account.

• cash doesnt equal revenue

prepaid items are recorded when cash is _____ before the good or service is recieved.

(asset) paid. giving $ before benefiting

Unearned revenues are recorded when cash is ____ before the good or service is given.

(liability) recieved (recieving $ before doing)

KCQ: when you purchase an airline ticket in january for a spring break trip in march, what account does the airline company credit for the cash they recieve in january?

unearned revenue.

Accounts payable would be an expense 4 company you pay later (Ex:if they buy jet fuel early)

__________ are recorded when the good or service is provided before the cash is recieved

Recievables

_____ are recorded when the good or service is precieved before the cash is paid

payables

Examples of adjusting entries

Depreciation (Value decreases over time)

Utilities

Subscriptions

adjusted trial balance

summary of the unadjusted trial balance and adjusting entries made at the end of thr account