MA

Comprehensive Financial Accounting Summary

Financial Accounting Notes

Overview of Key Concepts

  • Closing the Income Summary: It is essential to know the steps involved in closing the income summary, which includes calculating the overall credit balance by subtracting expenses from revenues.

Revenue and Expenses

  • Current Offer Price: $700
  • Revenues: $185,000
  • Expenses: $3,700
  • Dividends Paid: $18,000
  • Retained Earnings Before Closing: $297,000

Calculating Income Summary

  • Formula: ext{Income Summary} = ext{Revenue} - ext{Expenses}
  • Calculation:
    • ext{Income Summary} = 185,000 - 3,700 = 181,300
  • After closing the income summary, retained earnings can be adjusted accordingly.

Retained Earnings

  • Always check retained earnings after summarizing income to determine the new balance.

Cash Basis vs. Accrual Basis

  • Cash Basis Accounting: Recognizes revenue only when payment is received.
  • Accrual Basis Accounting: Recognizes revenue when it is earned, regardless of when payment is received.
    • Example: Services provided in July are recognized as revenue in July even if payment is made later.
    • Key distinction: Focus on when the payment is received versus when services were rendered.

Accounts Receivable and Liabilities

  • Accounts Receivable: Increases when services are performed but payment has not yet been received. E.g., received 890 from customers as partial payment in July from a June sale.
  • Borrowed Funds: 7,400 borrowed from the bank classified as a liability.

Financial Position Changes

  • If assets and liabilities change:
    • Asset Increase: 100,000
    • Liability Increase: 70,000
    • Closure implies adjusting funds to balance the accounts.

Cash and Receivables

  • Current Cash on Hand: 15,000
  • Accounts Receivable: 13,500

Depreciation and Prepaid Expenses

  • Prepaid Insurance: Recorded at 8,550. This amount should be accounted for annually in the financial records.
  • Purchase of Assets: For instance, a van purchased on January 1 needs to be evaluated for depreciation as of December 31.

Conclusion

  • Understanding the foundation of accounting principles such as income recognition, asset management, and the importance of cash versus accrual systems is crucial for accurate financial reporting. Always ensure you're up-to-date with the current values and correct classifications of assets and liabilities to maintain balanced financial statements.