Accounting Exam Preparation Notes

Excess of Issue Price Over Par of Common Stock:
Termed as Premium, this occurs when stock is sold for a price higher than its par value. The premium reflects investor confidence and helps the company account for the higher perceived value of its shares.

Journal Entry for Cash Sales:
Debit Cash for the amount received and Credit Sales for the same amount. This entry reflects the receipt of cash from customers for goods or services sold, impacting both the Cash account in assets and the Sales account, which affects revenues.

Closing Process:
The closing process involves several steps, with Step 3 specifically being to Close Income Summary to the Owner’s Capital Account. This step ensures that all revenue and expense accounts are reset to zero for the next fiscal period, and the net income or loss is transferred to the owner’s equity section.

Closing Entry Requirement:
The primary account requiring a closing entry at the end of the fiscal period is the Income Summary, which provides a summary of the revenues and expenses for the period. This account is crucial for determining the company's profitability.

Proving a Journal:
To ensure the accuracy of financial records, the total of all debit columns should equal the total of all credit columns. This balance validates that every transaction has been recorded correctly and maintains the integrity of the accounting equation.

Types of Journal Entries Needed:
Adjusting and Closing Entries are needed to change general ledger account balances at the end of the fiscal period. Adjusting entries ensure that income and expenses are recognized in the period they occur, while closing entries finalize the period's accounts.

Receipt of Cash from Owner as Investment:
Journal Entry: Debit Cash and Credit Capital. This entry records additional capital contributed by the owner, increasing both cash assets and the owner's equity.

Closing Entry for Expenses:
To record closing expenses, Debit the various expenses totaling $3,000; Credit Income Summary for $3,000 when net income is $2,000 and total expenses are $3,000. This ensures that all expenses are accounted for in the period they occurred and appropriately transferred to the Income Summary.

Recording Sale of Merchandise on Account:
When merchandise is sold on credit, Debit Accounts Receivable and Credit Sales and Sales Tax Payable. This shows that the business is owed money for the sale and recognizes the potential obligation for sales tax.

Journal Entry for Cash Paid at Maturity:
Upon maturity of a financial obligation, Debit Cash for $5,000 and Credit Notes Payable for $5,000. This indicates that the debt has been settled and cash has been disbursed.

Financial Statements and Income Concepts

Income Statement:
The Income Statement is a fundamental report that indicates whether a business has earned a profit over a specific period. It lists revenues generated and the types and amounts of expenses incurred, providing insight into operational efficiency and profitability.

Transfer of Net Income or Loss:
Closing entries transfer the net income or loss into the Owner’s Capital Account, which affects the equity structure of the business. This process enhances transparency and reflects the company's overall performance on the balance sheet.

Accounts Receivable:
Accounts Receivable represents amounts owed by customers for services rendered or merchandise sold, providing future economic benefit. It is a vital component of working capital management, indicating liquidity and customer payment trends.

Balance Sheet:
The Balance Sheet itemizes the assets and liabilities of a business, presenting a snapshot of its financial position at a specific point in time. It summarizes the company’s resources and obligations, helping stakeholders evaluate financial health.

Cash Handling and Bank Reconciliation

Outstanding Checks:
Outstanding checks are checks that have been written by a business but not yet presented to the bank for payment. Understanding outstanding checks is crucial for accurate cash forecasting and bank reconciliation processes.

Bank Service Charge Journal Entry:
When bank service charges are incurred, Record a Credit to Cash and a Debit to Miscellaneous Expense. This entry reflects the reduction in available cash due to bank fees and ensures accurate expense tracking.

Checks Written but Not Reconciled:
A discrepancy between the bank statement balance and checkbook balance occurs due to outstanding checks or deposits, and adjustments for service charges. Proper reconciliation ensures accuracy in cash reporting and reflects reliable financial statements.

Financial Analysis and Accounting Goals

Short-term vs Long-term Financial Goals:
Short-term goals typically take less than a month to achieve and focus on immediate financial performance, while long-term goals span over one year, guiding strategic growth and sustainability initiatives.

Proving Equality of Debits and Credits:
To ensure records are correct, perform footing or cross-footing, a technique to verify that total debits equal total credits in the trial balance, thereby confirming the integrity of the accounts.

Ownership Structures

Partnership:
A Partnership is owned by two or more persons, allowing shared decision-making and resources. Partners may have different levels of investment and control, influencing profit-sharing and operational strategies.

Sole Proprietorship:
A Sole Proprietorship is a business owned by one person, who maintains complete control and decision-making authority. This structure simplifies tax filing but exposes the owner to unlimited personal liability for the business's debts.

Depreciation Methods

Depreciation Calculation:
The Units of Production Method allows for depreciation calculation based on usage of an asset. For example, if an asset costs $80,000 and has a useful life of 720,000 units, the depreciation expense is calculated per unit of production, allowing for accurate expense matching.

Accumulated Depreciation:
Accumulated Depreciation represents the total depreciation expense that has been allocated over time against an asset, reflecting its current value and helping show a business’s financial status accurately over time.

Ethical Considerations in Accounting

Ethical Behavior:
Ethical behavior in accounting requires maintaining confidentiality, integrity, and objectivity in financial reporting, fostering trust with stakeholders and ensuring compliance with laws and regulations.

Checklist for Ethical Decisions:
In making ethical decisions, consider whether an action violates any laws, ethical standards, or negatively impacts any affected parties. This assessment can guide accountants in their professional conduct and responsibilities.

General Ledger and Account Management

Permanent Accounts:
Permanent Accounts include assets, liabilities, and equity, which continuously exist, whereas temporary accounts like expenses and revenues are reset at the close of each period. Understanding their classification helps in effective financial reporting.

Account Classified Status:
For example, Accumulated Depreciation is classified as a contra asset account with a credit balance. This classification is significant for financial statement presentation and helps demonstrate the relationship between asset cost and its used value.

Summary of Key Transactions

Adjusting Entries:
Adjusting Entries are essential to ensure accounts reflect an accurate financial position at the end of the period, such as adjustments to insurance and depreciation, aligning revenues and expenses to the correct accounting period.

Variable vs Fixed Accounts:
It is crucial to differentiate between variable and fixed accounts, understanding their classifications in accounting statements, which aids in financial analysis, budgeting, and forecasting processes.