Acct 2301 4 week notes
Acct 2301 4 week notes ACCT2301
Popular in Principle of Accounting I
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This 7 page Bundle was uploaded by Laxman Bista on Tuesday March 1, 2016. The Bundle belongs to ACCT2301 at University of Texas at Arlington taught by Galen D. Carpenter in Spring 2016. Since its upload, it has received 50 views. For similar materials see Principle of Accounting I in Accounting at University of Texas at Arlington.
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Date Created: 03/01/16
Chapter 1 Accounting and the Business Environment Notes 1. Accounting Information system that: Measures business activities, Processes the information into reports Communicates the results to decision makers. Financial versus Managerial Accounting PROVIDES INFORMATION PROVIDES INFORMATION TO FOR EXTERNAL DECISION INTERNAL DECISION MAKERS MAKERS EX INVESTOR, EXEMPLOYEE, MANAGERS CREDITORS, TAX AUTHORITY SHOULD I INVEST IN THE HOW MUCH MONEY BUSINESS? SHOULD THE BUSINESS IS THE BUSINESS BUDGET FOR PRODUCTION? PROFITABLE? SHOULD THE BUSINESS SHOULD WE LEND MONEY EXPAND TO A NEW TO THE BUSINESS? LOCATION? CAN THE BUSINESS PAY US HOW DO ACTUAL COSTS BACK? COMPARE TO BUDGETED COSTS? Types of Accountants Certified Public Accountants (CPA) Serves the general public. Certified Management Accountants (CMA) Specialize in accounting and financial management knowledge and work for a single company. What are the organizations and rules that govern Accounting? o Financial Accounting Standards Board (FASB) The private organization that oversees the creation and governance of accounting standards in U.S. o Securities and Exchange Commission (SEC) U.S. government agency that oversees the U.S. financial markets. o Generally Accepted Accounting Principles (GAAP) Accounting guidelines currently formulated by FASB. The main U.S. Accounting rule book. 2. The Economic Entity Assumption An organization that stands apart as a separate economic unit. 3. Cost Principle Measured principle that acquired assets and services should be recorded at their actual cost. 4. Going Concern Assumption Assures that an entity will remain in operation for the foreseeable future. 5. Monetary Unit Assumption Assumes financial transaction are recorded in a monetary unit. ACCOUNTING EQUATION Assets = Liabilities + Equity Assets An asset is an economic resource that is expected to benefit the business in the future. Ex Cash, Merchandise inventory, Furniture, Land Liabilities Debts that are owed to creditors. Many liabilities have the word Payable in their titles. EX Accounts payable, Notes Payable, Salaries Payable. Equity The owner’s claims to the assets of the business, also called stockholders’ equity. Increases in equity result from Contributed Capital and Revenues. Decreases in equity results from Dividends and Expenses. Equity consist of Two Components Contributed Capital Also called paid in capital, is the amount invested in the corporation by its owners, the stockholders. Common Stock represents the basic ownership of every corporation. Retained Earning Equity earned by profitable operations of a corporation that is not distributed to stock holders. ASSETS = LIABILITIES + EQUITY . Contributed Capital + Retained Earning Common Stock Dividends + Revenues – Expenses Net Income = Revenues > Expenses Net loss = Revenues < Expenses Analyzing a Transactions Transaction A transaction affects the financial position of a business and can be measured with faithful representation. Steps of analyzing transaction 1. Identify accounts and account types (Assets, Liability, or Equity). 2. Decide whether each account increases or decreases. 3. Determine whether the accounting equation is balance. Preparing Financial Statement 1. Income Statement Reports the net income or net loss of a business for a specific period. 2. Statement of Retained Earning Reports on the change in retained earnings for a specific period. Ending retained earning = Beginning retained earning + Net Income (or – Net Loss) – Dividends. 3. Balance Sheet Reports on an entity’s assets, liabilities, and stockholders’ equity as of a specific date. Assets = Liabilities + Stockholders’ Equity 4. Statement of Cash Flow Reports on a business’s cash receipts and cash payments for a specific period. Chapter 2 Recording Business Transactions What is an Account? An Account is the detailed record of all increases and decreases that have occurred in an account during a specified period. ASSETS ACCOUNT 1. Cash A business’s money that includes balances, bills, coins, and checks. 2. Account Receivable A customer’s promise to pay in the future for services or goods sold. Often described as “On Account”. 3. Note Receivable A written promise that a customer will pay a fixed amount of money and interest by a certain date in the future. Usually more formal than an Account Receivable. 4. Prepaid Expense A payment of an expense in advance. It is considered an asset because the prepayment provides a benefits in the future. Ex Prepaid Rent, Prepaid Insurance, and Office Supplies. 5. Equipment, Furniture, and Fixtures The cost of equipment, furniture, and fixtures. A business has a separate asset account for each type. 6. Building The cost of an office building, a store, or a warehouse. 7. Land The cost of land a business uses in operations. LIABILITIES ACCOUNT 1. Account Payable A promise made by the business to pay debt in the future. Arises from a credit purchase. 2. Notes Payable A written promise made by a business to pay a debt, usually involving interest, in the future. 3. Accrued Liability An amount owed but not paid. A specific type of payable such as Taxes Payable, Rent Payable, and Salaries Payable. 4. Unearned Revenue Occurs When a company receives cash from a customer but has not provided the product or services The promise to provide services or deliver goods in the future. EQUITY ACCOUNT 1. Common Stock Represents the net contributions of the stockholders in the business. Increases Equity. 2. Dividends Distributions of cash or other assets to the stockholders. Decreases Equity 3. Revenues Earnings that results from delivering goods or services to customers. Increases Equity Ex Service Revenue, Rent Revenue 4. Expenses The cost of selling goods or services. Decreases Equity. Ex Salaries Expense, and Utilities Expense What is a Ledger? Record holdings of all accounts of a business, the changes in those accounts, and their balances. What is Double – Entry Accounting? Transactions always involve at least two accounts. To record the dual effect of each transaction Ex Office Supplies are purchased for cash requiring an increase in office supplies and a decrease in cash. What is the TAccount? A shortened form of the ledger. The left side of the T Account is called the DEBIT. The right side of the TAccount is called the CREDIT. . CASH ( Account Name) . DEBIT(DR) | CREDIT(CR) The Normal Balance All accounts are summarized on one side of the T account, called normal balance. An account’s normal balance appears on the increase side of the account. EX assets increase with a debit so normal balance is debit Liabilities and equity increase with a credit so the normal balance is credit. What is the Trial Balance? Summary of the ledger listing all of the accounts with their balances. Asset account are listed first followed by liabilities and then equity. Chapter 3 The Adjusting Process Cash Basis Vs. Accrual Basis Accounting 1.Revenue is recorded when cash is received. 1.Revenue is recorded when earned. 2.Expenses are recorded when cash is paid 2.Expenses are recorded when incurred. 3.Not allowed under GAAP 3.Used by most business. The Time Period Concept Time period concept Business activities are sliced into small time segments. Financial statements can be prepared monthly, quarterly, or annually. Fiscal Year Any 12month accounting period. Often coincides with a calendar year. The Revenue Recognition Principle Dictates when to record revenue and the amount of revenue to record. Record revenue when earned. May be different from cash collections. Revenue is based on the actual selling price of the item or service. The Matching Principle Guides accounting for expenses. Expenses are recorded when they are incurred during the period. Expenses are matched against the revenue of the period. Ex Record rent expense for January against January Revenues, even if the rent was paid in December. Unadjusted Trial Balance Comes from the general ledger. Adjustments are needed due to the Time Period Concept, The Revenue Recognition Principle, and The Matching Principle. Types of Adjusting Journal Entries Deferrals Deferred Expenses Advance payments of future expenses. Treated as assets until used. Types Prepaid Rent, Office supplies, Depreciation. Depreciation Allocation of a plant asset’s cost over its useful life. Plant Assets Long Lived, tangible assets Used in the operations of the business Usage is recorded as Depreciation Expense Accumulated Depreciation Account is the sum of all depreciation expense recorded for the depreciable asset to date. Deferred Revenues Occurs when a company receives cash before it does the work or delivers a product. Is a Liabilities because the business owes the customer the product, the service, or a refund. Upon performance or delivery, deferred revenue is converted to Earned Revenue. Accruals Accrued Expenses Expenses a business has incurred but has not yet paid. Ex Salaries, Interest, Utilities Accrued Revenues Arise when a company performs a service but has not yet collected cash, or when a company delivers a product but has not yet collected cash. Record Debit to Accounts Receivable, and Credit to Service Revenue. Chapter 4 Completing the Accounting Cycle What is the closing process, and how do we close the accounts? Closing Entries Transfer Revenues, Expenses, and Dividends to Retained Earnings. Revenues and expenses may be transferred first to an account titled Income Summary (To Summarize the net income or loss over the period) Preparing a Post – Closing Trail Balance The Accounting Cycle ends with a postclosing trial balance. A list of the accounts and their balances at the end of the period, after journaling and posting the closing entries. Includes only permanent accounts. Current Ratio Measures a company’s ability to pay its current liabilities with its current assets. Current Ratio = Total Current Assets (Converted to cash/used within 12 Months) Total Current Liabilities (Must be paid either with cash/goods services within 1year)
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