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AU / Accounting / ACCT 2110 / What are the steps of the accounting cycle?

What are the steps of the accounting cycle?

What are the steps of the accounting cycle?

Description

School: Auburn University
Department: Accounting
Course: Principles of Financial Accounting
Professor: Elizabeth miller
Term: Fall 2015
Tags: Financial Accounting; Miller; Chapter 3; Chapter 4; Test 2; Auburn University
Cost: 50
Name: Test 2 Study Guide
Description: Chapter 3- Accrual Accounting Chapter 4- Internal Control and Cash Test on February 24
Uploaded: 02/20/2016
3 Pages 212 Views 6 Unlocks
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Study Guide for Chapters 3 and 4


What are the steps of the accounting cycle?



Chapter 3 

Steps of the Accounting Cycle

1. Analyze the transaction

2. Record transactions in the journal

3. Post the transactions in the t-accounts found on the ledger

4. Preform the trial balance

5. Prepare the adjusting journal entries

∙ Step 5.5…prepare the adjusted trial balances  

6. Prepare the financial statements with the adjusted accounts

7. Close any temporary accounts  

Accrual vs. Cash Basis Accounting

∙ Accrual- follows the GAAP; transactions are recorded when goods and services are  provided - AKA when revenue is made  

∙ Cash- revenue is recorded when cash is received- this breaks the Revenue Recognition  principle  


Why are bank balances different than a company's?



Adjusting Entries

∙ Necessary to apply the revenue recognition and the matching principles o Matching principle- expenses are recorded when they are incurred  If you want to learn more check out Cocaine and meth are the most dangerous, what?

∙ These entries affect at least one income statement and one balance sheet account ∙ Is cash ever adjusted? NO

Types of Adjusting Entries

∙ Accruals- money change hands at a later date; "build up"

∙ Deferrals- money changes hands up front; "put off"

a. Accrued Revenues

o Cash has not changed hands

o Good or service has been provided, but has not been paid for yet

o Unrecorded revenues


What do internal control reports include?



b. Accrued Expenses

o Expenses have been incurred, but not paid for yet

o Example: I have used electricity, but have not paid the utilities bill yet c. Deferred Revenue

o Cash has been received, but revenue has not been earned

o Get cash but have not completed any work = liability

d. Deferred Expense

o Goods and services acquired before they are used

o Examples: cash is used to buy supplies, but we have not used all of the supplies yet

Depreciation

∙ Property, plant, and equipment depreciate- or lose value over time If you want to learn more check out What is the seperation of mixture, in chemistry laboratory?

∙ You must adjust to acknowledge that an expense has incurred on the equipment during that  specific time period

∙ The unused portion of a long-lived asset is put on the balance sheet ∙ Written as contra accounts to reduce the amount of long-lived assets o Have a normal credit balance (opposite of what assets have)

Closing Accounts

∙ Steps

1. Close revenues to Income Summary

2. Close expenses to Income Summary

o Now the Income Summary balance is the Net Income for that period 3. Close Income Summary to Retained Earnings Don't forget about the age old question of What are the four types of tissues?
We also discuss several other topics like What is simple harmonic motion equation?

4. Close Dividends to Retained Earnings  

o Notice that dividends does not get closed through the Income Summary- it goes  directly to the Retained Earnings account

∙ Never close out balance sheet accounts- assets, liabilities, and stockholders' equity ∙ Only revenues, expenses, and dividends are closed or zeroed

∙ Make sure to create the income summary t-account

o Never transfer dividends into the income summary account- only revenues and  expenses

Chapter 4 

∙ Internal cash control- system of policies and procedures that a company puts in place to  provide reasonable assurance that all always and regulations are followed, reporting is  reliable, and operations are effective  

∙ What do internal control reports include  

1. A statement of the managements responsibilities

2. Assessment of the effectiveness of the internal controls

Elements of Internal Control

∙ Control environment

o Integrity of ethical values of personnel

o Management's philosophy and operating style

o Assignment of authority and responsibility

o General structure of the organization

∙ Risk Management  If you want to learn more check out What do you mean by free living?

o Establishing responsibility

o Maintaining adequate documentation

o Segregation of duties

o Physical security of assets and records

o Independent verification

∙ Information and Communication

o Information should flow freely

o Communicate in a timely manner  

o Communicate well with management  

∙ Monitoring  

o Tracking potential and actual problems

o Assess the quality of the company's internal  

o Approaches of management  

∙ Ongoing activities and separate evaluation (by a third party audits)  

Reporting Cash and Cash Equivalents

∙ Cash- you deposit into the bank and it is ready to use

∙ Equivalents to cash- any investment that can be converted into an amount of cash and has  an original maturity of three or less months We also discuss several other topics like What is a compound and how is it formed?

Cash Controls and Bank Reconciliations  

1. Reconcile the bank balance to the actual cash balance

2. Reconcile the company's book balance to the actual cash balance

3. Update the company's book balance to the actual cash balance with journal entries  ∙ Why are bank balances different than a company's?  

o Basically timing differences  

o Recorded by the bank and not by the company (no journal entry has been made) ∙ Credit memorandums- interest, receivables

∙ Debit memorandum- deductions for fees or service charges

∙ NSF checks- deductions because a customer's check bounces  

o Recorded by the company and not yet by the bank

∙ Deposits in transit- deposit made, but the money does not appear yet ∙ Outstanding checks- check has been cut, but has not been cleared by the bank

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