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Accounting 1 study guide

by: Aishwarya Juttu

Accounting 1 study guide ACCT2331

Marketplace > University of Houston > Accounting (ACCT) > ACCT2331 > Accounting 1 study guide
Aishwarya Juttu

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About this Document

covers summary of chapters 1-3 & vocab
Mary Sykes
Study Guide
50 ?




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This 6 page Study Guide was uploaded by Aishwarya Juttu on Thursday September 22, 2016. The Study Guide belongs to ACCT2331 at University of Houston taught by Mary Sykes in Fall 2016. Since its upload, it has received 6 views. For similar materials see Accounting-Financial in Accounting (ACCT) at University of Houston.

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Date Created: 09/22/16
Accounting Exam 1 Study Guide Chapter 1 - Two primary functions of financial accounting- measure business activities of the company and communicate measurements to external users for decision making - Financial accounting is useful to investors and creditors in making decisions, helps predict cash flows, and tells about economic resources, claims to resources, and changes in resources and claims - Definitions: - Financial accounting- information provided for external users - Assests= resources of the company • Ex: Cash,Accounts receivable, supplies, equipment - Liabilities= creditors’claims to resources • Ex: accounts payable, salaries payable, utilities payable, interest payable, notes payable - Stockholders’equity= owners’claims to resources - Assets= Liabilities + Stockholders’equity - Revenue= sales of products or services to customers • Ex: Service revenue - Expense= costs of selling products or services • Ex: Rent expense, supplies expense, salaries expense, utilities expense, interest expense - Retained Earnings= net earnings the company has left (includes revenue, expense & dividends) - Dividends= distribution of profit of stockholders - Profit = Revenue - Expenses - Sole proprietorship= one person owns the business - Partnership= two or more people own the business - Corporation= business is legally separate from its owners (limited liability of stockholders) - Financial activities- transactions with investors and creditors - Investing activities- transactions with purchase and sale of resources that provide benefit - Operating activities- transactions that relate to the primary operations of company - Creditors and investors look at financial accounting information based on formal standards (GAAP= GenerallyAcceptedAccounting Principles) to decide investing and lending decisions - The rules of financial accounting are GAAP which are established by FinancialAccounting standards Board (FASB) whites governed by the Securities and Exchange Commission (SEC) - Global standard setting are established by the InternationalAccounting Standards Board (IASB) - Auditors- are trained individuals hired by a company to express a professional opinion about which financial statements are prepared in accordance with GAAP; this adds credibility to financial statements when investors and creditors make their decisions - Jobs for public (for corporations, gov., nonprofit organizations, individuals) accounting include auditors, tax preparers accountants, business consultants, financial planners, information tech. developers, financial advisors, financial analysts, forensic accountings, information risk managers, investment bankers, environmental accountants, tax lawyers - Jobs for private accounting (for your particular employer) include financial accountant managerial, internal auditors, tax preparers, payroll managers, information management, tax planners, acquisition specialists, FBI agents, sports agents - The conceptual framework used to develop GAAP include qualitative and enhancing qualitative characteristics, cost effectiveness constraint, and underlying assumptions - Underlying assumptions include economic entity, monetary unit, periodicity (economic life of an enterprise can be divided into time periods for periodicity financial reporting), and going concern - For the financial statements to be useful, they should have relevance and faithful representation Type of Income Statement of Balance sheet Statement of Statement Statement stockholders cash flow equity Measurements Revenue & Common stock & Assets, Liabilities, • Operating cash that are included in Expense retained earnings & retained flows: Revenues the statement earnings & Expenses Investing cash • flows: purchase & sale of long term assets • Financial cash flows: lenders & stockholders Purpose of compares summarizes the presents the Measuring statement revenues and changes in financial position of activities involving expenses for the stockholders’ the company on a cash receipts, current period to equity over an particular date cash payments assess the interval of time over an interval of company’s ability time to earn a profit from running its operations Notes/examples of written all positive,• subtract • written all • ex: issue of measurements subtract expense Dividends (-) & positive common stock + from revenue to add net income • total assets= • borrow from calculate net increase from total (liability + bank + income common stock stockholders • pay dividends (-) for the period to equity) • cash inflow from calculate total customers + stockholders cash outflow for • equity salaries & rent (-) • Dividends & net • purchase income fall under equipment (-) retained • net increase in earnings cash + How a statement is need net income need ending need net cash need net cash useful to other for statement of balance of increase for increase to statements stockholders stockholders statement of cash calculate the cash equity equity for balance flows at the end of the sheet year Chapter 2 - Six steps to measuring external transactions 1. Identify the accounts that are affected by the external transactions 2. Plug into accounting equation and analyze the impact of the external transaction 3. Decide whether it is debit or credit 4. Record transaction in journal 5. Post the transaction in general ledger 6. Prepare trial balance - Definitions - Account- summary of all transactions related to a particular item over a period of time - Chart of accounts- a list of all account names used to record transactions - Deferred revenue- company received money for it but did not yet provide services; the company owes the customer a service so it falls under liability - Journal- provides a chronological record of all transactions - Journal entry- format used for recording transactions - Posting- process of transferring the debit and credit info. from the journal to individual accountings in the general ledger - General ledger- provides a list of transactions affecting each account and its balance; each account has a separate list - - If total assets increase, then liabilities and stockholders’equity increases by the same amount. Vice versa - On account means it is not cash, so it would fall under liability under accounts payable Revenue Expense Dividends Retained earnings increase decrease decrease - Debit & Credit affects in accounting equation Assets = LiabilitiesStockhol Common Retained Revenue Expense Dividend + ders’ stock Earnings Equity Debit Increase Decrease Decrease decrease decrease decrease increase increase (left) Credit Decrease Increase Increase increase increase increase decrease decrease (right) DEALOR - Dividends (debit) - Expenses (debit) ex: salaries expense - Assets (debit) ex: cash, accounts receivable, supplies, prepaid rent, equipment - Liabilities (credit) ex: deferred revenue, accounts payable, notes payable - Owners’Equity (credit) ex: common stock - Revenue (credit) ex: service revenue - Debit amount = credit amount - Trial Balance- list of all accounts and their balances at a particular date - shows that total debits equal total credits - assists in preparing adjusting entries - used for internal purposes only - not required to follow an order of listing Chapter 3 - Revenues are recorded in the period in which the goods and services are provided to customers (revenue recognition principle) - Expense are reported in the same period as the revenues they help to generate (matching principle) - Expenses are recorded in the same period as the revenues they help to generate - Carrying value- cost of an asset less the accumulated depreciation Point of Difference Accural Basis Cash Basis Revenue Recognition Record revenue when goods and when cash is received, does not services are provided to have to necessarily provide customers service Expense Recognition record expense with the revenue when cash is paid, does not necessarily have to use the service GAAP part of GAAP not part of GAAP - During the year - record and post external transactions (measurement process) - End of the year - record and post adjusting entries (measurement process) - prepare financial statements (reporting process) - record and post closing entries (closing process) 1. Record and post external transactions (chapter 2) 2. Adjusting entries- transactions that have occurred during the period but have not been recorded by the end of the period; usually activities that occur daily; always involves a debit to an expense and a credit to an asset - Adjusting entries are unnecessary for transactions that do not involve the recognition of revenues or expenses and for transactions in which we receive cash at the same time we record revenue or pay cash at the same time we record an expense A. Prepaid expenses- pay cash to an asset in the current period that will be recorded an expense in a future period - costs are initially recorded as assets because they provide future benefits - we expense these costs in future periods as the assets are used - debit to an expense and a credit to an asset B. Deferred Revenues- a company receives cash in advance (current period) from customers and revenue will be recorded in the future - cash received is recorded as a liability at first until the service is provided. Then it is recorded under revenue - debit a liability account and credit a revenue account C. Accrued expenses- record an expense in the current period that will be paid in cash in a future period - cost is recorded as an expense and the amount owed is recorded as a liability - debit an expense account and credit a liability account D. Accrued revenues- record a revenue in the current that will be collected in cash in a future period - debit an asset account and credit a revenue account 3. Adjusting trial balance- lists all account balances after updating them for adjusting entries and is prepared after posting the adjusting entries to the general ledger 4. Closing entries- transfer the balances of all temporary accounts to the balance of retained earnings and to reduce the balances of the temporary accounts to zero to prepare them for the next period - Retained earnings is a permanent account which represents accumulation of all revenues, expenses, dividends over the life of the company - Temporary accounts such as revenues, expenses, and dividends close. The balances of the temporary accounts are transferred to the balance of retained earnings 5. Post closing Trial Balance- list of all account balance after updating for closing entries and helps verify that closing entries were prepared and posted correctly and that the accounts are now ready for the next periods transactions


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