Chapter 2 Notes (January 27-February 3)
Chapter 2 Notes (January 27-February 3) ACCT 2110 - 002
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ACCT 2110 - 002
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This 8 page Class Notes was uploaded by Callisa Ruschmeyer on Wednesday February 3, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 63 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.
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Date Created: 02/03/16
th rd January 27 – February 3 Essentially Chapter 2 Review Generally Accepted Accounting Principles (GAAP) Qualitative Characteristics (subject to Cost Constraint) o Fundamental Relevance- makes a difference in a decision Materiality- large enough difference Faithful representation- complete, neutral, and free from error o Enhancing Comparability- consistency is key; allows for external and internal comparisons Verifiability- when independent parties reach the same consensus Timeliness- available to users before it loses its ability to make a difference on decisions Understandability- average person with basic business knowledge can understand Assumptions o Economic Entity- each company is accounted for apart from its owners o Continuity (Going-Concern)- the company will be in existence to carry out commitments o Time Period- companies can divide time into artificial periods to solve problems as they arise o Monetary Unit- record everything in the same monetary unit (no conversions) Principles o Historical cost- we record what we had to give up to acquire the asset o Revenue recognition- revenue is recorded in the period in which it was earned o Expense recognition (matching)- expenses should be recorded when they are incurred o Conservatism- avoid overstating assets or income Accounting Cycle (Steps 1-4) 1. Analyze Transactions a. Write down the accounting equation b. Which elements are affected in the transaction c. Do the elements increase or decrease 2. Journalize Transactions 3. Post to the Ledger 4. Prepare a Trial Balance Expanded Accounting Equation Assets = Liabilities + Stockholders' Equity Assets = Liabilities + (Contributed Capital + Retained Earnings) Assets = Liabilities + (Beginning Retained Earnings + [Revenues - Expenses] -Dividends Transactions Classified Assets o Cash o Equipment (could be bought by cash or on account) o Prepaid Insurance o Supplies (could be bought by cash or on account) Liabilities o Note payable (borrowing cash) o Account payable (charging an asset on account) o Received cash prior to completing the work Stockholders' Equity o Contributed Capital Common stock (sold stock to investors and received cash) o Retained Earnings Revenue (sold and provided a service- produces increase in cash) Expense (used cash to pay an expense) Accounts An account is an individual record of increases and decreases of elements on a statement Every company will have a different chart of accounts depending on the nature of its business activities T-account DEAD CRLS o DEAD (Debits, Expenses, Assets, Dividends) o CRLS (Credits, Revenues, Liabilities, Stockholders' Equity) Debit (dr)- left side Credit (cr)- right side Assets- normal debit because they are on the left side of the balance statement equation (A = L + SE) o Increase on the debit side and decrease on the credit side Liabilities- normal credit balances because they are on the ride side of the accounting equation; increased on the credit side and decreased on the debit side o Remember, unearned service revenue is a liability Stockholders' Equity = Contributed Capital + Retained Earnings o Normal credit: increased on the credit side and decreased on the debit side Revenues- normal credit balances because they are contained in retained earnings (when they increase) o Increased on the credit side and decreased on the debit side Expenses- normal debit balances because they are part of the retained earnings (when they decrease) o Increased on the debit side and decreased on the credit side o Same as assets because they have the same effect on retained earnings Dividends- normal debit balance because they are contained in retained earnings (when they decrease) o Increased on the debit side and decreased on the credit Step 2: Journalize Transactions Remember, step 1 of the transaction cycle was to analyze accounts Even before making t-accounts, we must make journals Journals are in chorological order and show the debit and credit effects of transactions A journal entry shows the entire effect of one transaction o Debited account is always listed first o Indent the account you intend to credit o Record the brief explanation under the credited account o Then post the transaction into a t-account: a collection of t-accounts are called a ledger A journal entry has three parts o The date of the transaction o The accounts and amounts to be increased or decreased o A brief explanation of the transaction A simple journal entry only has two accounts A compound journal entry has more than two accounts o In the example we completed in class, an entry dealt with the cash, accounts payable, and equipment accounts o Remember, all debits are listed first on the journal entry In the example from class, Equipment was listed first, and then cash- followed by accounts payable Journal Entry vs. Ledger o T-accounts sum up the balance (shows it clearly) o Journals show what is going on (they provide a brief statement) Trial Balance List of all active accounts- contains all debit and credit balances Order is important: 1. Assets 2. Liabilities 3. Stockholders' Equity 4. Revenues 5. Expenses The trial balance is not a financial statement- it is used to see if the credits and debits are equal o Credits and debits coming out equal does not ensure that the analysis of accounts did not contain errors o What if a transaction was recorded twice? What is a transaction was not recorded at all? Both of these would result in an credits and debits coming out equal- but the balance is still inaccurate Important Vocabulary Double-entry accounting- two or more transactions are affected Journalizing- recording something in the journal Ledger- a collection of t-accounts Posting- transferring info from the journal onto the ledger (this is Step 3 in the Accounting Cycle)
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