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Notes for February 15-19

by: Callisa Ruschmeyer

Notes for February 15-19 ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Notes for February 15 19
Callisa Ruschmeyer
GPA 4.0

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Final notes on Chapter 3 All notes for Chapter 4- best review for the test- very thorough
Principles of Financial Accounting
Elizabeth G Miller
Class Notes
Financial Accounting; Chapter 3; Chapter 4; Miller; Auburn University
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This 7 page Class Notes was uploaded by Callisa Ruschmeyer on Tuesday February 16, 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 57 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 02/16/16
Final Notes on Chapter 3 and all of Chapter 4 Step 7: Closing the Accounts  Revenues, expenses, and dividends are the only accounts you close o They are temporary accounts o Must be zeroed out at the end of each accounting period  Balance sheet accounts- like assets, liabilities, and stockholders' equity- do not get closed o They are permanent accounts o Their balances carry over to the next account period o Contra assets are also found in this group  How do you close temporary accounts? o Transfer the effects of revenues, expenses, and dividends into the Retained Earnings t- account o In order to move revenues and expenses, you need to make a new t-account called the income summary  Dividends DO NOT go into the income summary- you transfer these directly to the Retained Earnings t-account o Steps  Close revenues to Income Summary  Close expenses to Income Summary  Now the Income Summary balance is the Net Income for that period  Close Income Summary to Retained Earnings  Close Dividends to Retained Earnings  Notice that dividends does not get closed through the Income Summary- it goes directly to the Retained Earnings account Final Notes on the Accounting Cycle  In between Adjusting the Accounts (step 5) and Preparing the Financial Statements (step 6), add the step "preparing the adjusted trial balance"  Steps 1-3 are repeated many times during an accounting period  Steps 4-7 are only completed once per period- always at the end of the period Using a Worksheet to Prepare Financial Statements  We went over an example of what a worksheet looks like  We will not have to do any work or answer any questions regarding a worksheet Chapter 4 Internal Control and Cash  Cash accounts  Most important asset any company has  Internal control makes sure everything is efficient and reliable Internal Control  System of policies and procedures that a company puts in place to provide reasonable assurance that: o The company is complying with applicable laws and regulations o Company financial reporting is reliable o Company operations are effective and efficient  Internal control helps a company protect its assets SOX and COSO  Sarbanes Oxley Act- SOX o Companies need some sort of regulation and rules so that unethical behaviors do not occur o Publically traded companies need to have a system for internal control  COSO o Report by congress; companies usually use this as the basis for their rules to company to the SOX What do Internal Control Reports Include? 1. A statement of management's responsibility to establish and maintain internal controls 2. An assessment of the effectiveness of the internal controls o Always by a third party auditor o Keeps the company ethical Elements of Internal Control  Control Environment o How members of a company or organization conduct activities and responsibilities o Every company has a different control environment- different attitudes for employees and management o Factors that Affect Control Environments  Integrity an ethical values of personnel  Thorough background check = minimizes riskof hiring them  Possible drug testing  Management's philosophy and operating style  How the office dresses  Ability to work at home? Or only in office?  Assignment of authority and responsibility  When you get hired- make sure you know exactly what you are supposed to do- when is the assignment due?  General structure of an organization  Large corporations may have many layers of management o Without a sound control environment, the remaining elements of internal control suffer  Risk Assessment o Assessing certain risks and avoiding them as much as possible o External: competition, customer expectations, natural disasters o Internal: bad employee training, errors in the financial reports, theft of assets and such by employees, breakdown in background checks o Process of Risk Analysis  Estimate the significance of a risk  Assess the likelihood of the risk occurring  Consider what actions should be taken to manage the risk  Control Activities o Policies and procedures established to address any risks that may threaten the achievement of organizations and what they are trying to accomplish o Activities Establishing responsibility- every employee needs to know their duties   Maintaining adequate documentation- all accounting records need to be documented; pre-numbering checks; keeping evidence of purchases  Segregation of duties- no one person should prepare the documents and records for one activity; multiple employees should be used to complete a task; one person on a task increases the likelihood of fraud  Physical security of assets and records- have more than one person and each responsibility  Independent verification- independent auditor  Information and Communication o Information should be able to flow freely throughout an organization o Communication in a timely manner and in an appropriate manner  This helps to solve any problems that may arise quickly and efficiently o Communication with management is key  Monitoring o Tracking potential and actual problems o Assess the quality of the company's internal control system o Approaches  Ongoing activities- by managers on a daily basis  Separate evaluation- by the required audit of the internal control system  Third party audit helps achieve this Internal Control Limitations  Human element- good job hiring; thorough background check  Cost-benefit analysis Reporting Cash and Cash Equivalents  Definition of cash- you deposit into the bank and it is ready to use o Coins, bills, checking and saving accounts, money orders, travelers checks  Equivalents to cash- any investment that can be converted into an amount of cash and has an original maturity of three or less months o Treasury bills, certificates of deposit, money market accounts Cash Controls  Cash is very easily taken…  Cash over and short accounts  Petty cash funds  Bank reconciliations o Timing difference occur between banks records and a company's records o Example- if we write a check today, we credit the cash account- but it will take a couple days for the bank to clear the check o Fees/service charges- order new checks, internet banking, your account drops below a certain amount; interest is earned o Reconcile the company's book balance- cash balance: make journal entries for the fees or gained money that was not accounted for yet o Simplified! 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 Terms Associated with Bank Reconciliations  Credit memorandum- an addition on the bank statement for things like interest or receivables from customers (but no journal entry has been made yet)  Debit memorandum- a deduction on the bank statement for things like service charges  Deposit in transit- deposit made, but the money does not appear on the bank statement yet  Outstanding check- check is cut, but has not been cleared yet by the bank  NSE (nonsufficient funds) check- nonsufficient funds; deductions made on the bank statement because a customer's check bounces  Simplified! o Accounts already recorded by the bank and not yet by the company  Credit Memorandums  Debit Memorandums  NSF checks o Accounts already recorded by the company and not yet by the bank  Deposit in Transit  Outstanding Checks


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