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Management 1A- Chapter 3

by: Daniel Ochs

Management 1A- Chapter 3 Management 1A

Daniel Ochs

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Chapter 3 notes
Principles of Accounting
D.S. Litt
Class Notes
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This 4 page Class Notes was uploaded by Daniel Ochs on Thursday April 14, 2016. The Class Notes belongs to Management 1A at University of California - Los Angeles taught by D.S. Litt in Spring 2016. Since its upload, it has received 12 views. For similar materials see Principles of Accounting in Business, management at University of California - Los Angeles.

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Date Created: 04/14/16
Thursday, April 14, 2016 Management 1A Chapter 3 [Page 117- Page 143] - 1031 Exchange: IRS Rule where you do not have to pay taxes on properties Exchange of certain types of property may defer the recognition of capital gains or • losses due upon sale, and hence defer any capital gains taxes otherwise due - Accounting Assumptions • Monetary Unit: usually the national currency of reporting company Economic Entity: a business is an economic unit separate and distinct from its • owner • Time Period: Information is reported in a company’s financial statements at least on an annual basis • Going Concern (Continuity): companies will operate indefinitely - Accounting Principles [Page 118] • Accrual Accounting: gives you better picture of performance - Recognizing revenue at the point of sale, not necessarily when we get the cash - Revenues should be recognized when: realization has taken place • • usually at the time of scale • recognize revenue when earned, measurable, and collectable - Cash accounting is easier - Realization: process of converting non-cash resources into cash or rights to cash • Matching: to determine the income of a company for an accounting period, the total expenses involved in obtaining the revenue of the period must be computed and matched against the revenues recorded in the period • Full Disclosure: circumstances and events that make a difference to financial statement users should be disclosed 1 Thursday, April 14, 2016 - Any information that could influences the actions of a decision maker must be disclosed: Investors, Bank, Government, Management • Historical Cost: acquisition of goods or services into accounting records at their exchange price - Accounting Constraints [Page 119] • Materiality: any item that is likely to influence the decision of a reasonable investor or creditor • Conservatism: overstate assets and income and understate liabilities and expenses • Time Period Assumption: assumption that the economic life of business can be divided into artificial time periods • Recognizing Revenues and Expenses: revenue is recognized in the accounting period in which its earned • Basics of Adjusting Entries: accounting systems are designed to collect, process, and report financial information - Adjusting Entries [Page 121] End-of-period adjustments that reflect timing differences caused by accrual • accounting • Involve recognition of revenues / expenses with no exchange • Do not involve cash • When a company is making financial statements • Required to record things that affect the financial position of the company not picked up by the accounting system • Types of Adjusting Entries: - Asset Depreciation: adjusting journal entry at end of each year assets book value lowers (most common expense of adjusting entries) - Prepaid Insurance: paying in advance and adjusting entry over time - Accrued Salaries: employees get money at end of pay period - Customers Advances: customers paying in advance (business records as revenue) 2 Thursday, April 14, 2016 - Accrued Interest: company loans money to firm, interest is due at maturity date - Prepayments • Expenses paid in cash and recorded as assets before used or consumed - Depreciation Adjustment • Depreciations: process of allocating the cost of an asset to expense over its useful life • Depreciation cost: computed by dividing the cost of an asset by its useful life • Accumulated depreciation: contra asset account and appears as an offset against the asset account on the balance sheet - Accruals • Accrued Revenues: earned but not yet received in cash or recorded at the statement date • Accrued Expenses: incurred but not yet paid or recorded at the statement date - Preparing the Adjusted Trial Balance • Proves equality of total debit and credit balances - Trial Balance Worksheet • Helps prepare financial statement - Accrual Accounting vs Cash Accounting [Page 126] • Cash Method - Recognize revenue when you receive cash - Recognize expense when you actually pay - Used for personal tax returns • Accrual Method - Recognize revenue when earned, measurable, and collectible - Recognize expense when incurred —> matching - Used for corporations (GAAP) - Preparing a Work Sheet 3 Thursday, April 14, 2016 • Prepare a trial balance on the work sheet • Enter the adjustments • Enter adjusted trial balances • Extend adjusted trial balance amounts to appropriate financial statement columns • Total the statement columns, compute net income / loss, and complete work sheet 4


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