ACC 131 Seipp Week 3 Lecture Notes: 8/31-9/4
ACC 131 Seipp Week 3 Lecture Notes: 8/31-9/4 ACC 131
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This 6 page Class Notes was uploaded by Daniel Hemenway on Monday September 7, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 38 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 09/07/15
ACC 131 Seipp 83194 Chapter 2 The Accounting Information System Fundamental Concepts When reviewing the financial statements of a company you are assessing its performance cash flows and financial position Accounting Cycle A simple and orderly process based on a series of steps and conventions Conceptual Framework GAAP Qualitative Characteristics Assumptions Principles Qualitative Characteristics of Useful Information There are two fundamental characteristics that useful information should possess Relevance Information the company provides must be relevant allows people to make informed decisions and predict future events about the company Faithful Representation Information representing the financial status and being of the company Information should be complete including all necessary information for the user to understand where the company stands and is error free Four Enhancing Characteristics Comparability Comparable information allows people to identify similarities and differences between two or more items Consistency can be achieved by a company applying the same accounting principles for the same items over time Verifiability The information presented is verifiable when independent parties can reach a consensus on the measurement of the activity Timeliness Information is timely if it is available to users before it loses its ability to influence decisions up to daterecent Understandability If users have reasonable knowledge of accounting and business can comprehend the meaning of the information it is considered understandable Cost Constraint States that the benefit received from accounting information should be greater than the cost of providing that information If the cost exceeds the benefit the information is not considered useful ACC 131 Seipp 83194 Assumptions Four basic assumptions underlie accounting Economic Entity Assumption Assumption that each company is accounted for separately from its owners Continuity or GoingConcern Assumption Assumes that a company will continue to operate long enough to carry out its existing commitments Time Period Assumption Allows the life of a company to be divided into artificial time periods so that net income can be measured for a specific period of time ie monthly quarterly annually Monetary Unit Assumption Requires that a company account for and report its financial results in monetary terms Principles General approaches that are used in the measurement and recording of business activities The four basic principles of accounting include Historical Cost Principle Requires that the activities of a company are initially measured at their cost the exchange price at the time the activity happened Revenue Recognition Principle Used to determine when revenue is recorded and reported Matching Principle Requires that an expense be recorded and reported in the same period as the revenue that it helped generate Cost incurred to generate revenue Conservatism Principle States that accountants should take care to avoid overstating assets or income when they prepare financial statements Don t show more than what the company has earned Better to understate than overstate the company ACC 131 Seipp 83194 Measuring Business Activities The Accounting Cycle Step 1 Analyze Transactions Step 2 Journalize Transactions Step 7 Close the Accounts Step 6 Prepare Step 3 Post Financial to the Ledger Statements Step 4 Prepare a Trail Balance Step 5 Adjust the Accounts Economic Events Economic Events Activities that all affect the company and are categorized as either financing investing or operating Can be external the company and an outside entity or internal or due to the company s own actions In order to be recorded items in the event must impact a financial statement element and provide a faithful representation Expanded Accounting Equation Assets Liabilities Stockholders Equity A Assets Liabilities Contributed Capital Retained Earnings A Beginning Assets Liabilities Contributed Capital Retained Revenues Expenses Dividends Earnings ACC 131 Seipp 83194 0 Step 1 Analyze Transactions Transaction Analysis Process of determining the economic effects of transaction on the elements of the accounting equation 0 Involves three steps Write down accounting equation Identify the financial statement elements that are affected by the transaction Determine whether the elements increased or decreased DoubleEntry Accounting The system used by companies to record the effects of transactions on the accounting equation 0 The effects of transactions are recorded in the accounts 0 Each transaction affects at least two accounts Accounts 0 Account A record of increases and decreases in each of the basic elements of the financial statements 0 Chart of Accounts The list of accounts used by the company TAccount A frequently used way of analyzing transactions 0 The left side is referred to as the debitlDRl side and the right side is referred to as the credithRl side Debit and Credit Procedures 0 Three steps to determine how balance sheet accounts increase or decrease Draw a Taccount and label each side either debit or credit Determine the normal balance of an account Increases or decreases to an account are based on the normal balance of the account Normal Balances of Contributed Capital and Retained Earnings Stockholders equity accounts both contributed capital and retained earnings have normal credit balances 0 Normal balance is always an increase size Debit assets are normally here Decrease in cash credit it More obligation credit it ACC 131 Deb DR Seipp 83194 U mmmzrn39oxl39l39l 39 Credit CR m IrnmmJgt lt I cpm rnczrnltrnm mUZquotquot39Ult U3l39l39l Il wjgt Step 2 Journalize Transaction Journal A chronological record showing the debit and credit effects of transactions on a company Journal Entry Represents each transaction so that the entire effect of a transaction is contained in one place Example Date Mar 1 Three parts of a journal entry Date of transaction Accounts and amounts to be increased or decreased A brief explanation of the transaction Sometimes more than two accounts may be affected by an economic event If this happens a compound journal entry that affects more than two accounts is made Account and Explanation Debit Credit Truck 20000 Cash 3000 Notes Payable 17000 Purchased Delivery Truck ACC 131 Seipp 83194 Step 3 Post to the Ledger Helps keep track of the balances of specific accounts General Ledger A collection of all the individual financial statement accounts that a company uses Posting The process of transferring the information from the journalized transaction to the general ledger Step 4 Prepare a Trial Balance Trial Balance A list of all active accounts and each account s debit or credit balance The accounts are listed in the order they appear in the ledgerassets first then liabilities stockholders equity revenues and expenses A trial balance whose debits equal credits does not mean that all transactions were recorded correctly Will not detect errors of analysis or amounts It will only prove the equality of debits and credits
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