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127 Cards in this Set

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Accounting
information system that
identifies, records, and communicates
the economic events (transactions)
of an organization to interested users
A business owned by one person?
proprietorship
A business owned by two or more persons associated as partners
partnership
A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock?
corporation
Stockholders’ equity is referred to as:
Residual Equity
There are two general categories of stockholders’ equity:
PAID-IN CAPITAL & RETAINED EARNINGS
Paid in Capital represents
the total amount invested by stockholders in a corporation
Stockholders invest cash or other assets in exchange for
common or preferred stock.
Retained earnings represents
cumulative profits (or losses) retained in the business over time
3 items make up the balance in retained earnings
REVENUES, EXPENSES, DIVIDENDS
Revenues
usually increase in an asset
Expenses
decreases in stockholders’ equity that result from operating the business. They are the cost of assets consumed or services used in the process of earning revenue
When a company is successful
Net Income
Dividends
the distribution of cash or other assets to stockholders that are available as a result of Net Income.
Dividends are NOT
an expense of the corporation
Internal users
Marketing managers
Production supervisors
Finance directors
Company officers
External Users
Investors
Creditors
Tax authorities
Regulatory agencies
Customers
Labor unions
ETHICS:
A set of standards by
which one’s actions are
deemed right or wrong,
honest or dishonest.
Steps for solving an ethical dilemma:
1.Recognize an ethical situation and the issues involved.
2.Identify the principal elements of the situation
3.Identify alternatives: weigh the impact on stakeholders
What is GAAP?
A set of standards generally accepted and universally practiced by accountants
1. Indicates how economic events are reported
2. Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)
BASIC ACCOUNT ASSUMPTIONS:
1) MONETARY UNIT
ASSUMPTION
2) ECONOMIC ENTITY
ASSUMPTION
MONETARY UNIT
ASSUMPTION
Only transaction data
that can be expressed
in terms of money
is included in the
accounting records.

The unit of measure
(the dollar in the USA)
is assumed to remain
constant in value
ECONOMIC ENTITY
ASSUMPTION
An economic entity
includes any organization
or unit in society.

All activities of an
entity are kept separate
from the activities
of its owners and
other economic entities.
ASSETS:
resources
owned by
a business
LIABILITIES:
claims
against
those
assets
STOCKHOLDER’S EQUITY:
owners’
residual
claim on
total assets
SUMMARY OF BASIC FINANCIAL STATEMENTS:
BALANCE SHEET, STATEMENT OF CASH FLOWS, INCOME STATEMENT, STATEMENT OF STOCKHOLDER’S EQUITY
Debit
Left
Credit
Right
When the debit amounts exceed the credits
an account has a debit balance; when the reverse is true, the account has a credit balance.
DOUBLE-ENTRY SYSTEM
equal debits and credits are made in the accounts for each transaction. Thus, the accounting equation will always stay in balance.
DEBIT:
INCREASE ASSETS, DECREASE LIABILITIES
CREDIT:
DECREASE ASSETS, INCREASE LIABILITIES
Which accounts below are decreased by debits?
• Inventory
• Accounts Payable
• Dividends
• Cash
• Notes payable
ACCOUNTS PAYABLE, NOTES PAYABLE
Both are liabilities, which are increased by credits and decreased by debits
NORMAL BALANCE:
ASSETS:
INCREASE DEBIT (NORMAL BALANCE), DECREASE CREDIT
NORMAL BALANCE:
LIABILITIES:
DECREASE DEBIT, INCREASE CREDIT (NORMAL BALANCE)
NORMAL BALANCE:
COMMON STOCK/RETAINED EARNINGS:
DEBITS DECREASE EQUITY
CREDITS INCREASE EQUITY
NORMAL BALANCE:
DIVIDENDS:
INCREASE DEBIT (NORMAL BALANCE)
DECREASE DEBIT
NORMAL BALANCE:
REVENUE:
DEBITS: DECREASE REVENUE, INCREASE EXPENSES
CREDITS: INCREASE REVENUES, DECREASE EXPENSES
RECORDING PROCESS:
1)ANALYZE EACH TRANSACTION
2)ENTER TRANSACTIONS IN A JOURNAL
3)TRANSER JOURNAL INFO TO THE FUCKING LEDGERS
JOURNALS:
Transactions are initially recorded in chronological order in a journal before being transferred to the accounts.
The journal records
records the complete effect of each transactions, making errors easy to locate
Every company
HAS A GENERAL FUCKING JOURNAL WHICH CONTAINS:
1. Transaction dates
2. Account titles
3. References
4. Two amount columns
If an entry involves only two accounts
one debit and one credit, it is considered a simple entry.
When three or more accounts are required in one journal entry
compound entry
The general ledger contains
all the assets, liabilities, and stockholders’ equity accounts for a given company
In the ledger
enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
Most companies have a chart of accounts
that lists the accounts and the account numbers which identify their location in the ledger.
The total debits
must equal the total credits.
The time period assumption
assumes that the economic life of a business can be divided into artificial time periods.
Accounting time periods are generally
a month, a quarter, or a year (fiscal year)
The revenue recognition principle
dictates that revenue be recognized in the accounting period in which it is earned.
In a service business, revenue is considered
to be earned when the service is performed.
The practice of expense recognition
is referred to as the matching principle
The matching principle dictates
that efforts (expenses) be matched with accomplishments (revenues).
Adjusting entries are needed to
ensure that revenue recognition and matching principles are followed
Revenues are recorded
in the period earned
Expenses are recognized
in the period incurred.
Trial Balance is
the starting place for adjusting entries
Adjusting entries for prepayments are required to
record the portion of the prepayment representing:

1 the expense incurred, or
2 the revenue earned in the current period.
The adjusting entry results
in a debit to an expense
account and a credit to an asset account.
Depreciation is the
allocation of the cost of an asset to expense over its useful life.
Depreciation is an
estimate of expired cost
Depreciation Expense
is debited and a contra-asset account
Accumulated Depreciation
is credited
Cost – accumulated depreciation
= book value
Adjusting entries for accruals are required to
record revenues earned and expenses incurred in the current period.
adjusting entry for accruals will
increase both a balance sheet and an income statement account.
An Adjusted Trial Balance is
prepared after all adjusting entries have been journalized and posted. Its purpose is to prove the equality of the total debit and credit balances in the ledger after all adjustments have been made
Revenues are recorded
in the period earned
Expenses are recognized
in the period incurred.
Trial Balance is
the starting place for adjusting entries
Adjusting entries for prepayments are required to
record the portion of the prepayment representing:

1 the expense incurred, or
2 the revenue earned in the current period.
The adjusting entry results
in a debit to an expense
account and a credit to an asset account.
Depreciation is the
allocation of the cost of an asset to expense over its useful life.
Depreciation is an
estimate of expired cost
Depreciation Expense
is debited and a contra-asset account
Accumulated Depreciation
is credited
Cost – accumulated depreciation
= book value
Adjusting entries for accruals are required to
record revenues earned and expenses incurred in the current period.
adjusting entry for accruals will
increase both a balance sheet and an income statement account.
An Adjusted Trial Balance is
prepared after all adjusting entries have been journalized and posted. Its purpose is to prove the equality of the total debit and credit balances in the ledger after all adjustments have been made
Financial statements can be prepared
directly from the adjusted trial balance.
The income statement is prepared
from the revenue and expense accounts.
The retained earnings statement is prepared
from the revenue, expense, dividends, and retained earnings accounts.
The balance sheet is prepared from
asset and liability and stockholders equity accounts.
Instead of debiting an asset at the time an expense is prepaid
the amount is charged to an expense account.
Instead of crediting a liability at the time cash is received in advance of earning it
amount is credited to a revenue account.
This treatment of prepaid expenses and unearned revenues will ultimately result in the same effect on the
financial statements
Revenue-Recognition Principle:
Revenue recognized in
the accounting period in
which it is earned
Time-Period Assumption:
Economic life of business
can be divided into
artificial time periods
Matching Principle:
Expenses matched with revenues
in the same period when efforts are expended to generate revenues
Adjusting entries are required
each time financial statements are prepared
Two main categories of adjustments are:
1)PREPAYMENTS
2)ACCRUALS
Prepaid Expenses
Expenses are paid
and recorded as assets
before they are
used or consumed

Example:
Prepaid Insurance
Unearned Revenues
Cash received and
recorded as liabilities
before revenue is earned

Example:
Cash received for
services provided in future
Accrued Revenues
Revenues earned but
Not yet received
In cash or recorded

Example:
Sales of merchandise
On account
Accrued Expenses
Expenses incurred
but not yet paid
in cash or recorded

Example:
Utilities used but
not yet paid for
A work sheet is
a multiple-column form that may be used in the adjustment process and in preparing financial statements.
Adjustments are
journalized and posted from the work sheet after financial statements are prepared.
STEPS IN PREPARING A WORKSHEET
1 Prepare a trial balance on the worksheet
2 Enter the adjustments in the adjustments columns
3 Enter adjusted balances in the adjusted trial balance columns
4 Extend adjusted trial balance amounts to the F/S columns
5 Total F/S columns, compute net income or loss, and complete the worksheet
The income statement is prepared from
the income statement columns of the work sheet.
The owner’s equity statement is prepared from
the balance sheet columns of the work sheet.
The balance sheet is prepared
from the balance sheet columns of the work sheet.
Closing entries transfer
net income/loss
and dividends to retained earnings.
Journalizing and posting closing entries
is a required step in the accounting cycle
A temporary account, Income Summary,
is used in closing revenue and expense accounts.
TEMPORARY (NOMINAL):
These accounts are closed , all revenue accounts, all expense accounts, Dividends
PERMANENT (REAL):
These accounts are not closed, all asset accounts, all liability accounts, Equity accounts
CLOSING PROCESS CORPORATION:
1 Debit each revenue account for its balance, and credit Income Summary for total revenues.
2 Debit Income Summary for total expenses, and credit each expense account for its balance.
3 Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss).
4 Debit retained earnings for the balance in the dividends account and credit dividends for the same amount.
Which of the following accounts will have a zero balance
after the closing process?
1. Unearned Revenue
2. Advertising Supplies
3. Prepaid Insurance
4. Rent Expense
Rent Expense is a temporary account.
All temporary accounts are closed and thus
have a zero balance after the closing process.
All temporary accounts
have zero balances
The balance in retained earnings represents
the accumulated undistributed earnings at the end of the accounting period.
The income summary account is used only
in the closing process. No entries are journalized or posted to this account during the year.
The post-closing trial balance is prepared
from the permanent accounts in the ledger.
The post-closing trial balance provides evidence that
the journalizing and posting of closing entries has been properly completed.
STEPS IN THE ACCOUNTING CYCLE:
1 Analyze transactions
2 Journalize transactions
3 Post to ledger
4 Prepare trial balance
5 Journalize & post adjustments
6 Prepare adjusted trial balance
7 Prepare financial statements
8 Journalize & post closing entries
9 Prepare post-closing trial balance
Errors that occur in recording transactions should
be corrected as soon as they are discovered by preparing correcting entries.
CLASSIFIED BALANCE SHEET
ASSETS:
Current assets, Long-term investments, Property, plant & equipment, Intangible assets
CLASSIFIED BALANCE SHEET
LIABILITIES &
STOCKHOLDERS EQUITY:
Current liabilities, Long-term liabilities, Stockholder’s Equity
CURRENT ASSETS
are cash and other resources expected to be realized in cash, sold, or consumed within one year of the balance sheet date or the company’s operating cycle, whichever is longer.
Listed on B/S in order of liquidity
Examples: CASH, INVENTORY, ACCOUNTS RECEIVABLE
LONG-TERM INVESTMENTS
are resources that can be converted to cash
Conversion is not expected within one year or the operating cycle, whichever is longer.
Examples: BOND INVESTMENTS, LONG-TERM RECEIVABLES, LAND HELD FOR RESALE
PROPERTY, PLANT & EQUIPMENT
Tangible resources of a relatively permanent nature used in the business and not intended for sale are classified as property, plant, and equipment.
Examples: Buildings, Machinery, Equipment
INTANGIBLE ASSETS
are non-current resources lacking physical substance.
Examples:
• Patents
• Trademarks
• Copyrights
CURRENT LIABILITIES
are Obligations expected to be
paid from existing current assets, or by creation of another current liability, within one year/operating cycle, whichever is longer.
Examples:
Accounts Payable
Interest Payable
Wages Payable
LONG-TERM LIABILITIES
Obligations expected to be paid after one year.
Examples:
Long term notes payable
Bonds payable
Mortgages payable
Lease obligations
STOCKHOLDERS’ EQUITY
The content of the owner’s equity section varies with the form of business organization.
Proprietorship  Owner’s capital
Corporation  Common Stock, Retained Earnings
Partnership --> Partner 1, Partner 2