Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
127 Cards in this Set
- Front
- Back
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 |