Understanding Accounting Steps And Financial Statements

Front 1

Shows the resources (assets) and financial obligations (liabilities)
of an organization, along with the amount the owner(s) invested (owner’s equity).

Back 1

Accounting Equation

Assets = Liabilities + Owner’s Equity

Front 2

The process by which an organization produces their financial statements for a given period of time.

Back 2

Accounting Cycle

Front 3

The most comprehensive way of communicating financial information

Back 3

Financial Statements

Front 4

Financial Statements consist of:

Back 4

1) Balance sheet

2) Income statement

3) Cash flow statements

4) Statement of retained earnings

5) Statement of changes in stockholders equity

Front 5

Summarizes the financial position of an
accounting entity over a given time frame as shown by its economic (assets), economic
obligations (liabilities), and equity.

Back 5

Balance sheet

Front 6

Summarizes the results of operations for a given period

Back 6

Income statement

Front 7

Summarizes the impact of an enterprise’s cash flows on its
operating, financing, and investing activities over a given period

Back 7

Cash flow statements

Front 8

Shows the increases and decreases in earnings retained by the company over a given period.

Back 8

Statement of retained earnings

Front 9

Discloses the changes in the separate
stockholders’ equity account of an entity, including investments by distributions of owners during the period.

Back 9

Statement of changes in stockholders equity

Front 10

Are consider the Qualitative Characteristics of Accounting

Back 10

Relevance and Reliability

Front 11

A term applied to the external decision makers who use an organization’s
financial reports.

Back 11

Relevance

Front 12

Relevance is measured by what three aspects of quality:

Back 12

1) Timeliness

2) Predictive value

3) Feedback value

Front 13

Define Timeliness:

Back 13

Timeliness. Accounting information should be made available to external
decision makers before the information loses its ability to influence decisions. Since fresh information always carries more relevance in the world of investing,
timeliness affects relevance

Front 14

Define Predictive value:

Back 14

Predictive value. When armed with accounting information, external decision
makers should be able to have an increased ability to make accurate
predictions about the outcome of future events for the organization.
Accounting information without predictive value leaves decision makers simply guessing.

Front 15

Define Feedback value:

Back 15

Feedback value. Accounting information should also help external decision makers confirm past predictions or in making updates, adjustments, or
corrections to current predictions.

Front 16

This is determined by the ability of an organization’s financial information to be accurate and free from bias.

Back 16

Reliability

Front 17

What are the three factors of quality that reliability must meet?

Back 17

1) Representational faithfulness.

2) Verifiability

3) Neutrality

Front 18

Define Representational faithfulness:

Back 18

Representational faithfulness is also referred to as validity, this aspect of accounting information must help external decision makers understand the value of an organization’s transactions. What may appear to be a positive financial move (acquiring another company, for example) may actually have significant negative consequences (increased debt, decreased liquidity, etc.).
Representational faithfulness must help determine the exact substance of economic figures and transactions, and not just the appearance of those numbers.

Front 19

Define Verifiability:

Back 19

Verifiability. The numbers in the accounting information need to have a verifiable auditing trail back to the original source documents so that accuracy may be tracked. Having secondary/backup documents is part of verifiability.

Front 20

Define Neutrality.

Back 20

Neutrality. This standard of reliability is met if the accounting information is free
from opinions or bias that may sway the investment outcome of an external
decision maker.

Front 21

What are the secondary qualities of accounting information?

Back 21

Comparability and Consistency

Front 22

Ledger use to help determine the current state of accounts.

Back 22

Beginning Ledger

Front 23

The process of journaling transactions, physically writing the entry into a journal of accounts, helps to measure and record the economic impact of transactions

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Journals and Journal entries

Front 24

A trial balance that is made up of simply a list of general ledger accounts (as opposed to subsidiary ledger accounts, which are typically individual accounts of customers, etc.) and their account balances.

Back 24

Unadjusted trial balance

Front 25

The list of accounts in order used for the Unadjusted trial balance.

Back 25

Assets, liabilities, owner’s equity, and temporary accounts.

Front 26

These statements are produced monthly, quarterly, or annually. They signify one cycle/period of accounting is to provide useful information to decision makers.

Back 26

Financial Statements

Front 27

What is the purpose of the unadjusted trial balance?

Back 27

The unadjusted trial balance is to provide for an easy means to check
that the sum of debits equals the sum of credits.

Front 28

These following permanent accounts are listed in this trial balance: (cash, accounts receivable, notes receivable, inventory, etc.) and have zero balances at this point.

Back 28

Post-Closing Trial Balance

Front 29

This trial balance lists all the account balances that will appear in the financial statements (retained earnings is the exception, because the account balance of retained earnings does not reflect the current year’s net income or dividends).

Back 29

Adjusted trial balance

Front 30

What is the purpose of
the post-closing trial balance:

Back 30

the purpose of the post-closing trail balance is to check the debit-credit balance after the closing
entries are posted.

Front 31

This is the last gate to catch errors in
the accounting cycle.

Back 31

Post-Closing Trial Balance

Front 32

These documents confirm the validity and reliability of accounting information

Back 32

Source Documents

Front 33

Name some examples of source documents:

Back 33

Transaction receipts from expenses, time cards (also called clock cards), lot tickets (which reflect movement of product), and
bills of lading (used to show shipment of products to customers.

Front 34

What is highly recommended to do with source documents?

Back 34

Make backup copies.

Front 35

are compared against the journal entries (which records the date of the activity) and against the general ledger (which records the activity and current state of any account).

Back 35

Source documents

Front 36

Journalizing and posting transactions is simply the process of recording business activity for the purposes of accounting. List theese procedures in there order.

Back 36

1) Enter the date of the transaction.

2) Enter the names of accounts debited (typically put in a section called Account Titles and Description).

3) Enter the names of accounts credited (also in the Account Titles and Description section).

4) Write a brief explanation of the transaction (example: investment of cash, this also goes in the Account Titles and Description section).

5) Enter the amount of debits in the debit column.

6) Enter the amount of credits in the credit column.

7) Create a post reference for the transaction (inventory number, etc.)—LAST
STEP OF JOURNALIZING.

8) Inside general ledger, go to the debit account associated with transaction that is journalized above.

9) Enter date and PR (post reference) number in general ledger.

10) Enter appropriate debit information in both debit columns of general ledger account sheet.

11) Inside general ledger, go to credit account associated with transaction journalized above.

12) Enter the date and PR number in general ledger.

13) Enter the appropriate credit information in both credit columns of general ledger journalized above.

Front 37

What is the purpose of adjusting entries?

Back 37

The process of adjusting entries is to bring entries up to date.

Front 38

If the general ledger shows prepaid rent for the office to be $900, but the balance sheet reveals a $600 balance, then an adjusting entry of $300.
What is the process of making this adjustment?

Back 38

1) Post the transaction (as mentioned above) as a journal under the description of
Adjusted Entries (in the Account Titles and Description portion).

2) In the general ledger, go to the debit account associated with the transaction (in this case) "Prepaid Rent".

3) CREDIT the amount of the adjustment (for this example only the action could be to debit the account under a different example), in this case $300 ($900
prepaid - $600 balance = $300).

4) In the general ledger, go the credit account association with the transaction (in this case) "Rent Expense".

5) DEBIT the amount of the adjustments ($300) to Rent Expense. Repeat this
process for all accounts that need adjusting—Last step of Adjusting!

6) Clear the revenue balance and transfer it to Income Summary. Income Summary is a temporary account in the ledger needed for closing.

7) Clear the individual expense balances and transfer them to Income Summary.

8) Clear the balance in Income Summary and transfer it to Capital.

9) Clear the balance in Withdrawals and transfer it to Capital. In the summary, the process of adjusting entries is the process of updating all journals and general account ledgers. The process of adjusting and closing (clearing accounts) is
necessary for all accounts that have activity during the business period. Preparation of Reconciliations, Financial Statements, and Trial Balances
Reconciliations Account.

Front 39

The process of _________and _______(clearing accounts) is
necessary for all accounts that have activity during the business period

Back 39

adjusting and closing

Front 40

How to Journalize the following Closing Entries

Revenue
Expenses
Income Summary
Withdrawals

Back 40

Revenue and Expenses get transferred into Income Summary

Income Summary and Withdrawals get transferred into Capital