Accounting 1 Basu study guide Exam 1 Chapter 1 Assets Liabilities Equity basic accounting equation Assets are the resources owned by a business these include cash accounts receivable equipment store supplies buildings land notes receivable Liabilities are the rights of creditors debts of the business and include accounts payable taxes payable interest payable wages payable and notes payable For a corporation the rights of the owners are called stockholder s equity for a proprietorship partnership or limited liability company the rights of the owners are called owner s equity These include contributed capital and retained earnings for a corporation o Stockholder s equity will increase from revenues and investments by stockholders o Stockholder s equity will decrease from expenses and dividends to stockholders o Revenues are resources generated by a business through selling of products or providing services o Expenses are the costs of generating revenues They could be resources that have been or they could increase the liabilities for the business o Dividends are the distribution of cash or other assets to stockholders Dividends reduce retained earnings However dividends are not an expense o Stockholder s equity Common stock dividends revenues expenses dividends revenues expenses retained earnings The income statement describes a company s revenues and expenses along with the resulting net income or loss over a period of time due Ratio of liabilities to stockholders equity total liabilities total to earnings activities stockholders equity Chapter 2 Account record of increases and decreases in a specific asset liability General Ledger record containing all the accounts by the accounting T accounts represents a ledger account and is used to understand the equity revenue or expense item system used by a company effects of one or more transactions o Debit left o Credit right o Chart of Accounts list of all accounts that includes an identifying number for each account o Typically Expenses Assets and dividends all run a debit balance Owner s Equity liabilities revenues run a credit balance DEAD COLR All journal entries have at least one debit and one credit Total value of debits must always equal total value of credits o Accountants divide the economic life of a business into months quarters or years o Companies match expenses with revenues in the period when the company makes efforts to generate those revenues o Cash basis accounting recognizes revenues and expenses at the time physical cash is actually received or paid out Chapter 3 Ex Say a 3 year insurance policy is purchased on 1 1 2013 the entire policy would immediately be recognized as an insurance expense and would not be recognized in any of the remaining 35 months Accrual basis of accounting recognizes the expense with the periods by whatever is acquired Adjusting process The analysis and updating of accounts at the end of the period before the financial statements Adjusting entries Are journal entries that bring the accounts up to date at the end of the accounting period Are needed to ensure that the revenue recognition and matching principle are followed Make it possible to report correct amounts on the balance sheet and on the income statement Are mandatory every time financial statements are prepared An adjusting entry is recorded to bring an asset or liability account balance to its proper amount Two main types of adjusting entries o Deferrals Prepaid expenses Expenses paid in cash and recorded as assets before they are used or consumed To correct a prepaid expense increase an expense account debits and decrease an asset account credits Unearned revenues Revenues received in cash and recorded as liabilities before they are earned To correct unearned revenue decrease a liability account debit increase a revenue account credit Accruals cash or recorded Accrued Revenues revenues earned but not yet received in To correct an accrued revenue increase an asset account debit increase a revenue account credit Accrued expenses expenses incurred but not yet paid in cash or recorded To correct accrued expenses increase an expense account debit and increase a liability credit Each adjusting entry always involves at least one Balance Sheet account asset liability and one Income Statement account revenue expense Never involve cash period trial balance Adjusting entries generally made at the end of the accounting Financial statements are prepared directly from the adjusted
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