Chapter 01 The purpose of accounting is to identify analyze record bookkeeping and communicate financial statements the economic events of an organization to interested users This information is relevant reliable comparable and helps users make better decisions Only events with direct monetary change are economic events Users of Accounting Information Financial accounting provides external users with financial statements External Users Investors IRS Creditors Customers SEC Labor Unions Managerial Accounting provides information needs for internal decision makers Internal Users Management Finance Human Resources Marketing Financial Statements Balance Sheet Income Statement Statement of Owner s Equity Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced GAAP Generally Accepted Accounting Principles SEC Securities and Exchange Commission Federal Agency to ensure that investors are provided with full and fair information on publicly traded companies FASB Financial Accounting Standards Board Responsible for setting accounting standards for all US companies Not part of the US government IASB International Accounting Standards Board Responsible for issuing international financial reporting standards Measurement Principles of Accounting Cost Principle Accounting information is based on actual cost Land buildings Fair Value Principle Indicates that assets and liabilities should be reported at fair market value sometimes is just an estimate hard to get an accurate value for many things Financial assets Assumptions of Accounting Monetary Unit Assumption Accounting transactions can only be expressed in financial terms Economic Entity Assumption Requires that a business be accounted for separately from other businesses including its owners Forms of Business for profit Entities Based on Ownership Sole Proprietorship owned by one person often small service type businesses owner receives any profits suffers any losses and is personally liable for all debts Partnership Owned by more than one person often retail and service type businesses unlimited personal liability partnership agreement all partners can be liable for one partner s mistake A Limited Liability Corporation LLC prevents this Corporation ownership divided into shares of stock separate legal entity organized under state corporation law limited liability double taxed The Basic Accounting Equation Assets Liabilities Stockholder s Equity Assets Resources owned or controlled by a company Cash Accounts Receivable Vehicles Store Supplies Notes Receivable Land Equipment Buildings Liabilities Creditor s claims on assets Accounts Payable Taxes Payable Notes Payable Wages Payable Stockholder s Equity Owner s claim on assets Common Stock Contributed Capital Retained Earnings Revenue Expenses Dividends Net Income Revenues Expenses Net Loss Net Income Assets Liabilities Common Stock Revenue Expenses Dividends Transactions are a business s economic event recorded by accountants Paid Cash On Account Credit Dividends Expenses are double negatives Income Statement describes a company s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities Revenues Consulting revenue Service revenue Total revenue Expenses Rent expense Utility expense Total expense 1 000 500 1 500 3 500 2 000 5 500 Net Income 4 000 Statement of Retained Earnings Retained Earnings Dec 1 2011 Plus Net Income Less Dividends 0 1 200 500 Retained Earnings December 31 2011 700 Balance Sheet describes a company s financial position at a point in time Assets Liabilities Equity Cash 10 500 Accounts Rec 1 000 Supplies 1 600 Accounts pa Statement of Cash Flows Chapter 02 An account is a record of increases and decreases in a specific asset liability cash accounts rec equipment rent expense etc A ledger is the whole thing with all accounts a collection of accounts A company s size and operations affects the number of accounts needed 6 categories of accounts assets liabilities common stock dividends revenue expenses DEAD COLR Debits left Expenses Assets Dividends Credits right Owner s Equity Liabilities Revenue Debit increase Credit decrease Credit increase Debit decrease Double Entry Accounting System Each transaction must affect 2 or more accounts Debits must credits Debit at least one account credit at least one account Debits before credits Normal balance is the accounts balance on the side that increases the account A T account represents a ledger account and is a tool used to understand the effect of one or more transactions Journalizing and Posting transactions Analyze apply double entry bookkeeping record journal entry post entry to ledger Trial Balance all total balances of each account Account Credits Debits Cash Accounts Rec Supplies Accounts Pay Common Stock Dividends Salaries Expense Consulting Revenue 3000 1500 2000 500 1000 6200 3000 9000 6000 18000 Limitations of a Trial Balance It may balance even when a transaction is not journalized a correct entry is not posted a journal entry is posted twice incorrect accounts are used in journalizing offsetting errors are made Chapter 03 GAAP Time Period Concept Periodicity Assumption Accountants divide the economic life of a business into artificial time periods Generally a month quarter or a year Fiscal year vs calendar year retail doesn t end on Dec 31st Revenue Recognition Principle a company can recognize revenue once they have provided the service or good Customer requests service service performed cash received Date when cash is exchanged doesn t matter Expense Recognition Principle Matching Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues Cash Basis Accounting Not allowed in GAAP Accrual Basis of Accounting Required by GAAP Adjusting Entries need to ensure revenue and expense recognition principles are followed An adjusting entry is recorded to bring an asset or liability account balance to its proper amount Paid or received cash before expense or revenue is recognized Prepaid deferred expenses expenses paid in cash and and recorded as assets before they are used Resources paid for prior to receiving benefits Prepaying rent insurance Debit expense increase Credit asset decrease Unearned deferred revenues revenues received in cash before earned LIABILITY Money received for services not yet performed
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