Accounting Study Guide Chapter 1 Three Accounting Activities Identification transactions Recording record classify and summarize Communication prepare accounting reports Internal and External Users Internal people inside a company who plan organize and run the business marketing managers production supervisors finance directors and company officers External individuals outside of a company who want financial information investors creditors taxing authorities regulators Ethics and Principles behavior Sarbanes Oxley Act 2002 law passed intended to reduce unethical corporate Generally Accepted Accounting Principles GAAP common set of standards that are accepted and practiced universally SEC agency that oversees US financial markets PCAOB determines auditing standards and reviews auditing firms FASB primary accounting standard setting body in the US IASB international accounting standards in countries other than the US Measurement Principles and Assumptions Cost Principle dictates that companies record assets at their cost Fair Value Principle indicates that assets and liabilities should be reported at the price received to sell an asset or settle a liability Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in money terms Economics Entity Assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities Basic Accounting Equation Assets Liabilities Financial Statements Common Stock Stockholders Equity Retained Earnings Revenues Expenses Dividends Income Statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time Retained Earnings Statement summarizes the changes in retained earnings for a specific period of time Balance Sheet reports the assets liabilities and stockholder s equity at a specific date Statement of Cash Flow summarizes information concerning receipts and payments for a period of time Crediting and Debiting Chapter 2 Debit left side of T account shows gains increases assets decreases liabilities Credit right side of T account shows loss decreases assets increases liabilities Debit balance debits exceed credits Credit balance credits exceed debits Journal Ledger Posting and Trial Balance Journal accounting record in which transactions are recorded in chronological order Discloses in one place the complete effects of a transaction It provides a chronological record Helps to prevent or locate errors because entries are easily compared Ledger contains all the asset liability and stockholders equity Provides balances in various accounts Posting transferring journal entries to the ledger Trial Balance list of accounts and their balances at a given time Checks that debit equals credit after posting Limitations does not prove that the company has recorded all transactions OR that the ledger is correct Timing Issues Chapter 3 Fiscal Year one year in length starting at any date Interim Periods monthly or quarterly artificial time periods Accrual Basis Accounting companies record transactions that change a company s financial statement in the period in which the event occurs recognizes revenue when earned rather than received recognizes expenses when incurred rather than paid Cash Basis Accounting companies record revenue when they receive cash and record an expense when they pay out cash not in accordance to GAAP Revenue Recognition Principle dictates that companies receive revenue in the accounting period in which it is earned Expense Recognition Principle dictates that expenses be matched with revenues Adjusting Entries Deferrals Prepaid Expenses expenses paid in cash and recorded as assets before they are used or consumed expire over time rent or insurance expire through use supplies revenue is earned rent magazine subscriptions airfare Unearned Revenues cash received and recorded as liabilities before the Accruals recorded Accrued Revenues revenues earned but not yet received in cash or Accrued Expenses expenses incurred but not yet paid or recorded interest rent taxes salaries Adjusted Trial Balance and Financial Statements Adjusted Trial Balance proves the equality of the total debit balances and the total credit balances of the ledger after all adjustments Companies can prepare financial statements directly from the adjusted trial balance Chapter 4 Using a Worksheet Worksheet multiple column form used in the adjustment process and in preparing financial statements optional use not a permanent record Contains trial balance adjustments adjusted trial balance income statement and balance sheet Closing the Books Closing the Books getting ready for the next period Temporary Accounts relate only to a given accounting period include income statements and dividends account Permanent Accounts relate to one or more future accounting periods include all balance sheet accounts carries these accounts into the next period Steps in Closing the Books close revenues to income summary close expenses to income summary close income summary to retained earnings close dividends to retained earnings Post Trial Balance lists permanent accounts and their balances after journalizing and posting closing entries Accounting Life Cycle 1 Analyze business transactions 2 Journalize transactions 3 Post to ledger 4 Prepare trial balance 5 Journalize and post adjusting entries 6 Prepare adjusted trial balance 7 Prepare financial statements 8 Journalize and post closing entries 9 Prepare a post closing trial balance REPEAT Classified Balance Sheet Current Assets assets a company expects to convert to cash within one year cash short term investments accounts receivable inventories prepaid Long Term Investments held for long periods of time expenses stocks bonds etc Property Plant and Equipment assets with relatively long useful lives that a company is currently using land buildings machinery etc Intangible Assets assets with no substance that are very valuable trademarks goodwill franchises etc Current Liabilities obligations a company is to pay in the coming year notes and accounts receivable taxes debts Long Term Liabilities obligations to pay after one year long term debt deferred tax etc Stockholders Equity retained earnings common stock