Accounting Study GuideChapter 1Three Accounting ActivitiesIdentification - transactionsRecording - record, classify, and summarizeCommunication - prepare accounting reportsInternal and External UsersInternal - 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 Sarbanes-Oxley Act (2002) - law passed intended to reduce unethical corporate behaviorGenerally Accepted Accounting Principles (GAAP) - common set of standards that are accepted and practiced universallySEC - agency that oversees US financial markets PCAOB - determines auditing standards and reviews auditing firmsFASB - primary accounting standard-setting body in the USIASB - international accounting standards in countries other than the USMeasurement Principles and AssumptionsCost Principle - dictates that companies record assets at their costFair 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 entitiesBasic Accounting Equation Assets = Liabilities + Stockholders Equity (Common Stock + Retained Earnings) (Revenues - Expenses - Dividends)Financial StatementsIncome Statement - presents the revenues and expenses and resulting net income or net loss of a company for a specific period of timeRetained Earnings Statement - summarizes the changes in retained earnings for a specific period of timeBalance Sheet - reports the assets, liabilities, and stockholder’s equity at a specificdateStatement of Cash Flow - summarizes information concerning receipts and payments for a period of timeChapter 2Crediting and DebitingDebit - left side of T account, shows gains, increases assets, decreases liabilitiesCredit - right side of T account, shows loss, decreases assets, increases liabilities Debit balance - debits exceed creditsCredit balance - credits exceed debitsJournal, Ledger, Posting, and Trial BalanceJournal - 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 comparedLedger - 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 correctChapter 3Timing IssuesFiscal Year - one year in length, starting at any dateInterim 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 paidCash-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 revenuesAdjusting EntriesDeferrals - 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)- Unearned Revenues - cash received and recorded as liabilities before the revenue is earned- rent, magazine subscriptions, airfareAccruals - Accrued Revenues - revenues earned but not yet received in cash or recorded- Accrued Expenses - expenses incurred but not yet paid or recorded- interest, rent, taxes, salariesAdjusted Trial Balance and Financial StatementsAdjusted 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 balanceChapter 4Using a WorksheetWorksheet - 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 sheetClosing the BooksClosing the Books - getting ready for the next periodTemporary Accounts - relate only to a given accounting period- include income statements and dividends accountPermanent Accounts - relate to one or more future accounting periods- include all balance sheet accounts- carries these accounts into the next periodSteps in Closing the Books- close revenues to income summary- close expenses to income summary- close income summary to retained earnings- close dividends to retained earningsPost Trial Balance - lists permanent accounts and their balances after journalizing and posting closing entries Accounting Life Cycle1. Analyze business transactions2. Journalize transactions3. Post to ledger4. Prepare trial balance5. Journalize and post adjusting entries6. Prepare adjusted trial balance7. Prepare financial statements8. Journalize and post closing entries9. Prepare a post closing trial balanceREPEATClassified Balance SheetCurrent Assets - assets a company expects to convert to cash within one year- cash, short term investments, accounts receivable, inventories, prepaid expensesLong Term Investments - held for long periods of time- 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, debtsLong-Term Liabilities - obligations to pay after one year- long term debt, deferred tax, etc.Stockholders Equity -