Forms of business types characteristics advantages disadvantages Proprietorship o o o Partnership Sole Proprietorship One person complete liabilities Acorn Alley Arctic Squirrel o More than one owner All animal control o G J Floral o Personal liability o LLC Limited Liability o Can have one or many owners called members o o o o Corporation o o o o o o Does have limited liability Kent Stage Off the wagon Dr Green Bee Issues stock survives after partner dies Own legal identity Raise large sums of cash Formed under state law Standing rock jewelers Campus book and supply Entity assumption Personal Tax is separate from business Franklin stand deli Example Historical cost principle Record purchases at purchase price Scribbles Stable Monetary Unit Assumption No Hyperinflation Assets liabilities equity accounts into the future Assets Economic resources that are expected to produce benefit House store business Car Cash Total assets House Business Cash Car Liabilities Debt that is payable to an outsider What we owe Current versus long term Current Expected to be converted to cash within the next business cycle 12 months Cash Short term investments Accounts and notes receivable Inventory Prepaid expenses Long term Will be longer than 1 yr Property plant and equipment Land building computers equipment Intangibles Long term investments Accounting equation Debt Accounts payable and long term debt Equity Insider claims of a business Stockholders equity shareholders equity capital Owner s equity What we have invested in the business Equity Assets Liabilities Retained Earnings Revenues expenses dividends Net Income Revenues expenses Loss is always is What impacts retained earnings and how to calculate retained earnings How has stockholder equity changed during the year Begins with retained earnings balance Flows from income statement Reports ending retained earnings balance portion of net income the company has kept Account A record of all the changes in a particular asset liability or stockholders equity during the period Date of every transaction Amount Example Cash Trial balance Accounts are listed in random order in a trial balance False Assets Liability Equity Revenue Expense Trial balance is one of a company s major financial statements False Balance Income Statement of retained earnings Cash Flow Why do we use a trial balance Total Debits Total Credits Journal Journal Chronological record of all transactions Journal entry Debit always start with a debit Credit indented Date Accounts and explanation Is cash involved Asset Debit to increase credit to decrease Transaction An event that has a financial impact on a business and can be reliability measured There is always two sides to ever transaction Looking at the side of the business Get give Example Ice cream truck customer gives cash for milkshake Woody s music gives lessons time for cash Journal entries how to write them what is debited credited or increased or decreased Debit credit rules Credits Decrease Assets Expenses Dividends Debits increase Assets Expenses Dividends Credits Increase Debits Decrease o o o o o o o Liabilities Common stock Retained earnings Revenue o o o o o o o Liabilities Common stock Retained earnings Revenues Fraud Intentional misrepresentation of facts Causes injury or other damage to another party Large problem that increases each year 75 percent of companies of fraud 50 6 or more of fraud in 1 year Lost 2 4 million dollars 2007 Types of Fraud Misappropriation of assets most common Employees steal assets from company Cash Inventory False expense reporting Fraudulent Financial Reporting most costly Managers make false entries so company appears more profitable Deceive investors and creditors Sarbanes Oxley Act of 2002 Federal Law requiring public companies to have system of internal controls Auditors examine controls and issues reports on reliability Provisions Require internal control report by companies Create public company accounting oversight board PSAOB Limit non audit of auditing firms Penalize violators Bank reconciliations Two records of a business s cash The cash account in the general ledger Bank statement Amounts are usually different Time lags in recording transactions Explains differences BANK BALANCE ALWAYS timing Add deposit in transit Subtract outstanding checks Add or subject correction of bank errors Adjusted Balance BOOK BALANCE ALWAYS Add bank collections interest rev and EFT receipts Subtract service charges NSF checks EFT payment Add or subtract correction of book error Adjusted Balance Journal entries for reconciling items on the bank statement when are they needed and some examples Why does cash require specific internal controls Why is payment by check an important internal control as opposed to paying by cash Journalizing Bank Reconciliation Items All items on book side require journal entries Item is added on book side debit cash Item is subtracted Credit cash Internal Control over Cash Receipts Cash is easy to steal All transactions ultimately affect cash Cash receipts should be deposited quickly Companies can receive cash Over the counter Through the mail Controls over payments by check Payment by check or EFT is internal control Provides record of payment Check is signed EFT must be approved by authorized official Should be supported by evidence Internal Control for Purchasing Segregate the following duties Purchasing Receiving Approving and paying Petty Cash Small fund to make minor purchases One employee is responsible for accounting Custodian Set amount of cash Voucher prepared for each payment Sum of fund plus paid voucher should equal set amount Imprest system Accrual accounting what it is when to recognize expenses and revenues Revenue isn t recognize until earned Unearned service Revenue Liability Example Ticket Master earn the revenue at the concert not when sell the ticket Cash basis accounting Individuals Only record things when cash exchanges hands Business s are not allowed to use Just tracking cash Adjusting entries and adjusting entry process Type of Account CREDIT Asset Revenue Liability Revenue Contra asset Category of adjustment Deferrals prepaid expense Deferrals Unearned revenue Accruals Accrued expense Accruals Accrued Revenue Depreciation Income Statement Revenues and Expenses Reports net Income DEBIT Expense Liability Expense Asset Expense Revenues Less Expenses Net Income Statement of Retained Earnings Shows changes in retained earnings Income Statement