Chapter 1 Chapter 2 Transaction any event that has a financial impact on the business and can be measure reliably Account record of all the changes in a particular asset liability or equity Examples of transactions and their effects a increase one asset decrease another collect of account receivable purchase of an asset for cash sale or asset for cash b decrease an asset and decrease owner s equity expense transaction payment of a dividend to owner c decrease an asset and decrease a liability pay a liability return asset purchased on account d increase an asset and increase owner s equity issuance of stock revenue transaction e increase an asset and increase liability borrow money purchase of asset on account Debit Credit Rules debits on left credits on right 1 Asset increase with debit decrease with credit 2 Liability increase with credit decrease with debit 3 Equity increase with credit decrease with debit 4 Revenues increase with credit decrease with debit 5 Expenses increase with debit decrease with credit 6 Dividend increase with debit decrease with credit Posting copying information from a journal entry into a ledger 1 journal 2 ledger 3 trial balance 4 financial statements Trial balance shows if credits equal debits lists assets liabilities equity dividends revenues and expenses in that order Normal balance falls on the side of an account where increases are recorded usually debit balanced are assets credit balanced are liabilities and equity Accounting errors Debit credit mix up divide by 2 Slide 400 as 40 Transposition 1200 as 2100 Both are fixed by dividing by 9 Board of directors stockholder elected set policies and appoint officers CEO Chief executive officer elected by board of directors COO Chief Operations Officer CFO Chief Financial Officer Proprietorship one owner personally liable Partnership 2 or more partners general partners liable limited partners are not LLC Limited Liability company members not personally liable Corporation many owners not personally liable GAAP generally accepted accountings principles FASB Financial accounting standards board Goal relevance and faithful representation Other goals comparability verifiability timeliness Understandability Cost of disclosure should not exceed expected benefits Entity assumption any organization that stands apart as a separate economic unit Historical cost costs recorded at price they were paid for Asset provides future economic benefit cash accounts receivable inventory Current asset used within the next year Long term not used within next year Liability debt accounts payable unearned revenue Equity common stock retained earnings Important equations Assets Liabilities Equity Revenues Expenses Net income loss Beg Retained Earning Net income loss Dividends End Retained Earnings Beginning Cash flow Investing Financing End Cash flow Statement Order 1 Income Statement 2 Statement of Retained Earnings 3 Balance Sheet 4 Statement of Cash flows Income Statement statement of operations lists revenues expenses net income loss Retained Earnings lists beginning RE net income dividends ending RE Balance sheet statement of financial position lists assets liabilities and equity current assets total current assets long term assets total assets same for liabilities equity is common stock and retained earnings only one with date all others are periods Statement of cash flows not too important Chapter 3 Cash basis records only cash transactions Accrual records the impact of a business transaction as it occurs Calendar year January through December Fiscal year any 12 month period set by company Revenue Recognition Principle record revenue after its earned or service is delivered to client record amount of cash value of g s Expense Principle identify all expenses incurred recognize expenses in same period that related revenues are earned Deferral business has paid received cash in advance and now has to recognize that it has used earned part of that item Prepaid expense recorded as an asset when purchased expensed when expired Unearned revenue recognized as liability when received recognized as income when earned Accrual business has not yet paid for expense incurred or not paid for earned revenue Accrued expense record expense before paying cash liability Accrued revenue record revenue before collecting cash earned and will collect next period Depreciation process of spreading the cost o a physical asset over its useful life Accumulated depreciation contains depreciation expense since beginning contra asset credit balanced Book value cost original accumulated depreciation Adjusted Trail balances comes after adjusting entries assets liabilities expense equity revenue expenses Summary of Adjusting Entries Deferral Prepaid Expense debit expense credit asset Deferral Unearned Revenue debit liability credit revenue Accrual Accrued Expense debit expense credit liability Accrual Accrued Revenue debit asset credit revenue Depreciation debit expense credit contra asset Overstatement expense depreciation Understatement Rev Closing the books prepares accounts for next period sets revenue expenses dividends to zero RED Temporary accounts closed RED Permanent accounts not closed assets liabilities equity Closing entries 1 closing revenues debit each revenue account credit retained earnings 2 closing expenses debit retained earnings credit each expense account 3 close dividends debit retained earnings credit dividends Order of assets on balance sheet cash accounts receivable inventory plant assets Chapter 4 Fraud intentional misrepresentation of facts that causes injury or damage to another party Misappropriation of Assets employee steals asset from company and makes a false expense report Fraudulent financial reporting managers make false entries so company appears stable deceives creditors and investors Fraud Triangle Motive opportunity and rationalization Internal control primary way fraud and errors are prevents detected corrected managements Board of Directors implement plans and procedures Objectives safeguard assets encourage employees to follow policy promote operational efficiency ensure accurate and reliable records comply with legal requirements Sarbanes Oxley Act 2002 federal law requiring public companies must issue an internal control report and an outside auditor must evaluate it the Public Company Accounting Oversight Board oversees the audits of public companies accounting firm may not be both an auditor and also provide