FINANCIAL ACCOUNTING EXAM 1 Bookkeeping is the mechanical part of accounting Keyana Bacon Two types of accounting are financial report to outside world And managerial inside company to manage better Forms of businesses Proprietorship Single owner Corporation legal entity own identity files own tax returns limited to invested Limited liability corp LLC retain tax benefits of partnership and proprietorship LIMIT YOUR RISK Partnership can t protect personal assets Assumption and Principles Entity assumptions business is its own entity and you are separate accounting done separate Continuity assumption we aren t going bankrupt Historical cost principle what you actually paid for something not bias facts Stable monetary unit assumption we assume we don t have high inflation The business records of a sole proprietorship should NOT include the proprietor s personal finance LIABILITIES what I OWE NET WORTH ASSETS LIABILITIES EQUITY ASSETS what I OWN NETWORTH is NOT an accounting term EQUITY is the term ASSETS LIABILITIES EQUITY BALANCE SHEET Examples of ASSETS Supplies Land Prepaid Expenses Accts Receivable Merchandise Inventory Equipment Cash Examples of LIABILITIES Accts Payable Long Term Debt Note Payable Accrued Expenses Payable Examples of STOCK EQUITY Common Stock Retained Earnings EXPENSES REVENUES DIVIDENDS NET INCOME REVENUES EXPENSES INCOME SHEET DIVIDENDS Return of investment and NEVER impacts income NET LOSS when total expenses exceed total revenues The nature of an ASSET An economic resource that s expected to benefit future operations All financial statements EXCEPT the BALANCE SHEET is the year ending INCOME STATEMENT measures operating performance INCOME STATEMENT and STATEMENT OF CASH FLOWS cover a period of time Companies will prepare FINANCIAL STATEMENTS at the END OF THE ACCOUNTING PERIOD A corporation does NOT have to pay DIVIDENDS EVERY YEAR TRANSACTION any event that has a financial impact on the business can be measured reliably as GIVING VS RECEIVING so there is DOUBLE ENTRY ACCOUNTING BEGINNING BALANCE is NOT a TRANSACTION Goods purchased on account for future use in the business such as store supplies are called PREPAID EXPENSES REMEMBER DEBIT GOES FIRST Accounts Affected Service performed on acct ASSETS CREDIT Cash in exchange for issuance of stock ASSETS DEBIT EQUITY CREDIT Purchase land on acct ASSETS DEBIT LIABILITIES CREDIT Pays an amount it owes to a creditor ACCTS PAY DEBIT ASSETS CREDIT Receive payment from a customer on acct CASH DEBIT ACCT RECEIVE CREDIT Prepaid insurance Insurance expense DEBIT Prepaid insurance CREDIT Interest revenue accrued Interest receive DEBIT Interest revenue CREDIT Unearned service revenue unearned serv revenue DEBIT service rev CREDIT Depreciation Depreciation expense DEBIT Accumulated depreciation CREDIT Salary expense Salary expense DEBIT Salary Payable CREDIT Income tax expense Income tax expense DEBIT income tax payable CREDIT Interest receivable interest receivable DEBIT Interest Revenue CREDIT Insurance expense Insurance expense DEBIT Prepaid insurance CREDIT Increase asset and decrease another asset purchase building for cash Decrease asset and owner s equity paid dividends to owners Decrease an asset and liabilities pay amt owned to office max from last month s invoice Increase an asset and owner s equity issued stock for cash Increase an asset and liabilities purchased office supplies on acct If a company declares and pays a dividend to its stockholders both cash and expenses will decrease FALSE DIVIDENDS is NEVER an expense INTERNAL CONTROL WEAKNESS giving someone the opportunity to steal When STRONGER it is HARDER to steal OBJECTIVES TO AND INTERNAL CONTROL SYSTEM Compliance with legal requirements safeguarding an asset compliance with company policies ERRORS Service charge book balance Bank collection of a notes receivable on our behalf to book Deposit in transit deposit money bank bank dk to bank Non Sufficient Funds NSF Check to book Book error to book EFT receipt to book Difference in bank statement and cash account is primarily the result of a time lag in recording transactions DEFERAL is an adjustment for payment of an item or receipt of cash in advance ACCURAL ACCOUNTING is taking a note of action and money earned if you haven t received it yet tells you what you did NET INCOME is in terms of ACCURAL ACCOUNTING CASH ACCOUNTING is when you actually receive the money COST OF GOODS SOLD expense what you pay for goods CASH BALANCE BEGINNING BALANCE REVENUE EXPENSES BOOK VALUE ORIGINAL COST ACCUMALATED DEPRICATION ACCOUNTING CONCEPTS AND PRINCIPLES TIME PERIOD CONCEPT ensures that accounting info is reported at regular intervals REVENUE PRINCIPLE make journal entry and record revenue when earned when and how much cash value of goods and services WHEN BUSINESS DELIVERS GOODS OR SERVICES TO A CUSTOMER EXPENSE RECOGNITION PRINCIPLE identify all the expenses incurred during the accounting period measure the expenses and recognize them in the same period in which any related revenues are earned UNEARNED SALE REVANUE a LIABILITY will be increased when a company receives cash before performing the services CASH aka ASSETS DEBIT UNEARNEDED SALES REVENUE CREDIT PERMANENT ACCTS Assets Liabilities Equity Accts Retained Earnings TEMPORARY ACCTS Revenue Expenses Dividends INCOME OVERSTATED INSURANCE EXPENSE DEPRECIATION EXPENSE SALARY EXPENSE INCOME TAX EXPENSE INCOME UNDERSTATED INTEREST REVENUE SERVICE REVENUE UNDERSTATED OVERSTATED NET INCOME UNDERSTATED is usually negative EXTERNAL AUDITORS is NOT responsible for maintaining a company s system of internal controls
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