Study Review for Exam 1 Chapter 1 Accounting is an information System Financial Accounting provides information for people outside the firm Proprietorship Business has a single owner Owner is personally liable for business debt Partnership Two or more owners Limited Liability Companies Business is liable for the companies debt Many non corporate businesses form LLC Corporations Owners are stock holdser Each partner is personally liable for business debts Stock holders not personally liable for corporation debt Board of Directors sets policy and appoint officers Generally accepted accounting principal GAAP FASB Financial Accounting Standard Board States that the FABS must be Relevant Reliable Comparable Consisitent Entity Cost A business is separate from its owners Assets are recorded at Cost not fair value Going Concern Business will continue indefinitely The Accounting Equation Asset Liabilities Owners Equity Assets Cash Property Plant Equipment Liabilities Accounts Payable Notes Payable Owners Equity Assets liabilities Paid in capital common stock Retained Earning 1 Revenue increases retained earning 2 Expenses decrease retained earning 3 Dividends decrease retained earning Income Statement Reports revenue and expenses Net income totals revenue expenses Statement of Retained Earning Increases net incomes Decreases dividends Balance Sheet Current Assets A Converted to cash B Short term Investment C Accounts Receivable D Inventory Long Term A Property B Intangible C Investment Current Liabilities Accounts Payable Payables Long Term Liabilities Long term notes payable Mortgage Payable Stockholders Equity A Paid In Capital A Common Stock Statement of Cash Flow Three Basic activities 1 Operating activities 2 Investing activities 3 Financing activities Companies operate by selling goods and services to customer Companies invest in long term assets Companies need money for financing Income Statement Net income get transferred to Retained Earning Retained Earning Ending Retained Earning get transferred to Balance Sheet Balance Sheet Ending Cash get transferred to Statement of Cash Flow Quick Quiz A Common Stock Balance Sheet B Income Tax Payable Balance Sheet C Dividend Statement of Retained Earning D Income Tax Expense Income Statement E Ending Balance Statement of Retained Earning Balance Sheet F Total Assets Balance Sheet G Long Term debt Balance Sheet H Revenue Income Statement Chapter 2 Assets Cash money and any medium of exchange Accounts Receivable receive a promoise for future collection Notes Receivable customer signs the note Inventory most important asset Prepaid Expenses provides a future benefit for the business Land shows the cost of land Building Equipment Furniture Fixtures Liabilites Accounts Payable Notes Payable Accured liabilities liability for an expense you have not yet paid Stockholders Equity Common Stock shows owners investment in the corporation Retained Earning shows the cumulative net income earned Dividends determined by the board of directors Revenues increase in stockholders equity from selling goods services Expenses The cost of operating business decrease Stockholder equity Accounts Title Debit and Credits increase or decrease depending on the account All Assets are increased by debits and decreased by credits All Liabilities and Stockholders Equity are decreased by debit and increased by credits Debit to increase Assets Dividends Expenses Credit to increase Liabilities Revenue Common Stock Retained Earnings column computed Write the account debited first and the amount in the left column Write and indent the account credited next and the amount in the right After transactions are posted the amount in each ledger account is The debt side and credit side are totaled The difference between the two sides is computed If the debit side is larger the account has a debit balance If the credit side is larger the account has a credit balance Sometimes the trial balance columns don t equal Divide the out of balance amount by two This will help find a debt that was listed as a credit and vice versa Divide the out of balance amount by nine Slide misstating an amount by omitting or adding a zero 4000 as 400 Transposition switching figures within a number 1342 as 1423 Each account is assigned a number Asset usually begin with 1 100 s or 1000 s Liabilities usually begin with 2 Stockholders Equity Common Stock Dividends and Retained Earning begin with 3 Normal Balance what increases the account debit or credit Assets are increased by debits so assets have a normal debit balance Revenues with a 4 Expenses with a 5 Normal Balances Debits Assets Dividends Expenses Credits Liabilities Retained Earning Common Stock Revenues Chapter 3 Cash vs Accrual Basis Accrual Records business transactions when they occur When Sale is made When bill is received Complies with GAAP Presents accurate financial picture Cash Cash Collecting from customers Paying for expenses Borrowing money Issuing Stock Non Cash Sales on account Purchase on account Records transactions only when cash is received or paid Only used by very small businesses Omits important info Accrual Accounting records both cash and non cash transactions Using prepaid expenses Companies select a twelve month period for reporting purposes Categorize of Adjusting Entries Deferrals cash has already been received or paid prepaid expenses Accrued Expenses Expenses incurred before cash is paid Common Accrued Expenses Calendar year Fiscal year Depreciations Accruals Defferals Salaries Interest Taxes Closing the Books Done after financial statements are prepared Transfers balances to retained earning account Temporary Entries Revenues Expenses and Dividends Closed Balances represent a period of time Permanent Entries Asset liability and equity accounts Not Closed Ending Balances of period carries over to following period There are three closing entries 1 Each revenue account is debited for its balance Retainied Earning is credited which increases the account 2 Each expense account is credited for its balance Retained earning is debited which decreases it 3 Credits the dividends account and debits Retained Earnings The acronym RED R revenues E Expenses D Dividends Liquidity How quickly item is converted to in cash Current Ratio Current assets Current liabilities A Strong Ratio is 1 5 or higher Debt Ratio Total Liabilities Total assets The higher the debt ratio the riskier the company