Accounting Final Study Guide Chapter 1 Sarbanes Oxley Act intends to reduce unethical accounting decisions by requiring the certification of the accuracy of financial information It also increases the independence of outside auditors and increase role of board of directors FASB financial accounting standards board GAAP is American accounting standards and IFRS is international standards o Convergence between two to make similar Two measurement principles o Use relevance and faithful representation to decide which o Cost Principle companies record assets at their cost o Fair Value Assets and liabilities should be reported at fair value Assumptions o Monetary Unit Assumption requires companies include in the accounting records only transaction data that can be expressed in money terms used to quantify economic events o Economic Entity Assumption the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities particular unit of accountability Proprietorship owner receives any profits suffers any losses and is personally liable for all of the business No legal distinction between business and owner Partnership proprietorship with two owners Corporation Stockholders have limited liability ease of transferring ownership unlimited life Assets Liabilities Owner s Equity Revenues expenses and dividends determine retained earnings o Retained Earnings Net Income Dividends Chapter 2 Account Balances o Assets Debit Increase Credit Decrease o Liabilities Debit Decrease Credit Increase o Common Stock Debit Decrease and Credit Increase o Retained Earnings Debit Decrease Credit Increase o Dividends Debit Increase Credit Decrease o Revenues Debit Decrease Credit Increase o Expenses Debit Increase Credit Decrease Trial Balance Proves debits equal credits at any given time o Doesn t prove company has recorded all transactions or ledger is correct o Transposition error reversing the order of numbers Chapter 3 Time Period Assumption accountants divide the economic life of a business into artificial time periods Accrual Basis Accounting companies record transactions that change a company s financial statements in the periods in which the events occur Cash Basis Accounting companies record revenue when the receive the cash Revenue Recognition Principle companies recognize revenues in the accounting period in which the performance obligation is satisfied Expense Recognition Principle Matching Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues Adjusting Entry Types o Ensure that revenue and expenses recognition principles are followed o Deferrals o Accruals Prepaid Expenses Unearned Revenues Accrued Revenues Accrued Expenses Appendix 3B Qualities of Useful Information Relevance o Needs a predictive value and has confirmatory value Faithful Representation o Must be complete and neutral Enhancers o Comparability consistency verifiability timeliness and understandability Assumptions Monetary Unit Assumption only things that can be expressed in money are included in the accounting records Economic Entity Assumption activities of the owner must be kept separate from business activities artificial time periods foreseeable future Time Period Periodicity Assumption life of a business can be divided into Going Concern Assumption businesses will remain in operation for the Accrual Basis Assumption transactions that change a company s financial statement are recorded in the time period in which they occur Principles Measurement Principles o Cost Principle record assets at cost o Fair Value Principle record assets and liabilities at a fair current value Revenue Recognition Principle o Companies recognize revenue in the accounting period in which the performance obligation is satisfied Expense Recognition Principle Matching o Expenses must be matched with revenues Full Disclosure Principle o Companies must disclose all circumstances and events that would make a difference to financial statement users Constraints Materiality Constraint a company must apply the rules of GAAP if an item is material enough to make an impact on a company s overall financial conditions and operations Cost Constraint Accounting standard setters weigh the cost in providing certain financial statements and information when requiring companies to do so Chapter 4 Closing Entries Income Summary temporary account used to record Net Income 1 Close Revenues into Income Summary 2 Close Expenses into Income Summary 3 Close Net Income into Retained Earnings 4 Close Dividends into Retained Earnings Accounting Cycle 1 Analyze Transactions 2 Journalize Transactions 3 Post to ledger accounts 4 Prepare a trial balance worksheet Journalize and post adjusting entries 5 6 Prepare an adjusted trial balance finish worksheet 7 Prepare Financial Statements Journalize and post closing entries 8 9 Prepare post closing trial balance 10 Reversing entries if necessary Chapter 9 Plant Assets resources that have a physical substance used in operations of a business and are not intended for sale to customers Land debit account all costs incurred to make land read for its intended use Land Improvements structural additions made to land Buildings when a building is purchased sots include purchase price closing fees and broker commission When a new building is constructed costs include contract price any architect fees permits and excavation costs Equipment include assets used in operations Depreciation process of allocating to expense the cost of a plant asset over its useful service life in a rational and systematic manner Factors in Computing Depreciation 1 Cost 2 Useful life estimate of the expected productive life 3 Salvage Value estimate of the asset s value at the end of its useful life Depreciation Methods 1 Straight Line 2 Units of activity 3 Declining balance Straight Line Companies expense the same amount of depreciation each year of the assets useful life Depreciable Cost Cost Salvage Value Annual Depreciation Expense Cost Salvage Value Useful Life years Or use an annual rate of depreciation Units of Activity Useful life is expressed in terms of the total units of production or use expected from the asset Depreciable Cost Total Units of Activity Depreciable Cost Per Unit Depreciable Cost per Unit x Units of Activity that Year Annual Expense Declining Balance Produces a decreasing annual depreciation expense over the asset s useful life Book