Accounting Midterm 1 September 30 2010 Chapter 1 Accounting identifies records and communicates the economic events of an organization to interested users 1 Identify selecting the economic events relevant to its business 2 Record keeping a systematic chronological diary of events journal 3 Communicate making financial statements Internal users individuals inside a company who plan organize and run the business managerial accounting External users individuals and organizations outside a company who want financial information about the company financial accounting Investors owners use accounting information to make decisions to by hold or sell ownership shares of a company Creditors suppliers and bankers use accounting information to evaluate the risks of granting credit or lending money Generally Accepted Accounting principles GAAP the common set of standards that are generally accepted and universally practiced indicate how to report economic events Securities and Exchange Commission SEC the agency of the U S government that oversees U S financial markets and accounting standard setting bodies Public Company Accounting Oversight Board PCAOB determines auditing standards and reviews auditing firms Financial Accounting Standards Board FASB the primary accounting standard setting body in the United States International Accounting Standards Board IASB issues international financial reporting standards IFRS that have been adopted by many countries outside of the United States Cost Principle dictates that companies record assets at their cost because market value is subjective Fair Value Principle indicates that assets and liabilities should be reported at fair value the price received to sell an asset or settle a liability FASB indicates that most assets must follow the cost principle Stocks bonds etc are the only things we used market value for Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in money terms Economic Entity Assumption requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic activities Proprietorship generally owned by one person small service type business owner receives any profits suffers any losses and is personally liable for all debts Partnership owner by two or more persons often retail and service type businesses unlimited personal liability partnership agreement Corporation ownership divided into shares of stock separate legal entity organized under state corporation law limited liability Assets primary resources a business owns has the capacity to provide future services or benefits Liabilities claims of those to whom the company owes money Accounts Payable Note Payable Wages Payable Sales and Real Estate Payable Stockholders Equity claims of owners SE Common Stock Retained Earnings Retained Earnings Revenues Expenses Dividends Business Transactions a business s economic events recorded by accountants An event is not recorded if it does not have an effect of the accounting equation Financial Statements 1 Income Statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time Revenues Expenses Net Income Specific Revenue Accounts Specific Expenses Accounts X 2 Retained Earnings Statement summarizes the changes in retained earnings for a specific period of time indicates why retained earnings has increased or decreased during the period Uses Net Income from Income Statement X X X X Retained Earnings September 1 Add Net Income Less Dividends Retained Earnings September 30 3 Balance Sheet reports the assets liabilities and stockholders equity of a company at a specific date uses Retained Earnings from Retained Earnings Statement Assets Cash Accounts Receivable Supplies Equipment Liabilities Accounts Payable Stockholders Equity Common Stock Retained Earnings Total Assets Liabilities and Stockholders Equity X Total Liabilities and SE Y Y Y Y Y Y X Total Assets and Total Liabilities and SE should balance should be equal X X X X X Y X 4 Statement of Cash Flows summarizes information concerning the cash inflows receipts and outflows payments for a specific period of time Cash flows from operating activities Cash receipts from revenues Cash payments for expenses Net Cash provided by operating activities X X X Cash flows from investing activities Purchase of equipment Cash flows from financing activities Sale of common stock Payment of cash dividends Net increase in cash Cash at the beginning of the period Cash at the end of the period Y X X X X X X Y 0 X X Y Chapter 2 Debit LEFT Credit RIGHT Every transaction must have at least one debit and credit and affect 2 or more accounts Total dollar amount of debits must always equal total dollar amount of credits Debit DEAD Expense Asset Dividends Credit COLR Owners Equity Common Stock and Retained Earnings Liabilities Revenue Business Documents ex sales slip check bill cash register tape provide evidence of the transaction Journal the book of original entry of transactions 1 Discloses in one place the complete effects of a transaction 2 Provides a chronological record of transactions 3 Helps to prevent and locate errors because debit and credit amount can easily be compared Journalizing entering transaction data in the journal date of transaction accounts to be debited and credited a brief explanation of the transaction General Ledger contains the entire group of accounts maintained by a company a collection of T accounts for each separate account Chart of Accounts lists the accounts and account numbers that identify their location in the ledger ex 101 Cash Posting transferring journal entries to the ledger accounts Ref Column in Journal gets account numbers ex 101 Ref column in Ledger gets journal number ex J1 Ledger Account Name title Account number in top right corner Columns Date Explanation Ref ex J1 Debit Credit Balance Trial Balance a list of accounts and their balances at a given time 1 List the account titles and their balances 2 Total the debit and credit columns 3 Prove the equality of the two columns Transposition Error reversing the order of the numbers when transferring ex recording 132 dollars as 123 Recording Process 1 Basic Analysis affect on equation in words 2 Equation Analysis affect on equation 3 Debit Credit Analysis journal entry in words 4 Journal Entry 5 Posting to the ledger 6 Trial Balance
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