CHAPTER 1 group elected by the stockholders to set policy for a corp 2 appoint its officers Board of Directors Chief Financial Officer CFO vice president in charge of sales accounting finance other key areas Chief Executive Officer CEO board elects chairperson holds the most power in the corp Forms of business Proprietorship sole ownership personal liability for that business including personal assets Partnership 2 or more in business together personal liability liable 4 everyone else 1 person exits partnership is done No separate legal identity Limited liability company LLC 1 or many owners members no business income tax limits individual liability personal assets not at risk Corporation stockholder or shareholder ability to raise large amounts of cash separate legal identity run by board of directors limited liability can exist by itself Corp continues with shareholders die Entity Assumption person and business are separate units separate from personal statements Historical cost principle value at cost what we paid for them buy things at stay at in our books record purchases at purchase price ASSETS economic resources that are expected to produce a benefit in the future CURRENT SHORT TERM maturing convert into cash within next yr or less Ex cash accounts receivable notes receivable prepaid expense supplies inventory LONG TERM provide economic benefit for company and will be around for more than a yr Ex land buildings equipment furniture and fixtures other assets LIABILITIES are outsider claims they are debts that are also payable to outsiders called creditors ex current liabilities withn 12 months accounts payable salaries payable accrued liabilities short term notes payable current portion of long term debt LONG TERM LIABILITY due in more than one year mortgages payable long term notes payable OWNERS EQUITY aka capital or stockholders equity represents the insider claims of a business equity means ownership Ex common stock retained earnings ACCOUNTING EQUATION Assets Liabilities owner s equity assets liabilities stockholders equity assets liabilities retained earnings RETAINED EARININGS Revenues Expenses Net Income or net loss net income and dividends impact RE Assets liabilities equity Assets liabilities common stock RE Financial Statements Income Statement revenues over a period of time measures operating performance Bottom line is net income or net loss Balance Sheet aka statement of financial positions reports 3 items assets liabilities stockholders equity Statement of Retained Earnings shows what a co did w its net income Statement of Cash Flows measures cash receipts and payments CHAPTER 2 ACCOUNT record of all the changes in a particular asset liability or stockholders equity during a period Assets cash accounts receivable notes receivable inventory prepaid expenses land buildings equipment furniture fixtures Liabilities accounts payable notes payable accrued liabilities Stckhldes eq common stock retained earnings dividends revenues expenses Trial Balance lists all accounts with their balances asset first then liabilities stockholders eq Journal 1 specify each account affected by the transaction and classify each account type 2 Determine whether each account is increased or decreased by the transaction Use the rules of debit credit to increase decrease account 3 Record the transaction in the journal including a brief explain The debit side is entered on left credit indented to right Transaction an event that has a financial impact on a business can be reliability measured There are always 2 sides to every transaction Give something receive something Ex when a restaurant collects money from a customer for the meal purchased a transaction has occurred Reviewing Debit Credit Rules Decision Process Step 1 Pick ONE account that is affected by this transaction Step 2 Is this account you picked in Step 1 INCREASING or DECREASING Step 3 What type of account is this Step 4 Combine UR answer from Step 2 Step 3 to find whether you DEBIT or CREDIT the account u identified in step 1 Repeat Steps 1 through 4 for the OTHER account in this transaction Remember Total debits in a journal entry transaction must equal the total credits in that transaction You need at least one debit and one credit for every journal entry Debits are on the left credits are on the right Impact on accounting equation of carious transactions Posting copying information from the journal to the ledger Ledger is grouping of all the T accounts with their balances CHAPTER 4 Internal Control a plan of organization and a system of procedures implemented by company management and the board of directors designed to accomplish the following five objectives 1 Safeguard assets against waste inefficiency and fraud 2 Encourage employees to follow company policy everyone in an organization managers and employees need to work toward the same goals 3 Promote operational efficiency companies cannot afford to waste resources They work hard to make a sale and they don t want to waste any of the benefits 4 Ensure accurate reliable accounting records accurate records are essential 5 Comply with legal requirements companies like people are subject to laws such as those of regulatory agencies like SEC the IRS and state local and international governing bodies Fraud intentional misrepresentation of facts causes injury or damage to another party large problem that increases each year Made for the purpose of persuading another party to act in a way that caused injury or damage to that party Sarbanes Oxley Act of 2002 federal law requirements requiring public companies to have system of internal controls Auditors examine controls issue reports on reliability Provisions require internal control report by companies create public accounting oversight board limit non audit services of auditing firms penalize violators Separation of Duties separates 3 key duties asset handling record keeping and transaction approval Bank Reconciliation two records of a business s cash the cash account in the general ledger the bank statement Amount s are usually different time lags in recording transactions Bank reconciliation explains differences Cash requires specific internal controls b c its easy to steal all transactions ultimately affect cash cash receipts should be deposited quickly co s can receive cash over the counter or through the mail Payment by check payment by check or EFT payment is an internal control It provides record of the payment the