Chapter 1 A Framework for Financial Accounting Financial Accounting vs Managerial Accounting Financial Accounting external users investors creditors regulators Managerial Accounting internal users management Business Activities Operating affecting revenues and expenses Investing purchase or sale of any productive asset Financing borrow or issue stock Accounting Equation Assets Liabilities Stockholder s Equity own owe difference Assets cash receivables supplies inventory pre paids equipment land Liabilities amounts notes salaries interest and tax payable Equity common stock retained earnings revenues expenses dividends Financial Statements Income Statement Revenue Expenses Net Income Statement of Stockholder s Equity Balance Sheet Assets Liabilities Equity Statement of Cash Flows operating investing and financing Standard Setting GAAP Generally Accepted Accounting Principles FASB Financial Accounting Standards Board sets US rules IASB International Accounting Standards Board sets international rules SEC Securities Exchange Commission enforce standards for public companies Auditors Big 4 regional and local accounting firms Homework Help Review Problem on page 17 18 Chapter 2 The Accounting Cycle The business activities or transactions we want to measure and communicate are classified as external or internal External Transactions transactions the firm conducts with a separate economic entity Selling products Paying salaries Borrowing money Internal Transactions events that affect the financial position of a company but do not include an exchange with a separate economic entity Using supplies Earning revenues Be able to identify different types of transactions ILLUSTRATION 2 1 Six Steps in Measuring External Transactions Use source documents to identify accounts affected by an external transaction Sales invoices and bills Identify date participating parties and monetary terms Analyze the impact of the transaction on the accounting equation Assess whether the action results in a debit or credit to the account balance Record the transaction in a journal Post the transaction to the T account in the general ledger Prepare a trial balance Debit Dr left Credit Cr right Normal Balance increase side Assets Debit increase Credit decrease Liabilities Debit decrease Credit increase Stockholders Equity Common Stock Debit decrease Credit increase Retained Earnings Debit decrease Credit increase Revenues Debit decrease Credit increase Expenses Debit increase Credit decrease Dividends Debit increase Credit decrease E2 11 March 1 Cash Common Stock March 5 Cash Notes Payable March 10 Equipment Cash 15 March Advertising Expense Cash March 22 Accounts Receivable Service Revenue March 27 Cash Accounts Receivable 3 Steps Credit Credit Debit 21 000 Debit 9 000 Debit 25 000 Debit 1 100 Debit 18 000 Debit 13 000 Credit Credit Credit Credit 21 000 9 000 25 000 1 100 18 000 13 000 Record transactions in a journal by date Post transactions to T accounts in the ledger by account Prepare a trial balance by account E2 19 Part One March 1 Cash Common Stock March 2 Land Notes Payable March 3 Equipment Cash March 4 No Entry Credit Credit Credit Debit 42 000 Debit 24 000 Debit 9 000 42 000 24 000 9 000 March 5 Cash Service Revenue March 6 Supplies Accounts Payable March 7 Salaries Expense Cash Part Two Cash 42 000 13 000 9 000 9 000 37 000 24 000 Land 24 000 Credit Credit Credit Debit 13 000 Debit 3 000 Debit 9 000 13 000 3 000 9 000 Supplies 3 000 3 000 9 000 Equipment 9 000 Accounts Payable 3 000 3 000 Notes Payable 24 000 24 000 Common Stock 42 000 42 000 Service Revenue 13 000 13 000 Salaries Expense 9 000 9 000 Green Waves Trial Balance Part 3 Cash Supplies Land Equipment Accounts Payable Notes Payable Debit 37 000 3 000 9 000 24 000 Credit 3 000 24 000 Common Stock Service Revenue Salaries Expense Totals 42 000 13 000 9 000 82 000 82 000 Chapter 3 Accounting Cycle End of the Period Accrual Basis Revenue Recognition Principle a company records revenues when it sells a product or provides a service Matching Principle a company records expenses in the same period as the revenues they generate Accrual Basis record revenues when earned and expenses when incurred with the related revenues Cash Basis record revenues when cash is received and expenses when cash is paid Adjusting Entries Internal end of period Prepaid Expenses rent insurance supplies depreciation Example 1 Supplies Purchase supplies in 2013 Actual physical count at year s end 2013 Supplies Cash 12 31 13 Supplies Expense Supplies Example 2 Insurance Purchase annual liability insurance 12 1 13 12 1 13 Prepaid Insurance Cash 12 31 13 Insurance Expense Prepaid Insurance Example 3 Depreciation Purchase computer equipment 4 year life 1 1 13 Equipment 5 000 2 200 Debit 5 000 2 800 6 000 Debit 6 000 500 12 000 Debit 12 000 Credit 5 000 2 800 Credit 6 000 500 Credit Accumulated Depreciation 3 000 Unearned Revenue Geico received a 6 000 annual premium for liability insurance Cash 12 31 13 Depreciation 12 1 13 Cash Unearned Revenue 12 31 13 Unearned Revenue Insurance Revenue Balance 12 31 13 Utilities expense Accounts payable 1 20 13 Accounts payable Cash 12 31 13 Accounts receivable Service revenue Cash Accounts receivable Accrued Expenses Received a December utility on January 6th due January 20th Accrued Revenue A utility company sends a December utility bill for 2 000 on January 6th due January 20th Prepaid Expenses Expense Accrued Expenses Expense 12 000 Credit 6 000 500 Credit 2 000 2 000 Credit 2 000 2 000 3 000 Debit 6 000 500 5 500 Debit 2 000 2 000 Debit 2 000 2 000 Asset Accounts payable Unearned Revenues Unearned Revenue Revenue Accrued Revenues Accounts receivable Revenue Adjusting Entries with Interest On November 1 2013 borrow 10 000 for 1 year at 6 interest Credit On September 1 2013 loan 10 000 for 1 year at 6 interest Credit Debit 100 Debit 200 100 200 Adjusting Entries 3 8 Post to Ledgers T accounts 3 9 Prepare a Trial Balance 3 11 Prepare Financial Statements 3 12 13 14 Closing Entries 3 15 Post Closing Entries Prepare Post Closing Trial Balance Credit December 31 2013 Interest expense Interest payable December 31 2013 Interest receivable Interest revenue The Accounting Cycle Journal Entries E3 14 December 31 2013 Rent expense Prepaid rent Unearned revenue Service revenue Salaries expense Salaries payable Supplies expense Supplies Debit 2 400 750 700 3200 2 400 750 700 3200