Entity Assumption Any organization that stands apart as a separate economic unit Historical cost principal States that assets should be recorded at their actual cost measured on the date of purchase Assets economic resources that are expected to produce a benefit in the future Cash Accounts Receivable sells its goods or services and receives a promise for a future collection of cash Notes Receivable Notes signed by customer promising to pay usually carries interest Inventory Prepaid Expenses expenses paid in advance like rent insurance supplies Land buildings equipment furniture fixtures Liabilities Debts payable to outsiders called creditors Account Payable opposite of AR promise to pay a debt from credit purchase Notes payable Signed notes promising to pay a future amount carries interest Accrued Liabilities Liability for an expense not yet paid ex Interest payable salary payable income taxpayable Owners equity insider claims of a business Common Stock shows the owners investment in the corporation Retained Earnings amount earned by income producing activities and kept for use in the business 3 major transactions affecting RE Revenues Expenses and dividends Beginning Bal of RE Net income or Net Loss Dividends for the period ending balance of retained earnings Dividends optional after profitable operations the BOD may declare and pay a cash dividend Revenues The increase in stockholders equity by delivering goods or services to customers Expenses cost of operating a business Cellphone Corp Statement of Retained Earnings Year Ended December 31 2012 RE Dec 31 2011 290 Add Net Income 110 Less Dividends 44 RE Dec 31 2012 356 Split Second Wireless Inc Income Statement Year Ended December 31 2012 millions Revenues 97 Expenses 26 Net income 71 Current Assets expected to be converted to cash or consumed during the next 12 months Long Term property and equipment investments expected to benefit the company over a long period of time Accounting equation Assets liabilities owners equity or Assets liabilities Stockholders Equity Net income loss Revenues Expenses Net Income Loss RE Assets liabilities comon stock 1 Income Statement Statement of Operations Reports revenues and expenses for the period Includes Salary Expense Sales Revenue Net Income Interest 2 Statement of Retained Earnings Includes Dividends Retained Earnings Net Income 3 Balance Sheet Inventory retained earnings cash accounts payable common stock long term debt 4 Statement of cash flows dividends net income cash net cash provided by operating activities Net cash for financing activies I D cash Account a record of all the changes in a particular asset liability or stockholders equity during the period Trail Balance lists all the accounts with their balances Assets first then liabilities and stockholders equity Transaction An event that has a financial impact on a business and can be reliably measured Always 2 sides to every equatn Journal A chronological record of all transactions credits always indented first account always debited Accounts and Explanation Equipment Accounts Payable Type of Account How to INCREASE How to DECREASE Assets Liabilities Equity Revenues Expenses Step 1 Pick one account affected by this Dividends transaction 2 Is the account you picked in Step 1 increasing or decreasing Credit Debit Debit Debit Credit Credit Debit Credit Credit Credit Debit Debit Debit Credit 2000 Date May 10 Journal 2000 3 What type of account is it Assets somthing tht has future economic benefit Cash account Receivable Inventory Prepaid Insurance Equipment Liabilities A debt owed to others Accounts payable Unearned Revenue Notes Payable long term Mortgage payabl Equity Common Stock Retained Earnings Revenues Sales Revenue Service Revenue Sales Expenses Cost of Goods Salaries Expense Insurance Expense Dividends These are dividends that the company has declared and has or will pay to its stockholders Safeguard Assets a company must safeguard its assets against waste inefficiency and fraud Flow of Accounting Data 1 Transaction occurs 2 Transaction Recorded 3 Transaction entered in journal 4 Acconts posted to ledger Internal Control a plan of organization and a system of procedures implemented by company management and BODs 5 objectives 1 2 Encourage employees to follow a company policy A proper system of controls provides clear policies resulting fair treat 3 Promote operational efficiency Effective controls minimize waste which lowers cost and increases profits 4 Ensure accurate reliable accounting records if unreliable impossible to tell what part of biz profitable or needs improve 5 Comply with legal requirements helps insure compliance with the law and avoidance of legal difficulties Fraud An intentional misrepresentation of facts made for the purpose of persuading another party to act in a way that causes injury or damage to that party Misappropriations of assets Type of fraud committed by employees of an entity who steal money from the company and cover it up through erroneous entries in the books Fraudulent financial reporting Type of fraud committed by company managers who make false claims and misleading entries in the books making financial results seem better than they actually are Sarbanes Oxley Act of 2002 Federal Law requires public companies to have a system of internal controls Two records of a businesses cash Cash Account in a companies general ledger The bank statement which shows the cash receipts and payments transacted through the bank Basic Bank Reconciliation Form Start with Bank Balance Start with Book Balance Add Deposits in transit Subtract Outstanding checks Add or subtract Correction of bank errors adjusted balance Add Bank collection Interest revenue EFT receipts Subtract Service charges NSF checks EFT payments Add or Subtract Corretion of bank errors Adjusted balance Entity Assumption Any organization that stand apart as a separate economic unit Continuity going concern Assumption Assume that the entity will continue to operate long enough to use the existing assets Historic Cost States that assets should be recorded at their actual cost measured on the date of purchase Stable Monetary Unit Assumption Accountant assume the dollars purchasing power is stable over time ignoring inflation Accrual Accounting Records the impact of a business transaction as it occurs even if biz receives or pays no cash Cash Basis Accounting Records cash only transactions Cash receipts are treated as revenues Cash payments