Intermediate Ch 3 Conceptual Framework The FASB has issued seven statements of financial accounting concepts for business enterprises Concepts underlying accounting Foundation Not GAAP in and of themselves Help ensure coherent set of standards and rules Help solve new and emerging practical accounting problems Fundamental Characteristics Qualitative Characteristics things that make accounting useful Relevance Predicative Value MAIN Confirmatory value Materiality Faithful Representation Completeness Neutrality Free from error R Predicative Value helps predict the future Confirmatory Value provides feedback confirms or changes about previous evaluations Materiality determines if an error or omission in financial statements is significant enough to influence the decisions of those who use the statements FR Completeness includes all information necessary for a used to understand the phenomenon being depicted Neutrality depiction is without bias Free from error no errors or omission Enhancing Qualitative characteristics Comparability Verifiability Timeliness understandability Constraint Cost Effectiveness costs are justified by the benefits of reporting that information Elements of Financial Statements Balance sheet Moment in time Assets Statement Liabilities Equity Period of time Comprehensive income Investment by owners Equity Distribution to owners Revenue Expenses Gains Losses MIT Asset present right to an item for economic benefit EX Cash Liability present obligation to provide economic benefit to others Equity Residual interest what s left over POT Investments by owners contributions by owners Distributions to owners Dividends given to owners Comprehensive income total financial performance over a period Revenues income by selling asset Expenses using up assets Gains increasing assets Loses decreasing equity Assumptions Economic Entity Specific economic activates are considered an identifiable accounting unit Monetary Unit everything goes to dollars Going concern assume a company is going to continue operations Periodicity report changes in a company s financial position over a series of distinct time periods such as quarters or years Principles Measurement how we measure things Revenue recognition principle recognize it when you have done what you must do EX Walmart selling a gallon of milk Expense recognition follow the revenue Full Disclosure all the information they need to make a decision Accounting Cycle process by which an event happens to it being reported in the financial statements Accounting Transaction Day to day operations Event Journalize Post to Account Ledgers At period end in trial balance Close zero out all nominal accounts to real accounts Make Adjusting Entries List totals from each ledger Summarize in format of financial statements Income statements include your temporary accounts Nominal Accounts temporary accounts the accounts we close at the end of a period Revenue accounts expense accounts dividend account A classic event that does not lead to a transaction signing a sales contract because the obligation has not been fulfilled Accounting equation Assets Liabilities Stockholders Equity Debits and Credit Left and Right Resources are reported on the left Debit Side Claims on resources are reported on the right Credit Side Real permanent accounts Point in time accounts their all the time Nominal Temporary Accounts period of time accounts Assets Liabilities Stockholders equity Cash AR Prepaid expense supplies inventory equipment Paid in capital common stock retained earnings net income dividends AP salaries payable accrued expenses notes payable bond payable deferred revenue Normal balance DEBIT Assets Expenses and Losses Dividends Normal Balance CREDIT Liability Revenues and Gains Common Stock Retained Earnings Journal to ledgers than to the trial balance Debits credits always Adjusting entries Recording internal transactions Accrual accounting we recognize revenues expenses gains and losses in the periods that depict an entity s performance during a period Revenue is recognized when you complete your obligation Expenses are the same they follow the revenue Deferrals Cash before recognition before cash Prepaid expense rent insurance services Supplies but no cash is Accruals recognition Accrued revenue are performed Received Invoiced sales Then we go from the Trial balance and prepare the Income statement Retained Earnings statement and Balance Sheet Prepare and post closing entries Transfer balances from temporary accounts to permanent account retained earnings Reduce the balance of the nominal accounts to zero to prepare the period accounts for the next periods transactions Closing income summary to retained earnings represents your net income from the period Reversing entries reverse out some adjusting entries accruals and deferrals to simplify future record keeping All accruals should be reversed Adjusting entry will never affect cash To create a reversing entry simply reverse the debit and credit accounts of the original adjusting entry For example if the original adjusting entry was Debit Utilities Expense Credit Utilities Payable The reversing entry would be Debit Utilities Payable Credit Utilities Expense Note Reversing entries are optional and their use depends on the specific needs and preferences of the business They are often used for recurring transactions to simplify the accounting process Reverse all your accruals Adjusting entries will always affect one balance sheet and one income statements account