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ACCT 2101: EXAM 1
Accounting |
recording business transactions in an accounting system so that information can be summarized to aid in the preparation of financial statements for external users
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External users
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Investors, creditors (businesses, individuals, entities that the business owes money to), employees, government agencies (ex. IRS)
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Accounting system
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Post transactions to various accounts
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Assets
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Things of value to a business - resources used by a business to help the business earn revenue
-Ex. Cash, equipment, land, inventory, vehicles, building
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Liabilities |
Future obligations of a business - the business owes somebody "something"; represent creditors interest
-Ex. owe the bank, owe employees (salaries), owe another business (suppliers)
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Stockholders Equity
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Represents the owners interest in the business - owners initial investment and the earnings the owner has a right to share in based on ownership percentage
-Represented by 2 accounts (common stock and retained earnings)
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Common stock
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Certification given to an owner (investor) as proof of his investment in the business; these owners are called stockholders
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Retained earnings
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This account increases/decreases based on earnings activity; this account represents the earnings in a business (profit) that is kept in the business since the business began operations
-Revenue (increase RE)
-Expenses (decrease RE)
-Dividends (decrease RE)
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Accounting equation
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Assets = Liabilities + Common Stock (CS) + Retained Earnings (RE)
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Notes payable
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Liability; Owe the bank
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Revenues
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Providing goods or services to customers in the course of operating a business; results in an increase in assets and increase in retained earnings
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Expenses |
Costs incurred in the process of earning (generating) revenue; results in decrease in assets and a decrease in retained earnings
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Dividends
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Transfer of wealth (earnings from business) to the stockholder; results in a decrease to cash and a decrease to retained earnings, but is NOT an expense
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Primary Financial Statements (4)
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-Income statement
-Statement of changes in stockholders equity
-Balance sheet
-Statement of cash flows
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Income statement
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Reports on the profitability of your business over a period of time (one year)
-Revenues - Expenses = Net income (loss)
-DON'T include dividends
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Statement of changes in stockholders equity
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Reports in the change in equity accounts over a period of time (one year)
Where dividends are shown
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Balance sheet
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Reports on the financial condition of a business on any given day (Dec. 31)
Reports on the assets, liabilities, and stockholders equity accounts of the business at 12/31
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Statement of cash flows
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Reports on the change in cash over a period of time (one year)
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Net income
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Revenue - Expenses
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Accrual Accounting
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Record revenue in the accounting period the revenue is earned and expenses in the accounting period the expenses are incurred, regardless of when cash is received or paid
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Accruals |
Recognize revenue or expense before cash is exchanged
-Action first, cash later
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Differals
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Recognize revenue or expense after cash is exchanged
-Cash first, action later (ex. prepaid rent)
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Trigger for revenue recognition
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When the revenue is earned; earned when the service is provided or products are sold
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Trigger for expense recognition
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When the expenses are incurred; incurred when the business becomes legally responsible to pay and the resource that was purchased has been used up in the earnings process
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Accounts receivable
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Represents amount of cash expected to be calculated from customers in the future
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Accounts payable
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... |
Unadjusted bank balance
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,... |
Unadjusted book balance
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... |