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A business is

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an organization in which basic resources (inputs) such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

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Services business earn their revenue by

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providing service to their customers rather than product

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The revenue earned by Service type businesses is called

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Service Revenue

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Merchandising businesses earn revenue by

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purchasing products from other businesses to sell to their customers

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The revenue earned by Merchandising type businesses is called

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Sales

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Manufacturing businesses earn revenue by

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changing basic resources (inputs) into products that are cold to individual customers. Their customers are mainly retailers who sell to consumers

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The revenue earned by Manufacturing type businesses is called

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Sales

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The role of Accounting:

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an information system that provides reports to users about the economic activities and condition of a business.

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Managerial Accounting provides

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internal users with information

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Financial Accounting provides

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external users with information

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General-purpose financial statements are

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one type of financial accounting report that is distributed to external users.

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Financial Accountants follow

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GAAP - generally accepted accounting principles

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In the USA who has the primary responsibility for developing accounting principles

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FASB - Financial Accounting Standards Board.

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A proprietorship is

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owned by one individual; easy and cheap to organize; limited resources of the owner

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A partnership is

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owned by two or more individuals; combines skills and resources of more than one person

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A corporation is

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organized under state or federal statutes as a separate legal taxable entity; ownership is divided into shares called stock; can obtain large amounts of resources by issuing stock; used by large businesses

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Shareholders do not own the corporation directly instead they own

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shares or stock in the company

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A Limited Liability Corporation (LLC) combines

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the attributes of a partnership and a corporation; high tax/legal advantages for owners

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account payable

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The liability created by a purchase on account.

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Accounting Equation

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Assets = Liabilities + Owner's Equity

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account receivable

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A claim against the customer created by selling merchandise or services on credit.

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assets

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The resources owned by a business.

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balance sheet

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A list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a month or a year

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business entity concept

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A concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business.

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cost concept

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A concept of accounting that determines the amount initially entered into the accounting records for purchases.

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earnings

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Used to describe when revenues exceed expenses. (Also see net income and net profits)

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expenses

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Assets used up or services consumed in the process of generating revenues.

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fees earned

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Revenue from providing services.

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financial statements

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Financial reports that summarize the effects of events on a business.

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income statement

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A summary of the revenue and expenses for a specific period of time, such as a month or a year.

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interest revenue

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Money received for interest.

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liabilities

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The rights of creditors that represent debts of the business.

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matching concept (or matching principle)

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A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

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net income or net profit

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The amount by which revenues exceed expenses.

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net loss

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The amount by which expenses exceed revenues.

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owner's equity

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The owner's right to the assets of the business.

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prepaid expenses

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Items such as supplies that will be used in the business in the future.

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profit

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The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.

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rent revenue

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Money received for rent.

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revenues

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Increases in owner's equity as a result of selling services or products to customers.

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sales

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The total amount charged customers for merchandise sold, including cash sales and sales on account.

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statement of cash flows

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A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

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statement of owner's equity

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A summary of the changes in owner's equity that have occurred during a specific period of time, such as a month or a year.

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unit of measure concept

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A concept of accounting requiring that economic data be recorded in dollars.

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Assets are

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the resources owned by a business; they are used to operate the business

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Examples of assets

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Cash Land Building Equipment

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Creditors & Owners supply the business

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money for assets

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Liabilites

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the rights of the creditors are the debts of the business; creditors have claim to the assets equal to the debt of liabilities

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Examples of Liabilities

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Accounts Payable Interest Payable Notes or Bonds Payable Accrued Expenses

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Owner's Equity is

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the rights of claim of the owner

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Net Profit would be

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Assets-Liabilities=Owner's Equity (Net profit)

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Revenue from providing services is recorded as

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fees earned

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Revenue from the sale of merchandise is recorded as

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sales

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After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called

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financial statements

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Revenues and expenses for a period of time, based on the matching concept is called an

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income statement

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The income statement follows the matching principle of accounting by

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matching expenses incurred with the revenues they produce

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The statement of owner's equity is prepared after the income statement and it

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reports the changes in the owner's equity for a period of time.

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How to prepare a statement

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top line: Name of Business middle line: Name of statement bottom line: For the time period ending...

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Balance sheet reports

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the balances of the assets, liabilities and owner's equity accounts

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On the Balance sheet,

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Assets are listed as those most liquid to the ones that will take time to liquidate

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On the Balance sheet,

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Liabilities are listed from most liquid to the least liquid

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On the Balance sheet,

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look to the statement of owner's equity for the amount of owner's equity

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The Balance sheet is said to be balanced when

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total assets are = to the total liabilities and owner's equity

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Statement of Cash flows contains 3 distinct sections:

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Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

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Cash flows from operating activities:

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Difference of Cash received from customers from cash payments for expenses will = Net cash flows

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Cash flows from investing activities:

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reflects cash purchases of fixed assets or cash inflows from the sale of fixed assets

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Cash flows from financing activities:

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reflects cash inflows /outflows from investors, investment for owners and withdrawals for personal use; take the difference

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The last step in statement of cash flows

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Total everything out; show the beginning balance; show the ending balance

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Computing ratio of liabilities to owner's equity

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Ratio of Liabilities to Owner's Equity = Total Liabilities Divided by Total Owner's Equity (the lower the ratio the better)

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Unearned rent is

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a Liability

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Accounts Receivable is

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an Asset

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Income Statement

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1) Fees Earned 2)List Expenses 3)Add to total the expenses 4)To get net income or net loss, add or subtract expenses from Fees Earned

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Statement of Owner's Equity

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1)List Capital Amount beginning next day after year ended 2)Net Income 3)Subtract withdrawals from Net Income 4)Add increase in owner's equity 5)Total Capital Amount from year ended date

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Revenues and expenses flow into the income statement. Recall that revenues include fees earned for goods and services.

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If revenues exceed expenses, a net income will result.

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Debits to the capital account occur as a result of a net loss and withdrawals. The income summary account only shows revenues and expenses and the resulting net income or net loss that is closed to the capital account.

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The first item normally on the statement of owner's equity is the beginning balance of the owner's capital account. This balance will be changed positively by any owner investments and net income, and negatively by any net losses and withdrawals.

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Two common classes of assets are

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1)current assets 2)property, plant, and equipment.

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A current asset

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can be converted to cash in one year or less

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Property, plant and equipment assets are

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tangible items that have lives of more than one year.

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Remember that the balance sheet is a formal representation of the accounting equation, such that Assets = Liabilities + Owner's Equity.

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Remembering this will help you determine the Cash balance. On a classified balance sheet, assets are separated into current and Property, Plant & Equipment (long-term assets), and liabilities are separated into current and long-term liabilities. Current assets are listed in the order of liquidity.

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What accounts are closed to Income Summary

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Revenue & Expense

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What accounts are not closed to Income Summary

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Permanent accounts like asset and liabilities are not closed to Income Summary

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Drawing accounts are

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closed to the owner's capital account instead of Income

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Prior to its closing, Income Summary had total debits of $1,190,500 and total credits of $1,476,300.What purpose is served by the income summary account and what is the nature of the entries that resulted in the $1,190,500 and the $1,476,300?

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The income summary account is used to CLOSE the revenue & expense accounts. The $1,190,500 represents the TOTAL EXPENSES , and the $1,476,300 represents TOTAL REVENUES . The company had a NET INCOME of $285,800 .

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Similar to the Statement of Owner's Equity, the amount of Darcy Lewis, Capital can be determined by the following equation:

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Ending Capital = Beginning Capital + Investments + Net Income - Withdrawals.

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Revenue accounts are

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debited for their balances with the offset to income summary

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expense accounts are

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credited for their balances with the offset to income summary

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the resulting Income Summary account is

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debited or credited for its balance

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the owner's capital is

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debited for the balance of the drawing account

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When closing Income Summary in the third entry

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companies may have a net income or a net loss. Companies with net incomes show a credit in the income summary account which is debited to remove it and owner's capital is credited for that same amount. If instead a company shows a net loss in income summary, the account will show a debit and the closing entry removes it by crediting income summary and debiting the owner's capital account for that amount.

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the purpose of a post-closing trial balance is to verify that the ledger is in balance at the beginning of the next period and if temporary or nominal accounts have been accurately closed out.

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Only permanent balance sheet accounts will remain and should agree with the accounts and amounts listed on the end of period balance sheet.

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Accumulated Depreciation-Equipment

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is always a credit

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Normal balances are typically reflected in any trial balance, including post-closing trial balances.

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This means that assets appear as debits; Liabilities and capital show up as credits; Any contra assets appear as credits.

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The accounting cycle begins with analyzing, journalizing and posting transactions, preparing an unadjusted trial balance prior to adjustments (which are also journalized and posted next),

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then preparing an adjusted trial balance to use for financial statement preparation, and finally ends with journalizing and posting closing entries prior to preparing a post-closing trial balance.

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Steps in the Accounting Cycle

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1)Transactions are analyzed & recorded in the journal. 2)Transactions are posted to the ledger 3)An unadjusted trial balance is prepared 4)Adjustment data are assembled & analyzed 5)An optional end-of-period spreadsheet (worksheet) is prepared 6)Adjusting entries are journalized & posted to the ledger 7)An adjusted trial balance is prepared 8)Financial statements are prepared 9)Closing entries are journalized & posted to the ledger 10)A post-closing trial balance is prepared

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Closing entries

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must be journalized and posted

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Short-term liabilities are those liabilities that

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will be paid in less than one year

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Notes Receivable due in 350 days appear on the

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balance sheet in the current assets section

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When preparing the statement of owner's equity, the beginning capital balance can always be found

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in the general ledger

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What is the major difference between the Unadjusted Trial Balance and the Adjusted Trial Balance?

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The Adjusted Trial Balance includes the postings of the adjustments for the period in the balance of the accounts.

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Unearned Fees appear on the

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balance sheet as a current liability

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Once the adjusting entries are posted, the Adjusted Trial Balance is prepared to

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verify that the debits and credits are in balance.

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The fiscal year selected by companies

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begins with the first day of the month and ends on the last day of the twelfth month

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After posting the second closing entry to the income summary account, the balance will be equal to

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the net income or (loss) for the period.

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A work sheet includes columns for

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adjusting entries

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Which of the statements below indicates that a company earned a net income for the period?

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The sum of the credits exceeds the sum of the debits in the Income Statement columns on the work sheet.

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Closing entries are dated in the journal as of

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the last day of the accounting period, although they are actually journalized after the end of the accounting period

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The classified Balance Sheet will subsection the assets section as follows

answer

Current Assets and Property, Plant, and Equipment

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Which of the accounts below would be closed by posting a debit to the account?

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Fees earned

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Which one of the steps below is not aided by the preparation of the work sheet?

answer

posting to the general ledger

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The difference between the totals of the debit and credit columns of the Adjusted Trial Balance columns on a work sheet

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indicates there is an error on the work sheet

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The Statement of Owner's Equity should be prepared

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after the income statement and before the balance sheet

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Which of the accounts below would not appear in the balance sheet columns of the worksheet?

answer

rent earned

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Which of the following accounts ordinarily appears in the post-closing trial balance?

answer

Unearned Rent

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The entry to close the appropriate insurance account at the end of the accounting period is

answer

debit Income Summary; credit Insurance Expense

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Which of the following accounts will be closed to the Capital account at the end of the fiscal year?

answer

Income Summary

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