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Accounting consists of three basic activities

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Identifies, records, communicates

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Who uses Accounting Data

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External Users: Creditors and Investors

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Recent Financial Scandals

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Enron, WorldCom, HealthSouth, AIG

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Sarbanes-Oxley Act of (SOX).

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Added new criminal charges for accounting scandals

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Financial Statements

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Balance Sheet Income Statement Statement of Stock Holder's Equity Statement of Cash Flows Note Disclosure

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Generally Accepted Accounting Principles (GAAP)

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Standards generally accepted and universally practiced

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Standard Setting Bodies

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Financial Accounting Standards Board (FASB) (SEC) International Accounting Standards Board (IASB)

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Historical Cost Principle

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dictates that companies record assets at their cost.

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Fair Value Principle

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states that assets and liabilities should be reported at a fair value

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Monetary Unit Assumption

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companies include in accounting records only transaction data expressed in money.

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Economic Entity Assumption

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Requires that activities of the entity be kept separate and distinct from activities of the owner

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Combining activities of Kellogg and General Mills would violate?

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Economic Entity Assumption

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Corporation

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Ownership divided into shares of stock

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Accounting Equation

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Assets= Liabilities + Stockholder's Equity

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Assets

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Resources a business owns Provide future service or benefits Cash, Supplies, Equipment

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Liabilities

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Claims against assets (Debts and Obligations) Creditors- Party to whom money is owed Accounts Payable, Notes Payable

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Stockholder's Equity

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Ownership claim on total Assets Referred to as residual Equity Common Stock and Retained Earnings

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Dividends

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distribution of cash or other assets to stockholders. They reduce retained earnings but are not an expense.

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Expense

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are the cost of assets consumed or services used in the process of earning revenue.

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Transactions

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Economic events recorded by accountants

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Income Statement

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Reports Profitability of the company List Revenues first, followed by expenses Shows net income or net loss

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Retained Earnings statement

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Reports changes in retained earnings for same period as income statement

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Balance Sheet

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Reports the assets, liabilities, and stockholders' equity at a specific date. Is a snapshot of the company's financial condition at a specific moment in time

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Statement or Cashflows

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Where did the cash come from What was it used for What was the change in balance

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The Account

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Record of increases and decreases in a specific asset, liability, equity, revenue, or expense

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Double Entry System

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Debit one account, credit the other Debits must equal Credits

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Debits > Credits

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Account will have a debit balance

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Credits>Debits

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Account will have a credit balance

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Recording Assets

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Debits should exceed credits

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Recording Liablities

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Credits should exceed debits

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Normal balance is

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on the increase side

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Owner's investments and revenues

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Increase stock holders equity (Credit)

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Dividends and Expenses

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decrease stock holders equity (Debit)

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Expenses Decrease

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stockholders equity

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Debits

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Increase assets and decrease liabilites

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Accounts that normally have debit balances are

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Assets, dividends, and expenses

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The Journal

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Shows complete effects of transaction Chronological Order Helps prevent and locate errors

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Cash and Accounts Payable Transaction

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Debit the total and Credit both transactions

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General Ledger

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contains the entire group of accounts maintained by a company

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Limits of the Trial Balance

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Transactions are not journalized Correct journal entry is not posted A jor

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Time Period Assumption

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Artificial Time Points: Month, Quarter, Year

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Interim Periods

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monthly and quarterly periods

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Cash-Basis Accounting

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Revenues recorded when cash is received. Expenses are recorded when cash is paid. Cash basis is not in accordance with GAAP

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Accrual-Basis Accounting

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Transactions recorded when events ocurr Companies recognize revenues when they perform services (Rather than receiving cash) Expenses are recognized when incurred (Rather than when paid)

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Revenue Recognition Principle

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Revenue is recognized when performance is satisfied, not when cash is received.

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Expense Recognition Principle

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spend a 100k on shirts in july. sells them for 150k in august. the expense is recognized in august.

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Adjusting Entries

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Deferals: Prepaid Expenses/Unearned Revenue Accruals: Revenues for services performed but not cash received/ Expenses incurred but not yet paid for in cash.

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Adjusted Trial Balance

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Prepared after all adjusting entries. Purpose is to prove equality of credits and debts in ledger

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Relevance

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its relevant if it makes a difference in business decision. Considered relevant if it provides predictive information.

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Confirmatory Value

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confirms or corrects prior expectations.

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Materiality

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An item is material when its size makes it likely to influence the decision of an investor or creditor.

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Faithful Representation

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means that information accurately depicts what really happened.

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Monetary Unit

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Only things that can be expressed in money are included in accounting records.

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Historical Cost

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Dictates that companies record assets at their cost

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Fair Value

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assets and liabilities should be reported at the price received to sell it.

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Expense Recognition

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Expenses are Matched with Revenues

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Full Disclosure Principle

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Companies must disclose all events

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Cost Constraint

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the cost of providing information must be measured against the benefit derived from the use of that same information.

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Worksheet

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May be an excel spreadsheet. Not a permanent accounting records.

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Closing Entries

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Net Income/NetLoss Dividends Closing entries posted at the end of an accounting period Produce a zero balance in all temporary accounts

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Current Assets

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Assets a company expects to convert to cash or use up within one year of the operating cycle

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Operating Cycle

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average time it takes to purchase inventory, sell it on account, and then collect cash

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Depreciation

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Allocating cost of assets to a number of years

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Accumlated Depreciation

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Total amount of depreciation expense thus far in asset's life

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Intangible Assets

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long-lived assets that do not have physical substance (Goodwill, customer lists, brands, trademarks)

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Liquidity

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Ability to pay obligations expected to be due within the year

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Long-Term Liabilites

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Obligations a company expects to pay after one year

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Prepaid Rent is

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An Asset

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The first item listed under current liabilities is...

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Notes Payable

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Prepared at the end of a company's annual accounting Period

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Journalizing and Posting Closing Entries

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When should errors be fixed during recording

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When they are found

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Posting Is...

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transferring journal entries to ledger accounts.

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Income Account Summary Before Close is equal to

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the net income or loss on the income statement.

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