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what is accounting

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the language of business

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three types of accounting

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tax accounting, financial accounting, managerial accounting

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managerial accounting

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designed to help users inside the company, no rules, designed to meet the needs of users

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managerial accounting

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no rules, designed to meet the needs of users

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financial accounting

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designed to help people outside the business make decisions

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financial accounting

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follows generally accepted accounting principals, multi-purpose reports

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internal users of accounting include

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managers, employees, owners

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managers

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use accounting info for analyzing the organization's performance and position and taking appropriate measures to improve the company results.

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employees

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use accounting info for assessing company's profitability and its consequence on their future remuneration and job security

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owners

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use accounting info for analyzing the viability and profitability of their investment and determining any future course of action

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external users of accounting include

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creditors, tax authorities, investors, customers, regulatory authorities

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creditors

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include suppliers as well as lenders of finance such as banks; use accounting intro to determine credit worthiness of company

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tax authorities

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use accounting info for determining to credibility of the tax returns filed on behalf of the company

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investors

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use accounting info for determining feasibility of investing. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company

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customers

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use accounting info for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term

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regulatory authorities

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use accounting info for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions

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best definition of an accounting system

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the personnel, procedures, devices, and records used by an entity to develop accounting information and communicate this information to decision makers

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the field of accounting may best be described as

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the art of interpreting, measuring, and describing economic activity

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a strong internal control system

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contributes to the accuracy and reliability of the accounting records

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GAAP includes rules set by standard setters

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US- Financial Accounting Standards Board (FASB), Securities Exchange Commission (SEC) International- International Accounting Standards Board (IASB)

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5 things that add credibility to financial accounting reports

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1. Rules/GAAP 2. Internal control 3. Laws and Regulations 4. Independent CPA Audit 5. Legal liability

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who is responsible for preparing the financial accounting reports?

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managers

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what are investors and creditors?

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individuals, businesses or governments

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investment

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money given

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return of investment

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when investment is given back

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return on investment

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the extra money received

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objectives of financial reporting

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Provide information useful is assessing amount, timing, and uncertainty of future cash flows, provide specific information about resources, claims to resources and changes in resources and claims

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a means to an end

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terminology often used in accounting to refer to the fact that accounting aids in decision making

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general purpose

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financial accounting prepared general purpose reports, they are not modified to fit the needs of any users

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estimations

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Some numbers included in the accounting reports are estimated. Accounting is not an exact science, and is frequently referred to as an art

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explanations

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Financial statements include disclosure notes to help explain the numbers

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historical

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Financial statements are primarily based on things that have already happened. It is more about the past than the future

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income statement

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revenues-expenses=net income

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statement of retained earnings

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Beginning Retained Earnings Balance + Net Income - Dividends = Ending Retained Earnings Balance

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balance sheet

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Assets = Liabilities + Equity

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statement of cash flows

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Cash inflows - Cash outflows = Net change in cash

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statement of cash flows

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Net change in cash + Beginning Cash Balance = Ending Cash Balance

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separate economic entity

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economic events associated with the business are separate from the owners

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going concern

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Business will continue for foreseeable future

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stable monetary unit

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Financial reports are prepared using a stable monetary unit (example U.S. Dollar)

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periodicity

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Accounting reports are prepared periodically (example, monthly, quarterly, and annually)

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entity principle

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recorded activities of a business entity will be kept separate from the recorded activities of its owner(s) and any other business entities

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historical cost principle

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assets are reported and presented at their original cost and no adjustment is made for changes in market value

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matching principle

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matching of expenses with revenues in the period incurred and earned

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revenue recognition/realization principle

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revenue is realized (reported on the income statement) when the good or service is provided

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full principle disclosure

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all of the information about the business entity that is needed by users is disclosed in understandable form

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materiality convention

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relaxes certain GAAP requirements if the impact is not large enough to influence decisions. Does it matter?

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cost-benefit convention

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relaxes GAAP requirements if the expected cost of reporting something exceeds the benefits of reporting it

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industry practices convention

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accepted industry practices should be followed even if they differ from GAAP

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balance sheet facts

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prepared for an economic (business entity), prepared for a point in time

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balance sheet includes

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assets. liabilities, equities (contributed capital, retained earnings)

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balance sheet

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assets=liabilities+equity

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equity

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contributed capital+retained earnings=equity (owners claim on assets)

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contributed capital

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component of equity+amount shareholders paid for stock purchased from company= contributed capital

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retained earnings

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component of equity+amount accumulated as a result of profitable operations=retained earnings

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total assets

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must always equal total liabilities+total owners' equity

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articulation

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the way in which financial statements relate

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decreases in owners equity are caused by

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distribution of assets to the owner and unprofitable operations

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income statement facts

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prepared for an economic (business) entity, prepared for a period of time

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income statement includes

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revenues earned for the period, expenses incurred during the period

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income statement

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Also referred to as Profit and Loss Statement (P&L), Statement of Operations, Statement of Financial Performance

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revenue

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the price charged for providing goods and services

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The change in owners' equity from one balance sheet to the next is partially explained by the:

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income statement

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an expense is best defined as

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Past, present, or future payments of cash required to generate revenues

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statement of cash flows facts

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prepared for an economic (business) entity, prepared for a period of time

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statement of cash flows includes

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Cash Flows From Operating Activities Cash Flows from Investing Activities Cash Flows From Financing Activities

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Ending Cash Balance

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Total Cash Flows + Beginning Cash Balance

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statement of cash flows

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Cash Flows From Operating Activities + Cash Flows from Investing Activities + Cash Flows From Financing Activities =Net Change in Cash + Beginning Cash Balance =Ending Cash Balance

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cash inflows from financing activities

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Cash received from creditors through long-term and short-term borrowings, cash received from investors (owners)

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cash outflows from financing activities

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Cash paid to creditors to repay long-term and short-term borrowings, does not include interest Cash paid to investors (owners), Includes dividends

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cash outflows from investing activities

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Cash paid to acquire investments and plant and intangible assets, cash loaned to others (borrowers)

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cash inflows from investing activities

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Cash received from selling investments and plant and intangible assets Cash received from borrowers for payment on loans, does not include interest

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cash outflows from operating activities

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Cash paid to suppliers of merchandise and services Cash paid to employees Cash paid for interest Cash paid for income taxes Cash paid for other operating activities

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beginning cash

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cash balance at the beginning of the accounting period

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ending cash

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cash balance at the end of the accounting period The net change in cash (from operating, investing and financing activities) + the beginning cash balance

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primary objective of financial statements

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Providing users outside the business organization with information about the company's financial position and operating results

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a strong cash flows statement indicates that significant cash is being generated by

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operating activities

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first adjusting entry

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converting assets to expenses

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converting assets to expenses

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Helps ensure that Assets on the Balance Sheet are not overstated Helps ensure that Expenses on the Income Statement are not understated

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second adjusting entry

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converting liabilities to revenues

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converting liabilities to revenues

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Helps ensure that Liabilities on the Balance Sheet are not overstated Helps ensure that Revenues on the Income Statement are not understated

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third adjusting entry

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accruing unpaid expenses

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accruing unpaid expenses

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Helps ensure that Expenses on the Income Statement are not understated

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fourth adjusting entry

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accruing uncollected revenue

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accruing uncollected revenue

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Helps ensure that Revenues on the Income Statement are not understated

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Under accrual accounting, salaries earned by employees but not yet paid should be expensed:

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In the period in which they are earned

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Under accrual accounting, fees received in advance from customers should be shown as being earned:

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When services are performed or goods delivered

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examples of assets & expenses

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Supplies Prepaid Expenses Depreciable Fixed Assets

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depreciating a fixed asset

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cost-residual value/useful life

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Adjusting entries help achieve the goals of accrual accounting by applying the following two accounting principles:

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realization principle and matching principle

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The period of time over which the cost of an asset is allocated to depreciation expense is called its

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useful life

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depreciation expense is

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only an estimate

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unearned revenue

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Example 1 Rent Revenue received in advance Example 2 Subscription Revenue received in advance

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unearned revenue may also be called

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deferred revenue

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the concept of materiality

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Justifies ignoring the matching principle or the realization principle in certain circumstances.

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During the last month of its fiscal year, Echo Lake Resort accepted numerous deposits from customers. By the end of the month many, but not all, of these guests had completed their stays. The entry to record this event is an example of an adjusting entry:

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to apportion unearned revenue

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Unearned revenue is a liability and should be reported on the income statement.

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false

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unpaid expenses examples

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Interest Payable Salary Payable Restricted Stock

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prepaid expenses appear

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as an asset on the balance sheet

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Which of the following is considered a contra-asset account?

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accumulated depreciation

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Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:

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Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080.

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uncollected revenues

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Interest Receivable Services rendered, but not yet billed

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financial statement articulation

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The Income Statement is prepared first Net income from the income statement is used to prepare Statement of Retained Earnings The ending balance on the Statement of Retained Earnings is used to prepare the Balance Sheet The ending cash balance on the Statement of Cash Flows is equal to the cash balance on the Balance Sheet The net change in cash on the Statement of Cash Flows is equal to the difference between the ending cash balance and the beginning cash balance on the Balance Sheet

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The adjusted trial balance contains income statement accounts and balance sheet accounts, while the after-closing trial balance will only have balance sheet accounts.

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true

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Financial statements are usually prepared before the closing entries are made.

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true

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At year-end, all equity accounts must be closed.

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false

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the purpose of making closing entries is to

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Prepare revenue and expense accounts for the recording of the next period's revenue and expenses.

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Of the following, which is not an alternative title for the income statement?

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statement of financial position

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Which account will appear on an after-closing trial balance?

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prepaid expenses

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Closing entries would be prepared before:

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a post-closing trial balance

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purpose of closing entries

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Reset temporary accounts to zero and get ready for a new accounting period

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temporary accounts

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Revenues and Gains Expense and Losses Dividends Income Summary

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closing entries

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Close revenue, gain, expense and loss accounts to income summary

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closing entries

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The balance in income summary will equal net income (loss) Credit Balance = net income Debit Balance = net loss

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closing entries

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Close income summary and dividend account to retained earnings

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Dividends declared are an expense and reduce net income.

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false

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dividends declared

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reduce retained earnings

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during the closing process

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All revenue accounts are debited and expense accounts are credited.

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