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Sole Proprietorship is

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a business owned by one person who is liable for debts the business can't pay for

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Income statement includes

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Revenue Expenses Net Income

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Balance Sheet includes

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Assets Liabilities Stockholders' Equity

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Retained Earnings includes

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Beginning Retained Earnings Net Income Dividends Ending Retained Earnings

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Partnership

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legal liability is the responsibility of two or more owners

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Sole Proprietorship and Partnership

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owners have unlimited liabilities

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Corporations

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income is taxed twice

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Accounting Equation

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Assets = Liabilities + Stockholders' Equity

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Net Income Equation

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Net Income= Revenue - Expenses

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Retained Earnings is

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The amount of net income retained in the corporation.

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Liabilities

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are measurable amounts that the company owes to creditors

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Statement of Cash flows

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Reports the operating, investing, and financing activities that caused increases and decreases in cash during the period.

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Balance sheet

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A financial statement that reports assets, liabilities, and owner's equity on a specific date.

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Income Statement

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A report showing the revenue, expenses, and income (or loss) of a business for a specific period of time.

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Statement of Retained Earnings

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A financial statement that reports the amount of accumulated net profits that a business has retained and not paid in dividends since inception.

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financing activities

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Business activities that involve obtaining funds to begin and operate a business.

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operating activities

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Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business, are classified as:

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investing activities

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Cash flow activities that include (a) purchasing and disposing of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.

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Accounting

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referred to as the language of business employed to communicate financial information based upon the recording, classification, summarization, and interpretation of financial data

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operating activities includes

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Cash used to buy supplies Cash received from customers Cash paid to employees

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LLC stands for

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Limited liability company

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Dividend are not

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an expense

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Dividends

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are earnings distributed to stockholders

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GAAP

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standards and practices used by publicly held corporations in the US and a few other countries in the preparation of financial statements

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Private Accountant

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an accountant who works for a single firm, government agency, or nonprofit organization

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Public Accountant

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An accountant who provides accounting services to individuals or for several business

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Separate Entity Assumption

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the financial reports of a business include only the results of that business's activities

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External Users of Financial Statements

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Creditors Investors Directors Government

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IFRS

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rules of accounting created by the International Accounting Standards Board of International use

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SEC (Securities and Exchange Commission )

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is government agency that oversees stock exchanges and financial reporting be public companies in the U.S.

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FASB

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Financial Accounting Standards Board

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SOX (Sarbanes-Oxley Act)

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states that Top Mangers must sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal control to ensure accuracy, and maintain an independent committee to meet with the company's independent auditors

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Sources of Stockholders Equity

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Common Stock and Retained Earnings

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Increased by Credit

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Stockholders' Equity and Liabilities

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Increased by Debit

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Assets

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Journal Entries

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is a document that lists all of the transactions in Debit=Credit format

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Classified Balance Sheet

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shows subtotals for Current Assets and Liabilities

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Trial Balance

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at year end shows the ending balances from each T-account

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Ledger Account

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dollar amounts from journal entries are copied to the appropriate accounts in the ledger, so that account balances can be totaled

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Revenue Recognition Principle

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Revenue is recognized when it has been earned and not necessarily when it is received

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Expanse (Matching) Recognition Principle

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requires expenses to be recognized in the same period as related revenue (when incurred)

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Cash Basis Accounting

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reports revenues when cash is received and expenses when cash is paid (Not Allowed Under GAAP)

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Operating Activities

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are primary source of revenues and expenses, and affect whether a company earns profit or incurs a loss

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Net Profit Margin

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indicates how much profit is earned from each dollar of revenue

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Income Statement Accounts

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are Temporary Accounts

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Balance Sheet Accounts

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are Permanent Accounts

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Measurements of Net Income Involves

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Estimation

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Adjusting Entries

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update the accounts to their proper balances and are needed in order to measure the periods' net income or loss

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Accural Basis Accounting

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reports revenues when they are earned, and expenses when they are incurred regardless of the timing of cash receipts

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Expenses

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decreases Retained Earnings

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Revenue

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increases Retained Earnings

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Stockholders' Equity includes

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Common Stock Retained Earnings (includes Revenue and Expenses)

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Adjustments

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are entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts

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Two types of Adjustments

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Deferrals and Accrual

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Deferral Adjustments

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receiving or paying money in advance (before)

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Decrease Prepaid Insurance and Increase Insurance Expense

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Deferral

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Decrease Unearned Revenue and Increase Service or Sale Revenue

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Deferral

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Accural Adjustments

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receiving or paying in the future (later on or After)

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Increase Accounts Receivable and Increase Sales Revenue

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Accural

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Increase Supplies Expense and Increase Accounts Payable

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Accural

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Adjusting Journal Entries

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record the effects of each periods' adjustment in debit=credit format

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Adjusted Trial Balance

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Is prepared to ensure Debits=Credits after posting the adjusting journal entries to the accounts

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Accounting Cycle Step 1

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Analyze Transactions

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Accounting Cycle Step 2

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Prepare Journal Entries and T- accounts

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Accounting Cycle Step 3

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Prepare an Unadjusted Trial Balance

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Accounting Cycle Step 4

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Analyzed Adjustments

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Accounting Cycle Step 5

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Record Adjusting Journal Entries and Adjusted T-accounts

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Accounting Cycle Step 6

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Prepare a Adjusted Trial Balance

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Accounting Cycle Step 7

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Report Financial Statements

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Order of the Financial Statements

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1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet

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Carrying Value

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They amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value."

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Reduce the carrying value of assets on the balance sheet

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Deferral Adjustments

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They transfer the amount of reduction to related expense accounts on the income statement

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Deferral Adjustments

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Depreciation

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Is the process of allocating the cost of buildings and equipment to the accounting periods in which they are used

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contra-account

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Is an account that is an offset to, or reduction of, the primary account.

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Accumulated Depreciation

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is a negative asset account that's subtracted from the equipment account (Assets)

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Balance Sheet Account

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Accumulated Depreciation

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Income Statement Account

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Depreciation Expense

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Amortization

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using up long term assets that lack substance and have a limited period of usefulness

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To prepare an Adjusted Trial Balance

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just copy the T-account adjusted balances into debits and credits columns

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Last Step of the Accounting Process

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The Closing Process

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Closing Process

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is performed after the financial statements have been prepared

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Permanent Accounts

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All accounts that appear in the balance sheet; account balances are carried forward from period to period

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Temporary Accounts

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are accounts that are for a limited period of time, which the balances are zero out at the end of each accounting year (all revenue accounts, all expense accounts, dividends)

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Post-Closing Trial Balance

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an internal report prepared to check that all debits = credits and all temporary accounts have been closed

Chapter 1 -4 of Fundamentals of Financial Accounting – Flashcards

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