Chapter 1:

-accounting is: identify, record, communicate (irc)

-IDENTIFY: related economic events to biz
-RECORDS: history of financial activities
-COMMUNICATES: info to users in accounting reports
-reports=financial statements
-Accountants must analyze/interpret data (uses, meaninings, limitations)

Who uses accounting data??

-INTERNAL USERS: managers to plan, organize, run biz
-EXTERNAL USERS: ppl outside who want info
Ex) Investors: owners that decide buy, sell, hold shares
Creditors: Suppliers/bankers look at risk giving credit/money
-Sarbanes-Oxley Act (SOX)
-reduce unethical behavior, stronger penalties, increase rolee/reliability
-Deal with ethical situation
1. recognize situation (written codes of guidance)
2. identify who may be harmed/benefited of parties involved
3. select most ethical alternative
**Only apply to large companies in the US exchange

Generally Accepted Accounting Principles (GAAP)

-used by USA, common standards report economic events
-set by the Financial Accounting Standards Board (FASB)
-Securities and Exchange Commission U.S gov agency oversees financial market (SEC)
**More rule based (detailed)

International Financial Reporting Standards (IFRS)

-used by people outside US
-set by International Accounting Standards Board (IASB)
**More principle based (simple)

USA: use GAAP made by FASB

Outside: use IFRS made by IASB
*want to converge standards in future

GAAP:
-choses measurement principal from relavance(makes difference in decision)
and faithful representation(numbers, descriptions are fact)
-historical cost principal(cost principal): record assets at same cost at
time of purchase and future (EX: buy at $400, value still $400 in 5 yrs)
-fair value principal: assets reported at price recieved (actual worth?)

Assumptions:
-Monetary unit assumption: only record things can by expressed in money terms
keeps things relevant and easy calculate
-Economic entity assumption: any org/unit, activites keep seperate and distinct
from owners (owner personal cost not included in biz costs)

Basic Accounting Equation

-Assets: resources owned
EX) Cash, supplies, equipment, Accounts recievable
-Liabilites: money owed to ppl outside biz (creditors)
EX) accounts payable: credit owed to other biz (bill)
notes payable: contract to pay back bank (loan)
wages, salaries, taxes payable
-Claims of owners=stockholders equity: money owned to stockholders in biz
EX) residual equity: money left after pay creditors
 common stock: shares sold by biz
retained earnings: revenues, expenses, dividends
-revenues: money made by biz (increase SE)
-expenses: cost of assests (decrease SE)
-dividends: distribution cash/assets to stockholders
Assets=Liabilites+Stockholder's Equity
-Liabilities must be paid first if bankrupt

Assets= Liabilites + Stockholders Equity

(Common Stock + Retained Earnings)
(Revenues-Expenses-Dividends)

FOUR Financial Statements

1. Income Statement: shows revenue/expenses=net income/loss for PERIOD OF TIME
Net Income/Loss= Revenue-Expenses
2.Retained Earnings Statement: Changes in retained earnings for PERIOD OF TIME
End Retained Earnings= Beginning RE + Net Income (from income statement) -
Dividends
3. Balance Sheet: assets, liabilites, SE for SPECIFIC DATE
4. Statement of Cash Flows: cash inflows (receipts) and outflows (payments) for
PERIOD OF TIME
Cash flows for operating
recipts from revenues-payments for expenses
Cash flows for investing
purchase of equipment
Cash flows for financing
sale of common stock-payment of dividends
Net increase in cash
cash at beginning (usually 0) + cash at end period
***only balance sheet is specific date

Chapter 2
-Account: individual accounting record of increase/decreas of Asset/Liability/SE
-T-account: left debit side Dr., right credit side Cr.
-positive= receipt (increase in cash as debit), negative= payment of cash
(decrease in cash as credit)

Debits Increase
-assets
-dividend
-expenses
Debits Decrease
-liabilities
-common stock
-retained earnings
-revenues

Debits:
-decrease revenue
-increase expenses
Credits:
-increase revenues
-decrease expenses

Steps in Recording Process:

1. Analyze transactions and effects
-biz transaction has to occur first, sale/purchase
2. Enter transaction in journal (general journal)
 -where orginal entry first recorded (journalizing)
-chronological, helps prevent/locate errors
-debit always first, then credit
3. Transfer journal info (posting) to ledger (general ledger)
-provides balance of each account and changes in the balances
-Individual asset accounts, Indiv liability accounts, indiv SE accounts
-record debit accounts, write in journal account number that debit posted
-record credit accounts, write in journal account number that credit posted

Trial Balance
-list of accounts and balances at given time
-made at end of accounting period, proves debit=credit
-can uncover errors in journaling and posting, useful prepare financial statements
1. list accounts and balances in either debit or credit
2. add debit and credit columns
3. prove equality

Chapter 3
-Time period assumption: economic life of biz divided into artificial time periods
-Accounting periods: month, quarter (interim periods) or year (fiscal year)

Accrual-Basis Accounting
-transactions recorded (that change financial statements) in period that occured
-recognize revenue when service is PERFORMED (not when paid)
Cash-Basis Accounting
-record revenue when they recieve cash
*not used by GAAP, ususally used by small companies

Revenue Recognition Principle

-Performance of obligation: when meets this, recognizes revenue
-list revenue when performed service
Expense Recognition Principle (matching principal)
-"Let expenses follow the revenue"
-list expense with revenues to match efforts company made to generate revenue

Adjusting Entries: in order to properly record revenues recieved, expenses incurred

-ensures revenue and expense recognition principles followed
DEFFERALS (expenses/revenues recognized at later date): prepaid expense not used,
unearned revenues cash recieved but service not performed
*prepaid expenses expire in time or use
*prior to adjustment: assets overstated, expenses understated
*adjustment increases expenses and decreases assets
ACCRUALS: accrued rev is service performed but not paid, accrued expense incurred
not paid
Accrued Revenue
*adjustment increases balance sheet and income statement
*B4 adjustment, assets and revenue understated
*adjustment increased assets and increases revenues
Accrued Expenses
*incurred, not yet paid
*EX) interest, taxes, salaries
*b4 adjustment, liabilies and expenses understated
*adjustment inceases expense and increases liabilities
Accrued Interest
-amount interest determined by face value note, interest rate(expressed as annual
rate), and length of time note outstanding
Face Value*Annual Interest Rate*Time Terms of 1 Year=Interest
EX) ($5000*12%*1/12)=$50
Depreciation: allocate cost of asset to expense over useful life
 -add depreciated amount to Accumulated Depreciation(contra asset account (IS
ON THE LEFT ASSEST SIDE, offsets asset account)
Book Value: difference btwn cost of depreciable asset and accumulated depreciation.
Cost-depreciation

**OPTIONALLLLL*
Worksheet
-multiple column form used in adjustment process and preparing financial statements
-working rool, not part of journal or ledger, only used to prepare adjusting
entries

Reversing Entries
-reverse adjusting entires at beginning of next accounting period
-reverses adjusting entry made

Adjusted Trial Balance

-after journalized and posted all adjusting entries, prepares trial balance from
ledgers
-proces equality of total debit and credits in ledger after adjustments
*primary basis for preparation of financial statements, contains all data
1. prepare in come statement from revenue and expense accounts
2. use retained earnings and dividend accounts and net income from income statement
to
prepared retained earnings statement
3. Prepare balance sheet from asset and liability accounts and ending retained
earnings balance from retained earnings statement

Correcting Entries
-correct errors as soon as discovered
-journalize and post correcting entries
*Must be posted before closing entries

Closing the books

*performed after prepared financial statements at end of annual accounting period
-end of accounting period, makes accounts ready for next period
-distinguishes btwn temporary (all closed at end of period) and permanent accounts
-transfers temporary account balance to permanent SE/RE accounts by closing entries
-Closing entries: formally recognize in ledger, transfer of net income/loss and
dividends to RE
*produce 0 balance in temporary accounts, ready to accumulate seperate,new
data in next period
-close income statement account by trans revenue/expense to temporary Income
Summary account
-transfer resulting income net income/net loss to RE
-record closing entires in general journal

Post-Closing Trial Balance

-After journalized and posted all closing entries, prepares from ledger
-list permanent accounts and balances
-proves equality of permanent account balances carried foward into next period
*only contains permanent (balance sheet) accounts

Chapter 4

Classified Balance Sheet

-presents biz financial position at point in time
-groups together similar assets and similar liabilites
-helps determine biz has enough assets pay debts, claims of short/long term
creditors
Assets:
-current assets (expects convert cash or use up in 1 year/operating cycle)
-operating cycle: average time biz purchase/sell inventory and collect cash)
-EX) cash, investments, recievables, inventories, prepaid expenses
-listed in order expect convert to cash
-long term investments
-investments in stocks or bonds held for many years
-land or buildings currently not using
-long term notes recievable
-property, plant, and equipment
-intangible assets
-goodwill, patents, copyrights, and trademarks
Liabilites and SE:
-current liabilities
-obligations to pay in coming operating cycle
-EX) accounts payable, salaries, wages payable, notes payable, interest
payable, income taxes payable
-current maturites of long term obligations
**relationship btwen current assets and liabilities important evalute biz
liquidity: ability to pay obligations due within next year
-current assets>current liabilites=paying liabilities favorable
-long term liabilites
-obligations pay after 1 year
-EX) bonds payable, mortages payable, long term notes, lease liabilites,
pension liabilites
-SE

Chapter 5
Operating Cycle of Merchandising Comp
-usually longer than service comp (time takes sell inventory/recieve money)
Flow of costs: beginning inventory+cost goods purchased=cost of goods available for
sale
Perpetual System
-detailed records of cost of each inventory purchase and sale
-recorded continuousy=perpetually
-determines cost of goods sold each time sale occurs
Periodic System
-determine cost of goods sold at end of accounting period
-takes physical inventory count
1. determine cost of goods on hand at beginning of accounting period
2. add to cost of goods purchased
3. subtract cost of goods on hand at end of period

Purchase return: return from customer from disatisfaction

Purchase allowance: customer keeps item at a discounted/deducted price
Purchase discount: discount for paying with cash instead of on credit account