acc chap 1-3 Flashcards
How do you record prepaid expenses?
Dr expense
Cr asset
How do you record depreciation
Dr expense
Cr contra asset
How do you record accrued expense
Dr expense
Cr liability
How do you record accrued revenue
Dr asset
Cr revenue
How do you record unearned revenue
Dr liability
Cr revenue
Types of Deferrals
Prepaid expenses – recorded as an asset when purchased
- Expensed when used or expired
Unearned revenue - recorded as a liability when payment is received
- Recorded as revenue when earned
Types of Depreciation (a type of deferral)
The allocation of the cost of a property, plant & equipment to expense over the asset’s useful life. - – Represents wear and tear and obsolescence.
- The cost spread over the amount of time you use it
Accumulated depreciation = contra asset account, has a credit balance
Carrying amount = cost - accumulated depreciation
Types of Accruals
Accrued expense - record expense before paying cash ex. Salaries, interest taxes
- The term accrued expense refers to a liability that arises from an expense that has not yet been paid
Accrued revenue
- Revenue that is recognized but not yet realized
Interest
*INTEREST IS ALWAYS A YEARLY RATE
Principal x interest x time
Ex. 10 200 x 10 % x 4/12 = 725
Supplies before and after it gets used up and where its recorded
Supplies is an asset on the balance sheet, when its used up it becomes an expense on the income statement
expense recognition principle
- identify expense when incurred
- measure the expense
- recognize along with related revenue
revenue recognition principle
- record after revenue is earned (percentage of completion)
- when goods/services have been delivered
What accounts get closed at year end and where do they go?
- Revenue, expenses and dividends go into retained earnings
How do you close accounts like revenue, expenses and dividends?
If it has a normal credit balance like revenue, debit it and credit retained earnings. If it has a normal debit balance, credit it and debit retained earnings.
How Transactions Affect Ratios
- Increase sales to enhance both net income and current assets
- Decrease expenses to improve net income and reduce liabilities
- Sell additional shares to increase cash and shareholders’ equity
What is accounting?
the information system that measures business activities, processes data into reports, and communicates results to decision makers
What are financial statements?
Business documents that companies use to report their activities to stakeholders. This may include: Income statements, statements of changes in equity, balance sheets (a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time), statement of cash flow.
Those who use accounting information include:
Individuals, managers, investors and creditors (primary users of accounting information), government regulatory agencies, taxing authorities, non-profit organizations (their profit must cover their costs to keep the non-profit running)
What are assets?
Products or services that aid in the profit of an organization now or in the future, ex. Company cars
What are liabilities?
Debts and loans payable to creditors (Examples include accounts payable, notes payable, salary payable, interest payable, etc)
Three ways to organize a business
Proprietorship (sole), partnership, corporation
Private vs public companies:
Private companies financial information can’t be accessed by the public so shares are privately held, public companies financial information is available for everyone to see so shares are sold on stock exchange
Anatomy of a corporation
Shareholders (owners), board of directors (hire people to run the corporation, supervises activities of the business), chief executive officer (CEO), and vice presidents
What is revenue
Money made by selling the product/service
Net income
Profit (= revenue - expenses)
Current assets
Assets that are short term - usually a year
Current liabilities
Accounts payable: bought inventory, supplies, etc, that were bought on account/credit, which the company will pay off later
Accounts receivable
products or services sold on account/on credit. Company will receive money later.
Shareholders equity
→ Assets = Liabilities + Owners Equity/Shareholders Equity
- Common shares: “Common shares are issued to business owners and other investors as proof of the money they have paid into a company. Of all shareholders, common shareholders have the least claim on a company’s assets.” - bdc
- Share capital: Amounts contributed by shareholders in exchange for shares
- Retained earnings: Money the company has after paying off its expenses, liabilities, etc.
Notes to financial statements
- An integral part of the financial statements
- Should be read carefully with financial statements
- provide information on the accounting policies used
- Examples are policies used to account for inventories and depreciation
Financial reporting responsibilities
- Company management are responsable for preparing financial statements (companies are required to hire and auditor to conduct an audit)
- Auditor’s responsibility is to gather evidence and decide whether the information reported in the financial statements complies with the applicable GAAP (generally accepted accounting principles).
- Auditor provides a signed report that states its opinion on the fairness of the company’s financial statements relative to GAAP
Dividends
“the percentage of a company’s earnings that is paid to its shareholders as their share of the profits”
Relationship among the financial statements
income statement –> statement of retained earnings & statement of changes in equity –>
Balance sheet –> Cash flow statement
Operating income
Profit a company makes after paying for day-to-day expenses (operating expenses)
Accounting’s Conceptual Framework
The overall objective of accounting is to provide financial information that is useful to investors and creditors. Accountants follow professional guidelines found in IFRS and ASPE.
- Information must be useful for decision makers
- Relevance
- Faithful representation
- Comparability
- Verifiability
- Timeliness
- Understandibility
- Cost
- Financial reporting standards
Accounting Assumptions:
- Separate entity assumption → The business is a separate economic unit
- The Going-Concern Assumption → The business will run in the foreseeable future
- The Historical Cost Assumption → Assets are recorded at their actual cost, not market value.
- The Stable Monetary Unit Assumption → Assumes the value of currency is stable
Gross profit vs Net profit
Gross profit is profit after paying some costs, net is after paying all costs.
Ethical analysis
- Accountant’s goal is to make a decision that fulfills their ethical responsibilities to every stakeholder
- Need to apply relevant accounting standards in a way that reports a faithful representation of the company’s financial position and operating performance
types of assets
cash, accounts receivable, land, furniture, tools, supplies
types of liabilities
loans, accounts payable, notes payable
types of equity
common shares, retained earnings, net income, revenue, dividends, expenses
Shareholders equity = common shares + retained earnings - dividends + revenue - expense
What is double-entry bookkeeping?
Double-entry bookkeeping uses debits and credits (credit left debit right) to record the dual effects of each business transaction.
Accounting cycle
- Transaction occurs
- Analyze the transaction
- Record in a journal
- Transfer to the general ledger
- Trial balance
Journal/ledger
- The journal is a chronological record of all transactions listed by date
- The ledger is a grouping of all the accounts
- Data must be copied to the ledger - a process called posting
Recording transactions in the ledger
Debit is the left side of T acc, credit is right
Assets have a normal debit balance
Liabilities and shareholders equity have normal credit balances (expenses and dividends though have a normal debit as it decreases equity)
Trial balance
A trial balance lists all accounts with their balances - assets, liabilities, and then equity (in that order)
Closing the Accounts
Prepares the accounts for the next period’s transactions
Temporary accounts such as revenue, expenses and dividends are set to zero at the end of the accounting period → all turned into retained earnings
- To close debit accounts, credit them and vice versa
- Dividends and expenses decrease retained earnings (R.E. is debited), revenue increases it (R.E. is credited)
Permanent accounts (assets, liabilities, and shareholders equity) are not closed.
Accounts like expenses, revenue and dividends are closed at the period’s end.
(Net) Working capital is:
Total current assets – Total current liabilities
It refers to the ability of the company to use its current assets to pay off its current liabilities
- Ratios are used by creditors in deciding whether or not to loan the company money, they must predict whether or not the loan will be repaid along with the interest
Current ratio
current assets/current liabilities
- Measures the companies ability to pay short term debt. The higher the number, the better.
Debt ratio
total liabilities/total assets
- measures the companies ability to pay all debt. the lower the number, the better
How transactions affect ratios
Increase sales to enhance both net income and current assets
Decrease expenses to improve net income and reduce liabilities
Sell additional shares to increase cash and shareholders’ equity
