Business Flashcards
Accounting
the language of business because its an information system; it measures business activities, process data into financial statements and reports, communicates results to decision makers.
Financial Accounting
For decision makers outside the entity (investors, creditors, public, government agencies)
Managerial Accounting
For managers inside the entity (budgets, forecasts, projections)
Proprietorship
a single owner; tend to be small retail stores or solo providers of professional services; PERSONALLY liable for all business’s debts; distinct entity for accounting purposes
Partnership
Two or more parties as co-workers; Many are small or medium-sized companies; general partnerships have mutual agency and unlimited liability; in limited-liability partnerships, only liable up to the investment put in.
Limited Liability Company
Business (not owners) is liable for debts; May have one owner or many called members; Members have limited liability
Corporation
Owned by stockholders (shareholders); able to raise large sums of capital by issuing stock; formed understate law; legally distinct from its owners; Stockholders have no personal obligation for the corporation’s debts, limited liability.
Double Taxation
Corporation pays income tax; Shareholders taxed on dividends. Stockholders elect board of directors which - Set policy; Appoints officers.
Accounting Equation
Accounting Equation
Assets = Liabilities + Owner’s Equity
Financial Statements
income statement, retained earnings statement, balance sheet, statement of cash flows
Retained Earnings
beginning retained earnings + net income - dividends = end retained earnings
Transaction
any event that has a financial impact on the business and can be measured reliably
Assets
economic resources that provide a future benefit.
- Cash; Accounts Receivable; Inventory; Investments; Property, Plant, Equipment
Liabilities
a debt or payable.
- Accounts Payable; Notes Payable
Stockholders’ Equity
the stockholders’ claims to the assets of the company.
- Common Stock; Retained Earnings; Dividends; Revenues; Expenses
Journal Entries
Double-entry system; records dual effects of each transaction, at least two accounts in each transaction
T-Accounts
a record of increases and decreases in a specific asset, liability, equity, revenue, or expense. Assets (Debit +, Credit -) = Liabilities (Debit -, Credit +) + Stockholders’ Equity (Debit -, Credit +)
Journal
a chronological record of transaction. Three Steps:
1) Specify each account affected by the transaction and classify by type
2) Determine if each account is increased/decreased (debit or credit)
3) Record in the journal
Flow of Accounting Data
1) Transaction Occurs
2) Transaction Analyzed
3) Transaction Entered in the Journal
4) Amounts Posted to the Ledger Accounts
Trial balance
Lists all accounts with their balances; Assets listed first, then liabilities and stockholders’ equity; Shows that debits equal credits; Usually prepared at the end of the period; facilities preparation of the financial statements.
Normal Balance of an Account
Assets (Debit); Liabilities (Credit); Stockholders’ Equity - Overall (Credit): Common Stock (credit), Retained Earnings (Credit), Dividends (Debit), Revenues (Credit), Expenses (Debit)
Accural Accounting
Records impact of transactions when they occur. Records revenue when earned and expenses when incurred.
Cash Basis Accounting
records only cash transactions- cash receipts and cash payments. Ignores important information. Results in incomplete financial statements. Only used by the smallest business.
Accrual Accounting - Cash transactions
Collecting cash from customers. Receiving cash from interest earned. Paying salaries, rent, and other expenses. Borrowing money. Paying off loans. Issuing stock.
Accrual Accounting - Non Cash transactions
Sales on account. Purchases of inventory on account. Depreciation expenses. Usage of prepaid rent, insurance, and supplies. Earning of revenue when cash is collected in advance.
Revenue Principle
- when to record (recognize revenue)
- what amount of revenue to record
Expense Recognition Principle
identify all expenses incurred during the period, measure the expenses and recognize them in the same period in which any related revenues are earned
Adjusting Entries - Deferrals, Depreciation, Accruals
Deferrals - An adjustment for payment of an item or receipt of cash in advance
Depreciation - Allocates the cost of a plant asset to expense over the asset’s useful life
Accruals- The opposite of a deferrals
Straight Line Depreciation Method
(purchase cost - salvage value) / useful life assumption
Steps to Close Books:
Do - Close Temporary Accounts (Revenues, Expenses, Dividends)
Don’t - Permanent Accounts (Assets, Liabilities, Stockholder’s Equity)
1) Debit each revenue for the amount of its credit balance. Credit Retained Earnings for the sum of all revenues.
2) Credit each expense account for the amount of its debit balance. Debit Retained Earnings for the sum of all expenses.
3) Credit the Dividends account for the amount of its debit balance. Debit Retained Earnings for the same account.
Fraud and its impact
Intentional misrepresentation of facts. For the purpose of persuading another party to act in a certain way. Cause injury or damage.
Prepare Bank Reconciliation
In reconciling the bank account, it is customary to reconcile the balance per books and the balance per bank to their adjusted balance.
Docs include: Signature Card, Deposit ticket, Check, Bank Statement, Bank Reconciliation
Bank Side
deposits in transit, outstanding checks, bank errors
Book Side
Bank collections
Electronic funds transfers
Service charge
Interest revenue
NSF checks
Cost of printed checks
Book errors
Accounting for Sales Discounts
When the seller allows a discount, this is recorded as a reduction of revenues and is typically a debit to a contra revenue account.
Cash - Dr XXX Discount - Dr XXX
To Sales - Cr XXX To Party’s Name - Cr XXX
Shipping Terms - Revenue Recognition
Related transportation and delivery expenses directly associated with the shipments are recorded once the revenue is recognized. Revenue is recognized at a point in time when the control passes to the customer.
Accounting for bad debt
Direct Write Off Method: writing off a bad debt expense directly against the corresponding receivable account . Therefore, under the direct write-off method, a specific dollar amount from a customer account will be written off as a bad debt expense.
Accounting for Notes Receivables - Journal Entries
The journal entry for interest on a note receivable is to debit the interest income account and credit the cash account. The portion of the note receivable due to be repaid within time period is classified as a current asset and the balance as a long-term asset.
First-In, First-Out (FIFO)
Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold. Determine the cost of your oldest inventory and Multiply that cost by the amount of inventory sold to calculate COGS.
Last-In, First-Out (LIFO)
Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. Determine the cost of your most recent inventory and Multiply it by the amount of inventory sold.
Gross Profit Percentage
gross profit/net sales revenue
Plant Assets
The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.
Costs include: Purchase price, Taxes, Commissions, other costs ready to use.
Land
Purchase price. Brokerage commission. Survey fee. Legal fees. Back property taxes. Expenditures for grading and cleaning land. Removing any unwanted buildings.
Building, Machinery, and Equipment
Purchasing - Purchase price. Brokerage commission. Sales and other taxes. Expenditures to repair and renovate building for its intended purpose.
Cost - Purchase price. Transportation from the seller. Insurance while in transmit. Sales and other taxes. Purchase commission. Installation costs. Expenditures to test the asset before it’s placed in service. Cost of any special platforms.
Book Value
the difference between the cost of a depreciable asset and its related accumulated depreciation
Book Value = Cost - Accumulation Depreciation
How to Measure Depreciation Cost
purchase price and all costs to get plant asset ready for use, known amount.
Estimated Useful Life
length of service expected from using the asset, estimated amount
Estimated Residual Value
expected cash value of an asset at the end of its useful life
Straight-Line Method
A depreciation method that allocates an equal amount of depreciation each year. (Cost - Residual value) / Useful life.
Current Liabilities
debts of the business that must be paid within the next accounting period
short-term notes payable
notes payable that are due within one year
Note(s)
A written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer.
Current Portion of Long-Term Debt
Portion of long-term debt due within one year or the operating cycle, whichever is longer; reported under current liabilities.
