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2 kinds of decision makers:
Internal and external
3 forms of business:
- Sole proprietorship
-What you own. (land, cash, supplies)
-What you owe. (Notes payable, Accounts payable, Salaries payable)
-difference of own and owe. owner’s residual claim against the assets of the company. (Retained earnings, common stock)
Financial statement order:
-Income Statement (Revenues - Expenses = Net income
- -Statement of Retained Earnings (Net Income - Dividends = Ending balance for Ret. Earn.)
- -Balance Sheet (Assets = Liabilities + Owner's Equity)
- -Statement of Cash Flows (Explains the sources and uses of cash for the period
-Financial Accounting Standards Board: Creates the rules and standards that govern financial accounting.
-Generally accepted accounting principles: Establishes the rules for recording transactions and preparing financial statements.
-Securities Exchange Commission: Oversees the US financial markets.
-International Accounting Standards Board: Creates international financial reporting standards.
Economic Entity Assumption-
Going Concern Assumption-
Monetary Unit Assumption-
-Requires an organization to be a separate economic unit.
-Assumes that an entity will remain in operation for the foreseeable future.
-Assumes that the financial statements are recorded in a monetary unit.
-States that acquired assets and services should be recorded at their actual cost.
- How does each financial transaction affect the basic accounting equation?
- (bought office supplies for cash: Increase asset for supplies, decrease asset for cash)
Assets = Liabilities + Equity
Results in the creation of the financial statements.
- step 1: Transaction Analysis
- step 2: Make journal entries
- step 3: Post the journal entries to the accounts they affect
- Step 4: Create the Trial Balance
Double entry accounting-
-Transactions always have two impacts on the accounting equation. These “double” entries help keep the accounting equation in balance.
-left of account
-right of account
Record of a financial transaction; has an equal debit and credit; records the affect (increase or decrease) of a financial transaction on the two accounts involved.
Listing of all accounts and their balances; shows the equality of the debit and credit normal balance accounts.
Chart of accounts-
-Book where the accounts are kept.
-Book where the journal entries are recorded.
-List of all the accounts of a business.
shows the proportion of assets financed with debt.
Cash Basis Accounting vs Accrual Basis Accounting:
Cash Actg- Revenue is recorded when cash is received.
Accrual Actg- Revenue is recorded when it is earned.
Time Period Concept-
-Assumes that a business’s activities can be sliced into small segments and that financial statements can be prepared for specific time periods, such as a month, quarter, or year.
-Any twelve month period.
Revenue Recognition Principle-
-Revenue should be recorded when it is EARNED
-Expenses are recorded when they are incurred during the period. Expenses are matched at the end of the period against the revenues for that period.
Adjusting Journal Entries-
- Adjustments to the Trial Balance are made by recording actual Adjusting Journal Entries.
- Each Adjusting Journal Entry will adjust a balance sheet account and an income statement account.
Adjusting Journal Entry types:
- 1.) Prepaid Expenses/Assets: Prepaid rent, supplies, depreciation.
- 2.) Unearned Revenues: Unearned service revenue.
- 3.) Depreciation4.) Accrued Expenses: Salary exp, interest exp.
- 5.) Accrued Revenues: Interest revenue
Adjusted Trial Balance-
After journalizing and posting all the adjusting journal entries at the end of the fiscal period, a new adjusted trial balance is prepared.
The accounts that are closed or zeroed out in the closing journal entries.
The accounts that are not zeroed out in the closing entries
- -Stockholders' equity (common stock and retained earnings accounts)
4 Closing entries:
- 1.) Close the revenue accounts to Income Summary
- 2.) Close the expense accounts to Income Summary
- 3.) Close Income Summary to Retained Earnings4.) Close Dividends to Retained Earnings