Economic Events
causes changes in the financial position of the company
external events
involve an exchange transaction with another entity
internal events
do not involve an exchange transaction with another entity
Accounting Equation
Assets = Liabilities + Owners' Equity
Double-entry system
refers to the dual effect that each transaction has on the accounting equation
Accounts
represents elements of the accounting equation
General Ledger
collection of accounts
T-accounts
used for instructional purposes instead of formal ledger accounts
General Ledger accounts
serve as control accounts
subsidiary acounts
maintained in separate subsidiary ledgers
permanent accounts, temporary accounts
permanent accounts
represent the basic financial position elements (Assets, liabilities, and shareholders' equity)
temporary accounts
represent changes in the RE, component of shareholders equity
Temporary accounts would not include
*Accounts receivable
Steps of the Accounting Cycle
1. source documents
2. transaction analysis
3. journal
4. general ledger
5. unadjusted trial balance
6. adjusting entries
7. adjusted trial balance
8. financial statements
9. closing process
10. post-closing trial balance
source documents
identify the date and nature of each transaction, the parties, and monetary terms
transaction analysis
the process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved
Journals
provide a chronological record of all economic events affecting a company
each entry is expressed in terms of equal debits and credits
unadjusted trial balance
list of general ledger accounts along with their balances
purpose: to check for completeness and prove that accounting equation is in balance
adjusting entries
record the effect on internal events on the accounting equation
recorded at the end of any period when financial statements are prepared
to implement the accrual accounting model
1. prepayments: prepaid expenses, defferred revenues
2. accruals: accrued li
prepayments(deferrals)
occur when cash flow precedes either expense or revenue recognition
Deferred revenues
cash received from customers in advance of providing a good or service
Accruals
involve cash flows that occur after either expense or revenue recognition
accrued liabilities and accrued receivables
Estimates
third classification of adjusting entries
depreciation expense
requires an estimate of expected useful life and expected residual value
bad debt expense
requires estimate of amount of accounts receivable uncollectible
Income statement
reports the change in shareholders' equity that occurred during the period of revenues, expenses, gains, and losses
Statement of Comprehensive Income
reports changes in shareholders' equity during the period that were not a result of transactions with owners
includes other comprehensive income (OCI) or loss items
can be reported in two ways
a single continuous statement of comprehensive income
two sepa
Balance sheet
presents the financial position of a company, organized list of assets, liabilities, and shareholders' equity at a point of time
classification according to common characteristics
current assets, current liabilities, noncurrent assets, long term liabiliti
current assets
cash, will be converted to cash, will be used up within one year or the operating cycle, whichever is longer
current liabilities
liabilities that will be satisfied within one year or operating cycle
noncurrent assets
include property equipment, long term receivables, and investments
long term liabilities
include all liabilities not classified as current
shareholders' equity
lists the paid in capital portion of equity--common stock--and retained earnings
Statement of cash flows
provides information about cash receipts and cash disbursements
Three categories of transactions affecting cash
Operating activities
investing activities
financing activities
operating activities
inflows and outflows of cash related to transactions entering into the determination of net income
investing activities
involve the acquisition and sale of long term assets used in business and non operating investment assets
financing activities
involve cash inflows and outflows from transactions with creditors and owners
Statement of shareholders' equity
discloses the source of changes in the permanent shareholders' equity accounts
-investment by owners (common stock)
-distributions to owners (dividends)
-net income
-other comprehensive income
Closing process
serves a dual purpose
1 temporary accounts are reduced to zero
2 temporary account balances are closed to retained earnings
Income summary
a bookkeeping convenience that provides a check that all temporary accounts have been properly closed
If expenses exceed revenues for the accounting period, the income summary account:
will have a debit balance after closing