bookeeping
The systematic gathering of financial information
Financial Accounting
Reporting summary financial information outside of your organization.
Managerial Accounting
reporting confidential financial information to the people inside your organization.
Income Taxes
Making sure that you are in compliance with the tax laws.
4 types of accounting
Bookkeeping
Financial Accounting
Managerial Accounting
Income Taxes
Accounting
a measurement and communication process used to report on the activities of profit-seeking business organizations and not-for-profit organizations
Financial Statements Prepared by an Accountant
Income Statement
Statement of Stockholder's Equity
Balance Sheet
Statement of Cash flows
The accounting Process
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Income Statement
A financial statement showing the revenue and expenses for a fiscal period.
Generally Accepted Accounting Principles (GAAP)
a set of commonly followed standards and principles for financial accounting
Four Basic Assumptions
Accounting Entity, Going Concern, Monetary Unit Principle, Time-Period Principle
Accounting Entity
assumes that the business is separate from its owners or other businesses. Revenues and expenses should be kept separate from personal expenses
Going Concern
assumes that the business will be in operation indefinitely. This assumption validates especially the carrying value of assets and liabilities. In cases when liquidation is certain, this assumption is not applicable
Monetary Unit Principle
assumes a stable currency is going to be the measurement unit of record. The FASB accepts the nominal value of the U.S. dollar as the monetary unit of record unadjusted for inflation for U.S.-based companies. This is also known as the stable dollar princi
Time Period Principle
implies that the economic activities of an enterprise can be divided into artificial time periods
statement of stockholders' equity
a financial statement that shows changes in a corporation's ownership for a fiscal period
Statement of Cash Flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.
Four Basic Principles
Historical Cost Principle, Revenue Recognition Principle, Matching Principle, Full Disclosure Principle
Historical Cost Principle
requires companies to account and report based on acquisition (original) costs rather than fair market value for most assets and liabilities
Revenue Recognition Principle
requires companies to record when revenue is (a) realized or realizable AND (b) earned, not when cash is received or when an order is received. Also, under this principle a company should establish an allowance for bad debts accounts. This way of accounti
Matching Principle
Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no
Full Disclosure Principle
Amount and kind of information disclosed should be decided based on cost-benefit or after trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs rea
Five Basic Constraints
Objectivity Principle, Materiality Principle, Consistency Principle, Conservatism Principle, Cost-Benefit Relationship
Objectivity Principle
the company financial statements provided by the accountants should be based on objective evidence
Materiality Principle
the significance of an item should be considered when it is reported
Consistency Principle
the company uses the same accounting principles and methods from year to year
Conservatism Principle
when choosing between two solutions, the one that will be least likely to overstate assets and net income, or understate liabilities and net losses
Cost-Benefit Relationship
the company considers the costs necessary to prepare the information and what benefit users will get from it in making decisions, for example, about voluntary financial statement disclosures
profitability
ability to provide financial rewards sufficient to attract and retain financing
Solvency
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Income Statement
Revenues - Expenses = Net Income
Revenues
amount of assets created from the sale of goods or services
Expenses
amount of assets consumed in creating revenue; caused when liabilities are created in generating revenues
Net Income
Overall measure of a company's performance during a period; the difference between revenues and expenses for the period
Earnings Per Share (EPS)
Net Income/ Outstanding number of shares of stock
Net Income Formula
Revenues>Expenses
Net Loss Formula
Expenses>Revenues
Dividends
the means by which a corporation rewards its stockholders (owners) for providing it with investment funds
The Accounting Equation
Assets = Liabilities + Equity
Assets
resources owned or controlled by a company that will likely provide future benefit
Liabilities
Obligations that may require sacrifice of future economic benefit in the form of transferring assets or providing services.
Owner's Equity
The amount the owner's originally invested in the business plus how much profit they have left in the business; ownership interest in the company's assets
Assets
things of value owned by the business
i.e: cash, accounts receivable, inventories, and buildings
Liabilities
the debts owed by a business
i.e: lines of credit, accounts/ notes payable
Owners interest
stockholders' equity
capital stock
amount of the owners' investment in the corporation
retained earnings
the accumulated net income of the corporation minus dividends distributed to stockholders
T account
a tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)
journal
A form for recording transactions in chronological order
Ledger
the group of accounts maintained by a company
source document
A paper prepared as evidence that a transaction occurred.
Transaction Entry
a recording of a business transaction in a journal
account
a part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, and stockholders' equity account
Types of Accounts
Nominal Accounts
sub classifications of the stockholders' equity accounts; temporary accounts because they temporarily contain revenue, expense, and dividend information that is transferred (or closed) to the Retained Earnings account at the end of the accounting period
Account numbered 1
Asset
Account numbered 2
Liability
Account numbered 3
Equity
Account numbered 4
Revenue
Account numbered 5
Expense
Trial Balance
a listing of the ledger accounts and their debit or credit balances to determine that total debits equal total credits in the recording process
Accounting Cycle
series of steps performed during the accounting period (some throughout the period and some at the end) to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements
Business Transactions
measurable events that affect the financial condition of a business
Accounting Cycle
Posting
process of recording in the general ledger accounts the information contained in the journal
Accrual Basis Accounting
revenues are recorded when a company makes a sale or performs a service, regardless of when the company receives payment for the sale or the service. Also, under the accrual basis of accounting, expenses are matched to the revenues that are recorded, whet
Matching Concept
matching of expenses to revenues in the period that revenues are recorded
Cross-indexing
the placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account
simple journal entries
have involved one debit and one credit
Compound Journal Entries
Journal entries that affect at least three accounts.
Worksheet
columnar sheet of paper or a computer spreadsheet, like Microsoft Excel, on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements
cash basis of accounting
recognizes revenues when cash is received and recognizes expenses when cash is paid out
Accounting Periods
equal in length and may be one month, one quarter, or one year
Accounting Year (Fiscal Year)
an accounting period of one year
Calendar Year
Ends on December 31st; May not coincide with a Fiscal Year
prepaid expenses
an asset whose value has expired or partially expired during the accounting period, such as prepaid insurance, prepaid rent, and supplies on hand
Prepaid Insurance
advance payment is an asset because the company will receive insurance coverage in the future as a result of this insurance policy payment. With the passage of time, however, the asset, prepaid insurance, gradually expires. The portion that has expired be
Depreciable Asset
long-lived asset such as a building, machine, vehicle, or piece of equipment that provides a service or a benefit to a business over a long period of time
Depreciation Expense
the amount of asset cost assigned as an expense to a particular accounting period
Depreciation Accounting
The process of recording depreciation expense
Asset Cost
the amount that a company paid to purchase the depreciable asset
Estimated Residual Value
the amount that the company expects to sell the asset for at the end of its estimated useful life
Estimated Useful Life
the estimated time that a company expects to use the asset
Straight-Line Depreciation
the same amount of depreciation expense to each accounting period over the life of the asset.
Accumulated Depreciation Account
a contra asset account that shows the total of all depreciation recorded on the asset from the date of acquisition up through the balance sheet date
Contra Asset Account
a deduction from the asset to which it relates in the balance sheet
Accrued Assets
assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period
Accrued Revenues
revenues for services performed but not yet received in cash or recorded
Cash Controls
control and manage cash
Internal Controls
control environment, accounting system, and control procedures.
Control Environment
the overall attitude, awareness, and actions of the board of directors, management, and stockholders
accounting system
consists of the methods and records that identify, assemble, analyze, classify, record, and report an entity's transactions to provide complete, accurate, and timely financial information
Control Procedures
are additional policies and procedures that management establishes to provide reasonable assurance that the company achieves its specific objectives
wire transfer
an electronic communication that moves funds from an account in one bank to an account in a different bank instantly
debit memo
form used by the bank to explain a deduction to an account
credit memo
form used by the bank to explain an addition to the account
bank reconciliation
a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company's books
deposits in transit
a day's cash receipts recorded in the depositor's books in one period but recorded as a deposit by the bank in the succeeding period
petty cash fund
a fund of currency and coin established for the payment of small amounts of money
petty cash voucher
a form used to reflect payments from the petty cash fund.
imprest fund
A cash account with two characteristics: (1) It is set at a fixed amount, such as $100; and (2) vouchers are required for every disbursement. At all times, the sum of cash plus vouchers should equal the preset fund balance.
Accounts Receivable
Amounts to be received in the future due to the sale of goods or services
trade receivables
receivables resulting from credit sales of goods and services
direct write-off method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be noncollectable.
allowance method
A method of accounting for bad debts that involves estimating noncollectable accounts at the end of each period.
net realizable value
the amount of cash the firm expects to collect
aging schedule
A grouping of accounts receivable into age categories based upon the length of time they have been outstanding on the company record.
Current Liabilities
liabilities due within a short time, usually within a year
long-term liabilities
liabilities owed for more than a year
Clearly determinable liabilities
Liabilities whose existence and amount are certain. Examples include accounts payable, notes payable, interest payable, unearned delivery fees, wages payable, sales tax payable, federal excise tax payable, current portions of long-term debt, and various p
Estimated Liabilities
Liabilities known to exist, but that must be recorded in the accounting records at estimated dollar amounts.
Contingent Liabilities
Liabilities that may arise from past transactions if certain events occur in the future.
payroll accounting
recording all aspects of employee compensation