Cost Principle
recording assets at their historical cost
Revenue recognition principle
revenue is recorded when it is earned
matching principle
costs are recorded in the same period as the revenues generated by the costs
assets
things a company owns
liabilities
amounts a company owes
The basic accounting equation
assets=liabilities + equity
income statement
only revenues and expenses
balance sheet
is the basic accounting equation. Contains assets, liabilities, and stockholders equity
double entry accounting
requires that each transaction must be recorded in at least two different accounts. 1 debit and 1 credit and they must equal
debit
left side, normal balance is assets, dividends, expenses
debit normal balance
DEA dividends, expenses, and assets
credit
right side, normal balance is liabilities, equity, revenue
credit normal balance
LER liabilities, equity, and revenue
journal
book of original entry, transactions recorded in chronological order
posting
transferring journal entries to ledger accounts
ledger
entire group of accounts maintained by a company
trial balance
list of accounts and their balances at a given time. Doesn't give detailed transactions. Purpose is to prove that debits equal credits.
prepaid expenses
cash happens first, it is a deferral. e.g. office supplies on hand that will be used in the next period
unearned revenue
cash happens first, it is a deferral, revenues received in cash and recorded as liabilities before they are earned. e.g. interest revenue collected, not yet earned
accrued revenues
first earned then receive, accrual. Earned but not yet received in cash or recorded. e.g. an expense incurred; not yet paid or recorded.
accrued expenses
first earned then received, accrual. expenses incurred but not yet paid in cash or recorded. e.g. an expense incurred; not yet paid or recorded
temporary accounts
accounts that are closed at the end of the year. All revenue accounts, expense accounts, and dividends
permanent accounts
are not closed. Assets, liabilities, stockholders' equity accounts.
current assets
assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.
long term investments
company is not currently using in its operating activities. Stocks, bonds, land/buildings for future use.
property, plant, and equipment
long useful lives, currently used in operations, depreciation, and accumulated depreciation
current liabilities
obligations the company is to pay within coming year. Notes payable, accounts payable...in order of liquidity
long term liabilities
obligations a company expects to pay after one year. Long term debt, deferred income tax
stockholders (owners) equity
common stock, retained earnings, capital stock/account
credit terms
specifies a percentage off the bill if paid within a certain number of days
operating cycle
cash to cash, merchandising company longer than service company
contra revenue accounts
debit, sales returns and allowances, sales discount
FOB shipping point
freight terms that require the buyer to pay the freight cost
FOB destination
freight terms that require the seller to pay the freight cost
LIFO
used when the last units purchased are the first ones to be sold
FIFO
used when the first units purchased are the first ones to be sold
average cost method
used by a company that sells large quantities of identical products
specific identification
used by a company that sells a few, very expensive items
lower of cost or market method
used in order to be conservative
inventory turnover
number of times on average the inventory is sold during the period
inventory turnover ration
COGS/average inventory
internal control
safe guard assets, enhance accuracy and reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations
establishment of responsibility
one person is responsible for a given task
segregation of duties
related duties should be assigned to different individuals
documentation procedures
use pre numbered documents for all documents to be accounted for
physical controls
safes, alarms, time clocks, etc.
independent internal verification
verify records periodically, verify by independent employee, discrepancies reported to management
human resource controls
bond employees, rotate duties and require vacations, conduct background checks.
bank reconciliation items
look at deductions and additions per bank statement compared to per books to get correct balance
receivables
amounts due from individuals and other companies that are expected to be collected in cash
percent of sales
emphasizes matching of expenses with revenues, and on the income statement
percent of receivables
accounts receivable to allowance for doubtful accounts, on balance sheet
cash realizable value
amounts we realistically thing ewe can collect from customers
cash realizable equation
accounts receivable less allowance for doubtful accounts
note receivables
receivable that usually includes interest
credit card sales
find accounts receivable turnover to find average collection period in days
plant assets
include land, land improvements, buildings, and equipment (machinery, furniture, tools)
depreciation
a cost allocation in a systematic and rational manner, cost spread over its lifetime
depreciation factors
cost, useful life, salvage value
straight line method
most common depreciation method, expense is same for each year. Cost - salvage value
units of activity
expense varies based on activity
book value
cost - accumulated depreciation
gain on disposal
proceeds >book value
loss on disposal
proceeds < book value
sales tax
expressed as a stated percent of the sales price, retailer sends taxes to state's department
salaries
managerial, administrative, and sales personnel (monthly/yearly)
wages
store clerks, factory employees, and manual laborers (per hour)
managerial
accounting for managers and other internal users, corporations, proprietorships, partnerships, and not for profit
planning
looking ahead, setting goals and objectives
directing
coordinate activities, implement objectives, provide incentives, hire/train employees, produce smooth running operations
controlling
keep on track, determine if goals met, decide changes to get back on track
direct materials
raw materials that can be physically and directly associated with the finished product
direct labor
work of factory employees physically and directly associated with the product
manufacturing overhead
costs indirectly associated with manufacturing the finished product
period costs
nonmanufacturing costs, selling expenses, administrative expenses
raw materials inventory
shows the cost of raw materials on hand
work in process inventory
cost applicable to units that have been started into production but are only partially complete
finished goods inventory
cost of completed goods on hand
CVP analysis
study of how specific costs respond to changes in the level of business activity
variable
costs vary in total directly and proportionately with changes in the activity level, remain the same per unit
fixed
costs remain the same, per unit cost varies inversely with activity
mixed
have both, change in total but not proportionately with changes in activity level
budget
formal written statement of managements plans, promotes efficiency, control device
budget period
any period of time, usually for one year
benefits of a budget
plan ahead, define objectives, early warning system, awareness, motivates, coordinates activities
participative
bottom to top approach, more accurate, fair, time consuming
master budget
set of interrelated budges, operating and financial budgets
sale budget
starting point and key factor in developing the master budget
service budget
coordinating professional staff needs with anticipated services