Final Exam Flashcards
Internal users of accounting data
People who work in the company.
Example: Managers, Human Resources, Marketing
External users of accounting data
People outside the company.
Example: Government Agencies, Consumers, Creditors, Investors
What are the three forms of business ownership?
- Sole Proprietorship - One business owner; personal liability; limited life
- Partnership - Two or more owners; personal liability; limited life
- Corporation - Share stock, limited liability; unlimited life
Income Statement
The purpose of an income statement is to determine net income
Single Step:
Revenues - Expenses = Net Income
Multi-Step:
Sales Revenue
(Less) Sales Discount, Sales Return & Allowances
Net Sales
- Cost of Goods Sold
= Gross Profit
- Operating Expense (Ex. Salaries, Rent, Depreciation, Utilities, etc.)
= Income from Operations
+ Other Revenues and Gains
- Other Expenses and Losses
= Net Income (Loss)
Retained Earnings Statement
The purpose of the Retained Earning Statement is to explain how retained earnings have changed over a period of time.
Retained Earnings (Beginning of Period)
+ Net Income
- Dividends
Retained Earnings (End of Period)
Classified Balance Sheet
The purpose of the balance sheet is to report a company’s financial condition at a precise moment in time.
Assets - Current Assets: Cash, Accounts Receivable, (LESS) Allowance for Doubtful Accounts, Inventory
PPE: Land, Building, (LESS) Accumulated Depreciation, Equipment
Intangible Assets: Patent, Franchise
Liabilities - Current Liabilities: Current Portion of Mortgage Payable, Notes Payable, Accounts Payable, Salaries Payable, Bonds Payable, (LESS) Discount on Bonds Payable, Premium on Bonds Payable, Unearned Revenue.
Long-Term: Mortgage Payable
Stockholders’ Equity - Capital Stock, Retained Earnings
Accounting Equation
Assets = Liability + Stockholders’ Equity
Assets
Something of value owned by an entity (Ex. Cash, Accounts Receivable, Supplies, Equipment, etc.)
Often used to produce a profit, and increase when they are acquired, or a company sells goods or services to customers.
Liabilities
Debts or obligations of the company (What the Company Owes) (Ex. Accounts Payable, Notes Payable, and Mortgage Payable)
Often increases when the company borrows money or when the debt is paid off to the creditor from which the money was borrowed.
Stockholders’ Equity
Owners’ claim on total assets of the business;
It contains two components:
1. Common Stock - the total amount paid in by stockholders for shares they purchase.
2. Retained Earnings - Net Income the company retains in the business; Contains revenues, expenses, and dividends.
Debit
The Left Side
Credits
The Right Side
Journal
Companies record all of their transactions in chronological order.
Ledger “T-Accounts”
Each account contains a record of all transactions affecting that specific account; it included all assets, liabilities, and stockholder’s equity accounts.
Journal Entries
- Debit accounts are journalized first; credit accounts are journalized on the next line below with an indention.
- Skip a line between each journal entry.
- Debits and Credits MUST equal for each entry.
- No Dollar signs should be used.
- Do not total out columns.
Charts of Accounts
List of accounts and account numbers used; no account balances are listed.
Trial Balance
List of ledger accounts and their balances at a specific point in time in order they appear in the ledger (Assets, Liabilities, Stockholders Equity, Revenues, Expenses)
It proves that debits equal to credits (Must total at the bottom of each column)
Normal Balances
The Side of the account which increases the account balance; Normal debits balances are assets, expenses, dividends and accounts receivable; Normal credit balance are liabilities, revenues, common stock, retained earnings, and accounts payable.
D.E.A.D
Debits INCREASE Expenses, Assets, Dividends
Time Period Assumption
Allows a company to report its economic activities on a regular basis for a specific period of time.
Economic Entity Assumption
Requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Monetary Unit Assumption
Requires that only transactional data capable of being expressed in terms of money be included in the accounting records of economic entity.
Revenue Recognition Principle
Revenue should be recognized in the accounting period in which services are performed.
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 preformed, or when a product is produced, but when the work or product actually makes its contribution to revenue.
Cost Principle
Dictates that companies record assets at their cost.
Temporary (Normal) Accounts
Accounts that are closed at the end of the period; Consist of revenues, expenses, dividends, and income summary.
Permanent (Real) Accounts
Accounts that are NOT closed at the end of the period; consist of assets, liabilities, common stock, and retained earnings (Balance Sheet accounts are permanent)
Closing Entries “R.E.I.D”
Revenues (D) –> Income Summary (C)
Expenses (C) –> Income Summary (D)
Income Summary (D) –> Retained Earnings (C)
Dividends (C) –> Retained Earnings (D)
Adjusting Entries
Entries to adjust account balances to their correct balances at the end of the period;
Effects both the balance sheet account and the income statement account;
Types of adjusting entries include:
1. Deferrals - When cash is exchanged before revenue is earned (Ex. Prepaid Expenses & Unearned Revenues)
2. Accruals - When revenue is earned or expense is incurred before a cash exchange (Ex. Liability)
Accrual Accounting
Recording transactions in the period in which they occur; record revenues when earned and expenses when incurred regardless of when cash is received or paid.
Adjusted Trial Balance
Trial balance prepared after adjusting entries are journalized and posted; used to prepare financial statements.
Service Company
Earns its revenue by providing services; Service Revenues are recognized when services are provided, and operating expenses include salaries, rent, depreciation, etc. (Same for merchandising and manufacturing companies)
Merchandising Company
Earns its revenue by buying or selling inventory.
- Sales Revenue (or sales) is recognized when a product is being sold
- Cost of Goods Sold is how much it cost the company to make the product that is being sold to the customer
- Inventory is the products the company is holding to sell to customers.
Manufacturing Company
Sells a product that is made (Ex. Raw Material, Work in Progress, Finished Goods)
- Sales Revenue is recognized when a finished product is sold to a customer
- Cost of Goods Sold is how much it cost the manufacturing company to make a product sold to customers
Sales on Merchandise
(Dr) Cash or Accounts Receivable
(Cr) Sales Revenue
(Dr) Cost of Goods Sold
(Cr) Inventory
Sales Return
(Dr) Sales Returns & Allowance
(Cr) Accounts Receivable or Cash
(Dr) Inventory
(Cr) Cost of Goods Sold
Sales Discount
Cash
(Dr) Sales Discount
(Cr) Accounts Receivable
(Payment received after a discount period)
(Dr) Cash
(Cr) Accounts Receivable
