Accounting Notes - Eva Solarsh PDF

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Eva Solarsh...

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1. Sole Proprietorship- One man runs the company and has unlimited liability. If he is in debt, creditors can take even his own personal assets. Schedule-C> Profit or loss from sole proprietorship 2. General Partnership- 2 or more partners. Unlimited liability. 3. Corporation- Can be any amount of people. Limited liability. It's own entity and separate from shareholders. Can only lose as much as invested in the company. They are audited much more often and taxed more. Balance sheet-> Statement of Financial Position- Always presented at a given point in time. ABC. CO, Bal. Sheet. Dec 31, 2017 Accounting equation- Assets= Liabilities+Owners equity (Liabilities always put first) Asset- Anything that has economic value. Most liquidable assets are written first. Current assets- Will be used currently- Cash, Notes receivable (More enforceable than A/R), Accounts receivable, supplies, Permanents assets- PPE. land, building, vehicles, machinery. Liabilities- Claims on assets by creditors. (Debts) Current liabilities- Notes-Payable, A/P, Salaries payable. Owners equity- After liabilities are taken from assets that's how much owners own. Capital Stock- When a company sells stock their capital stock goes up. Retained Earnings (End Bal.) = Net earnings-Dividends Dividends- Are not expenses. They are a reduction of earnings. Income Statement- Statement of operations. P&L statement. Income is recorded for a period of time. Ex. FYE Dec, 31, 2017

Revenue - Expenses When revenue is higher, than you have Net Income. When expenses is higher, than you have a Net Loss.

Statement of Cash flows ABC co, SCF. FYE Dec. 31, 2017 Looks at money coming in and going out. Cash flows from operating activities. Revenues from cash, Expenses from cash. Net Cash used for operation activities. Cash flows from Investing activities> Dealing with purchase and sales of assets for cash. > Net cash used by investing activities. Cash flows from Financing activities> Paying off liabilities, selling stock. Anything financial with a cash affect. Net Cash used by Financing Activities. Increase/Decrease in cash for the period. = Beginning cash balance or Ending cash balance. Statement of Retained Earnings FYE Dec. 31, 2017 Beginning Retained earnings + Add Net Income - Dividends= End Retained Earnings. The Accounting Cycle 1. Journalize transactions in General Journal 2. “Post” From the GJ to the General Ledger 3. Prepare a trial balance 4. Prepare adjusting entries

5. Prepare an adjusted trial balance 6. Prepare Financial Statements 7. Journalize and post closing entries 8. Prepare an after or post-closing trial balance

General Journal By date order Date

Title/Descr/Exp

Debit

2/1

Equip A/P Purchased eqpmt for $50,000 on acct

50,000

Credit

50,000

General Ledger Make T chart> Account name on top. Debit on left. Credit on right Equipment> Debit 50,000. A/P> Credit 50,000. Ledger accounts keep a running balance after each input but T chart doesn't. Assets are increased by debits (Normal Balance) Liabilities and Owner’s equity are increased by credits (Normal Balance). *Increases in O.E are recorded by credits> Revenues increase O.E and are recorded by credits. *Decreases in O.E are recorded by Debits> Expenses decrease O.E and are recorded by Debits. Dividends (not expense) decrease O.E and are also recorded by Debits.

Trial balances Order- Assets, liabilities, Equity, dividends, revenues, and expenses. Done to make sure all postings are correct. Debits and credits must equal each other. Transpose error- Writing the wrong amount of money in an account. Chapter 4 Cash bases of Accounting- Cash comes in, recognized as revenue. Cash goes out, recognized as expense. Accrual basis accounting- We don't care if the cash is coming in or going out Adjustments- Tools used to do accrual acct. To recognize revenues and expenses in the appropriate accounting period. 1. Realization principle- Recognize revenue when it is earned- When you sell goods or provide a service. 2. Matching principle- Required to match your expenses against revenues as you incur those expenses. 4 Categories of adjustments 1. Converting assets to expenses- Prepaid expenses- Not expenses they are assets. They result from cash being paid prior to an expense being incurred. Ex. Depreciation, insurance, supplies, rent. 2. Converting liabilities to revenues- Unearned revenues- They are not revenues, they are liabilities. They result from cash being received prior to revenue being earned. Ex. Being paid before doing a job 3. Accrued expenses- True expenses- They result from the expense being incurred before cash is paid. EX. Salaries payable

4. Accrued revenues- True revenues- They result from revenues being earned before cash is received. Ex. A/R 1. Depreciation- If building is 600,000 for 10 yr estimated life. That means each month it depreciates $5,000. Have an account for Depreciation expenses building, that is debited each month 5,000 and building is credited every 5 months. Contra-asset account Every adjusting entry will affect an income statement account and a balance account. But will not affect cash. Prepaid (unexpired) Insurance- Buying insurance policy for 12,000 for 1 year. Every month Insurance expenses is debited 1,000 and prepaid insurance is credited 1,000.

2. When an airline sells a ticket, Cash is debited and Unearned Rev is credited (liability Because haven't provided service yet). Once you provide the flight Unearned revenue is debited and Revenue is then credited. It goes from liability to revenue. 3. Debit the expense and credit a liability 4. Accrued Revenues. When you provide a service and bill a customer. Debit accounts receivable and credit client revenues. Once you are paid you debit cash and credit A/R.

Chapter 5 Closing process- Done on a yearly basis. 1. Close (“Zero out”) all revenue accounts to income summary. Debit all the revenue accounts (Bring them to zero) and credit income summary. 2. Close all expense accounts to income summary. Credit all the expense accounts and debit income summary.

2.5 Draw a T account for income summary and sum up the amount. 3. Update Retained Earnings for net income or net loss of the period. Close out the balance in income summary to retained earnings. If credit balance in income summary is a net income, then you debit income summary and credit retained earnings. If there is a Debit balance in income summary then it means you have a net loss, Credit income summary and debit Retained Earnings. 4. Close dividends account to Retained earnings. Credit dividends and debit Retained earnings. After closing trial balance ● After closing trial balance will only have balance sheet accounts. ● Retained earnings after 2nd trial balance is updated, new Retained Earnings is unlike the last one. 1st do Income statement, then Statement of retained earnings, then Balance sheet.

Chapter 6 Sales - Cost of goods sold = Gross profit Gross profit - All other expenses = Net income/Net loss Inventory- Asset account. Ultimate intent is to sell it for a profit. Perpetual Inventory system Constantly keeping track of inventory and cost of goods sold as transactions take place. Sale: Must record 2 journal entries. Debit A/R and Credit Sales account at sales price. Debit cost of goods sold and credit inventory at cost. Purchase: Debit inventory and Credit A/P at cost. Point of sale Terminal- As stores scan merchandise when selling them it updates their

inventory and costs of goods. Periodic Inventory System Track once in a while (Usually year end) inventory and cost of goods sold. Sale: Debit A/R and Credit Sales account at sales price. Then u Purchases: Debit purchases and Credit A/P at cost. Periodic: Beginning inventory + Purchases = Cost of goods available for sale. COGAS - End inventory =cost of goods sold. Gross profit rate = Gross profit / net sales In perpetual system their inventory is audited to see if their numbers are accurate. In periodic system the purpose of the audit is to see how much you make. Inventory Shrinkage- Price is off when doing inventory. (Debit cost of goods sold and credit inventory).

Gross sales -Sales returns and allowances (Contra-revenue account) -Sales discounts

(Contra-revenue account)

== Net sales

2/10 Means you get a 2% discount if paid in 10 days N/30 Means you have 30 days to pay the full amount 10EOM means payment is due in 10 days.

Chapter 8 Specifically identify sales price to unit cost.

FIFO- First in First out. First unit purchased are assumed to be first unit sold. Low cost of goods sold, high gross profit, which makes high net income, high taxable income. Higher ending inventory balance. LIFO- Last in first out. Most recent purchases will be first units sold. High cost of goods sold, low gross profit, lower net income, lower taxable income. Lower ending inventory balance. Average cost- Every item in inventory has same unit cost. Cost of goods sold and net income falls out in middle of FIFO and LIFO. The primary purpose of an inventory flow assumption is to Determine which unit costs are assigned to inventory, and which are assigned to the cost of goods sold

Chapter 11 Common stock same as capital stock. But it has voting power in it. Residual owners Preferred stock- If a corporation goes bankrupt you get what the company liquidates. 1. Cumulative Preferred stock- They must first pay out first year and then in arrear. 2. Non-Cumulative Preferred stock- If there's dividends in arrear you won't get paid. Authorized share stock- The maximum number of shares they will sell. Issued- The maximum number of shares that are issued. Outstanding shares- Number of shares that are in the market. The only difference between this and issued stocks is that treasury stock is taken out from outstanding. Par Value- Stated or legal capital. When issuing common and preferred stock it is used. When selling stock above its par value it is called> Additional paid in capital. Legal capital + APIC = Total Pd in Capital Total Pd in Capital + R/E = Total Stockholder Eq.

Book value- Only based on common stock. Total stockholder equity - preferred stock / outstanding common stock. Or Net assets / outstanding common stock Market value Legal capital means it's asking for par value of common and preferred stock. Preferred stock X percentage = Dividend paid annually

Chapter 7 Segregation of duties- is there to ensure that if you are dealing with cash, you have no access to the accounting records. Petty cash- Small insignificant, different amount for each company. Money kept on hand for small expenses. It is a fund and needs to be accounted for. Bank reconciliation- is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement. Timing differences- Things happen and clear the bank at different time. Deposit in transit- When you deposit a check and it takes time to get cleared. Outstanding checks- Checks not cashed yet at the bank. NSF (bounce check)- Not sufficient funds. When a check is cashed but not enough funds in checking account and both parties are fined.

Balance per bank, 9/30 $x

Balance per books, 9/30 $y

Add: Deposit in transit

Add N/R collection + interest

Less outstanding checks.

Less NSF checks + bank fees

Adjusted cash bal, 9/30 $Z

Adjusted cash bal, 9/30 $Z

Errors- Can happen anywhere. If cash account understated you must add to it. If cash account is overstated you must subtract from it. One entry for each time you add, and one entry for deducting. For NSF checks when doing the journal entry you debit A/R for the nsf amount.

Chapter 9 Deals with tangible assets 3 Stages in assets life that we have to account for (we only use first 2 in 101) 1. Acquisition (Purchase)- Cost of the asset + the necessary expenses to get that asset going. Must be reasonable and necessary. Ex. Shipping fees, taxes, installation labor fees, (not damage). Capitalize expenditures are in the assets cost. Revenue expenditure are expenses (damages). 2. Subsequent depreciation- Straight line- same amount every year. When there is residual, you subtract that from the full value then divide by the years (Not for accelerated). Half year- First year only do half amount and add another half year after the years are done. Accelerated- 150% declining balance- 1.5(Depreciation rate) 15% (Depreciation rate = 1/useful life). 200% declining balance- 2x depreciation rate, 20%. For next year you deduct the past years and recalculate book value. MACRS (Modified Accelerated Cost Recovery System)- IRS gives set amount for assets depreciation %. Don't deduct book value from previous years. 3. Sale (disposition)

Chapter 10

Current liabilities and long term liabilities. (Chapter 10 review questions)...