Accounting Study Notes Chapter 4 PDF

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chapter 4 notes...

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Accounting Study Notes Chapter 4 The Accounting System: Concepts and Applications A. Concepts Accounts An organized format used by companies to record the dollar effects of transactions.

The expanded Accounting Equation: Assets = Liabilities + Equity Assets = Liabilities + Contributed Capital + Retained Earnings Assets = Liabilities + Contributed Capital + Beginning Balance Retained Earnings + Net Income – Dividends Assets = Liabilities + Contributed Capital + Beginning Balance Retained Earnings + Revenues – Expenses – Dividends

Operating Cycle:

Accounting period The time span for which a company reports its revenues and expenses. Depreciation (Depreciation Expense) part of the cost of property, plant, and equipment (physical asset) that a company allocates as an expense to each accounting period in which the company uses the asset. Dual Effect of Transactions To keep the accounting equation in balance, a company must make at least two changes in its assets, liabilities, or owner’s equity when it records each transaction. End-of-Period Adjustments These ensure that all relevant expenses are included in the period. End-of-Period = when the company produced its financial statements (end of quarter or financial year end). Net Assets Assets - Liabilities Source document Business record used as evidence that a transaction has occurred. Closing the account entries: After recording all the transactions for the period, you can determine the ending balance of each column by calculating the totals per column. A company will use the ending balances to create a balance sheet and an income statement.

4 financial statements: Income Statement Accounting report that summarizes the results of a company’s operating activities for a specific time period. Balance Sheet Accounting report that summarizes a company’s financial position (assets, liabilities, and owner’s equity) on a given date. Cash Flow Statement Accounting report that summarizes a company’s cash receipts, cash payments, and net change in cash for a specific time period. Statement of Retained Earnings Schedule that starts with the beginning balance in retained earnings, adds the amount of net income, and subtracts the amount of dividends to determine the ending balance or retained earnings. Accounting recording concepts: Entity Concept - Record keeping for a business: entity needs to be separate from the activities of the owners. - Company is a separate entity. Monetary Unit Concept - All accounting transactions are recorded in monetary units. - Needs to be quantified. - US Companies: USD. Historical Cost Concept - A company records its transactions based on the value at the time the transaction occurred. Revenue Recognition Concept - Revenues are recorded when they are realized. - This does not have to be equal to the timing of a cash receipt. Matching Concept - Expenses are matched with revenues for the same period. - Therefore, expenses are recorded at the time when they are consumed to generate revenues. B. Problem solving activities - Being able to record transactions by making use of the accounting equation and related template: contribution of capital by the owners and withdrawal of capital by the owners - obtaining a bank loan - a credit or cash purchase of property, plant or equipment - a credit or cash purchase of supplies - a credit or cash purchase of inventory - a credit or cash sale - paying rent - paying salaries - end-of-period adjustment: accrued interest - end-of-period adjustment: adjustment for supplies used - end-of-period adjustment: rent expense when rent was prepaid upfront - end-of-period adjustment: depreciation for property, plant and equipment...