Exam 1 Study Guide Outline PDF

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WHAT IS ACCOUNTING? A systematic process of identifying, recording, classifying, verifying, summarizing, interpreting, and communicating financial information. A. Practice and body of knowledge concerned with: ● Methods for transactions ● Keeping financial records ● Performing internal audits ● Reporting and recording financial information to management ● Advising on taxation matters B. Provides information on: ● Resources available to a firm ● The means employed to finance those resources ● The results achieved through their use

TYPES OF ACCOUNTING 1. Financial Accounting Provides information for external use and decision makers Gathers and summarizes financial information to prepare financial reports such as: i. Balance Sheets and income statements for the organization’s management, investors, lenders, suppliers, tax authorities, and stakeholders 1 2. Management Accounting the process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short- term decisions Generates monthly or weekly reports for an organization’s internal audiences such as dept. managers and the chief executive officer These reports include: ● Amounts of available cash ● Sales revenue generated ● Amounts of orders in hand ● State of accounts payable and receivables ● Outstanding debts ● Raw material and inventory ● Statistics (trend charts, variance, analysis)

ACCOUNTING PURPOSES AND SPECIFIC USAGE Individual Utilize accounting skills to help keep track of spending habits, budgeting income, and plan for retirement 1

Business Use information to set goals, measure progress, make adjustments accordingly Investors Analyze if a company is worth investing in, predict how much they can earn, and keep track of investment performance Invest in stock Creditors Decide whether or not to extend credit and evaluate company’s reputation for paying money back Tax Authorities Levy taxes and work with IRS to note lawful deductions and penalize if otherwise

TYPES OF ACCOUNTING CERTIFICATIONS Certified Public Accountant CPA ● Serve general public ● Accounting firms ● Businesses ● Government ● Educational institutions Requirements: 1. Bachelors in accounting 2. 2 years of full time experience 3. Pass CPA licensing exam

Certified Management Accountant CMA ● Specialize in accounting and financial management knowledge Requirements: 1. Possess IMA membership

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WHO MAKES THE RULES?

GOVERNING ACCOUNTING ORGANIZATIONS Organization

Function

Financial Accounting Standards Board FASB

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Privately funded organization Oversees creation and governance of accounting standards

Securities and Exchange Commissions SEC

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US government agency Oversee US financial markets and FASB Dicatates audits

Generally Accepted Accounting Principles GAAP

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CREATED AND GOVERNED BY FASB US accounting rule book Useful Information must be relevant and have faithful representation

Public Company Accounting Oversight Board PCAOB

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Monitor the work of independent accountants who audit public companies Passed the SOX act: ○ Requires management to review internal control and take responsibility for accuracy and completeness of financial reports

International Financial Reporting Standards IFRS

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International accounting guidelines formulated by the IASB

International Accounting Standards Board IASB

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Private organization that oversees the creation and governance of IFRS

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ACCOUNTING PRINCIPLES AND GUIDELINES Principle

Explanation

Faithful Representation

-providing complete, neutral, and error free information regarding financial statements

Economic Entity Assumption

- an organization that stands apart as a separate economic unit

Cost Principle

-states that acquired assets and services should be recorded at their actual cost

Going Concern Assumption

-assumes that an entity will remain in operation for the duration of its life

Monetary Assumption

-requires that items on financial statements be measured in terms of a monetary unit

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BUSINESS ORGANIZATION TYPES Organization Type

Sole Proprietorship

Number of Owners & Liability for Debts

1 Owner Owner is personally liable

Partnership

2 or more Owners/ Partners Partners are personally liable

Corporation

1 or more Stockholders/ Shareholders Stockholders are NOT personally liable

Functional Properties ● ●

A single owner Business is NOT taxed separately; owner must pay tax on earnings

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Two or more partners NOT organized as a corporation Partners are taxed on their share of earnings on a self- employed basis

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● ● Limited Liability Company

1 or more Members/ Partners Not personally liable

Organization under state law that is a separate legal entity Taxed separately from individual, corporation pays tax A company where each member is only for his/ her actions Protects personal assets from litigation Pass- Through Tax ○ LLC’s can decide whether or not they would like to be taxed as a corporation or as sole proprietors

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FINANCIAL STATEMENTS AND FORMULAS Statement Type

Formula

Info & Purpose ●

Gives insight on economic resources the company owns such as: ○ Assets ○ Debts ○ Liabilities

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Provide info on profitability for a particular time period

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Reports business cash receipts and cash payments for a period of time

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Show changes in the owner’s capital account for a particular period Evaluate owner performance

Basic Accounting Equation Balance Sheet Asset= Liability + Equity 1

Income Statement

Net Income= Revenue- Expenses (+) Balance= Net Income (-) Balance= Net Loss

Cash Flow

Net Cash Flow= CFF+CFI+CFO Operations + Investments + Financing

Statement of Owner’s Equity

Return on Assets ROA

Owner, Capital, Beginning Owner Contribution (+)Net Income/(-) Net Loss - Owner Withdrawals Owner, Capital, Ending

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Net Income ÷ Avg Total Assets (ATA 2 = Beginning+Ending÷2) Ex. $673/((14,333+13,606)/2) =$673/$13,970 =0.0482= 4.8%

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Debt Ratio

Total Liability÷ Total Assets Ex. =$8,115/$13,606 =0.596= 59.6%

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Trial Balance

Total Debits= Total Credits

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Measure how profitably a company uses its assets Evaluate company performance Show proportion of assets financed with debt Used to determine company’s ability to pay back debts The higher the debt ratio the higher the risk A list of all ledger accounts

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Charts of Accounts

First Number to Symbolize Account Type Assets= 1 Liability= 2 Owner Equity= 3 Revenue= 4 Expenses= 5 Second number follows in numerical order Ex. Cash (asset) 101 Accounts Receivable 111 Accounts Payable 201

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A system organizing account types with number coding

1. Basic Accounting Equation a. An equation that balances the assets to combined sum of liabilities and equities. Both sides must be equal b. Expanded Accounting Equation

2. ATA= Average Total Assests

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ACCOUNT TYPES ASSOCIATED WITH ACCOUNTING EQUATIONS Asset Account Types Account

Cash

Explanation

Liability Account Types Name

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Money of the business Bank balances Bills Coins Checks

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Money owed/ customer’s promise to pay for goods or services Goods provided “on account”

Note Payable

A written promise that a customer will pay a fixed amount of money and interest by a certain date More formal than A/R

Accrued Liability

Accounts Receivables ● ●

Notes Receivables ● ●

Paid Expense

Payment of an expense in advance ○ Prepaid rent ○ Insurance ○ Office supplies

Land/ Building

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The cost of land or an office

Equipment, Furniture, Fixture

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The cost of equipment

Explanation ●

Debts of the business that come from credit purchases

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Written promise made by the business involving interst

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An amount owed, but not paid

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Occurs when a company receives cash from a customer for goods or services, but the cusromer has yet to receive the service

Accounts Payable

Unearned Revenue

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EQUITY ACCOUNT TYPES Account

Explanation Net contribution from the owner for the business (Increases Equity) ●

Owner Capital Owner Withdrawals

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Expenses for owner’s personal use

Revenue

● Earnings from goods sold or services (Increases Equity)

Expenses

The cost of selling goods or services ○ Rent ○ Utilities ○ Salary (Decreases Equity) ●

FINANCIAL STATEMENT HEADINGS AND TEMPLATES Income Statement: Net income is calculated as total revenues minus total expenses Name of Company Income Statement Month Ended Date Revenues: Service Revenue Total Revenues: Expenses:

$0 $000,000

Rent Expense Total Expenses: Net Income

$0 $000,000 $000,000

 lways balance (assets must equal sum of Balance Sheet: the balance sheet must a liabilities and equities) Ending cash balance must equal balance on balance sheet

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Name of Company Balance Sheet Date Assets Cash Accounts Receivable Office Supplies Land Total Assets

$0 $0 $0 $0 $0

Liabilities Accounts Payable Total Liabilities Owner Equity Owner, Withdrawals Total Liabilities

$0 $0 $0 $0

Cash Flow: If a transaction does not involve cash, such as the purchase of supplies on account, it will not be reported on the statement of cash flows.E  nding cash balance must equal balance on balance sheet Name of Company Statement of Cash Flows Date Cash flows from operating activities: Receipts: Collection from customers Payments: To Suppliers To Employees Net cash provided by operating activities Cash flows from investing activities: Acquisition of Land Net cash used investing activities Cash flows from financing activities: Owner Contribution Owner Withdrawal Net cash provided by financing activities Net cash increase in cash Cash balance, Date beginning Cash balance, Date ending Statement of Owner’s Equity: Name of Company Statement of Owner’s Equity 10

Date Owner, Capital, Beginning Date Owner Contribution Net income for the month (see income statement) Owner withdrawal Owner, Capital, End Date HOW TO ANALYZE BUSINESS TRANSACTIONS 1. Identify the accounts and account types. a. Each transaction must affect at least two or more accounts i. Owner Contribution of $30,000 Cash (asset); Owner, Capital (equity) 2. Decide if each account increases or decreases a. Remember to view this from a business perspective, NOT the owner’s i. Cash increases because it now has more cash than it did before and the capital increases because the business received a $30,000 contribution in cash from the owner in exchange for capital 3. Determine if the accounting equation is in balance. a. For each transaction the amount on the left of the equation must be equal to the amount on the right side i. $0=$0

RECORDING BUSINESS TRANSACTIONS Double- entry account - A system of accounting in which every transaction affects at least two accounts Ex. Purchasing office supplies Increase the account office supplies because the company gained the asset office supplies and decrease cash because the office supplies was bought by spending cash

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T- Accounts - An abbreviation of one account from the ledger - Can be used to balance account

Debit= DR Credit= CR Normal Balance - Represents the account side where an increase is recorded

How to determine the balance of a t- account 1. Total all debits and credits 2. Subtract smaller number from larger number 3. Report balance on side with larger number a. Debits Credits 5 3 Balance 2 (debit) FLOW OF ACCOUNTING Source Documents - Provide evidence and data for accounting transactions - NO TRANSACTION IS RECORDED WITHOUT SOURCE DOCUMENTS Source Document Types ● Receipts

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● Purchase Invoices ● Bank Checks ● Sales Invoices JOURNALIZING & POSTING Journal - Record of transaction in date order

Posting - Refers to transferring data from the journal to the ledger Ledger - A collection of accounts detailing performance and balances

HOW TO JOURNALIZE AND POST 1. Identify the account and account types 2. Decide where each account increases or decreases, then apply the rules of debits and credits 3. Record the transaction in the journal 4. Post the journal entry to the ledger 5. Determine whether the accounting equation is in balance

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