Accounting 1

  1. going concern
    no need to be concerned, seemingly fine to continue business
  2. historical cost
    cost at the time of purchase
  3. historical cost
    cost at the time of purchase
  4. matching principle
    match revenues with expenses incurred in order to produce those revenues in a particular period
  5. fiscal
    a years period of time
  6. income statement is always done first
  7. statement if retained earnings
    see what is happening in a company, show what's being held in a company

    shows how ownership changed over time
  8. Balance sheet
    "snapshot" picture on the last day of the period that we are talking about

    permanent accounts
  9. cash basis
    no records until cash exchages hands
  10. accrual accounting
    records revenues/sales when they are earned and expenses when they are incurred (regardless of when the cash changes hands)
  11. general journal
    records all transactions

    • Date
    • Description
    • Posted
    • Debit
    • Credit
  12. 3 forms of business
    • sole proprietorship
    • partnership
    • corporation
  13. Differences in equity on form of business
    • Sole proprietorship- Pamela's Equity
    • Partnership- Partners name
    • corporation- Common stock
  14. Sole Proprietorship
    • 100% liable personally if sued professionally (if company couldnt cover the assets)
    • can't take the house or car (you can keep the basics)
    • No state or federal approval
    • Hard to find funding
  15. Partnership
    • Must get an agreement!
    • 1 person must be the general partner (can come after personal assets)
    • Mutual agency- one person speaks for the other partner
    • Better for funding
  16. Corporation
    • limited liability (only liable what they contributed or invested)
    • double taxed (income)
    • very expensive
    • Must register with the state and federal govt
    • have a charter
  17. What kind of books do you see in GAAP?
    Tax or company
    Company Books
  18. Assets
    Economic resources that we use in the future for the production of income
  19. Liabilities
    you owe someone else
  20. Equity
    2 main sources: Common stock and retained earnings
  21. Common stocks
    accounts that track every time someone invests in the company

    ex: selling ownership or investing in your company
  22. Retained Earnings
    Tracks from inception what you are holding in the company when you do business

    • - Revenues
    • - Investments
    • - Expenses
    • - Dividends- DONT show on income stmt, only retained earnings
  23. Expenses
    related to production of income (don't pay taxes)

    ex: if you sell soccer balls (cost you $50, sell for $75 expenses $50, tax on $25)
  24. Revenue can also be called
    • Sales
    • Commissions
    • Fees Earned
  25. Income statement
    Revenues-Expenses= Net Income
  26. Statement of Retained Earnings
    • Beginning Balance, RE- DATE!!
    • + Net Income
    • =Sub Total
    • -Dividends
    • =Ending Balance- RE- DATE!!
  27. Balance Sheet
    Assets= Liabilities+Stockholders Equity
  28. Accounting Rules
    • For every journal entry there is at least 1 debit and 1 credit
    • whatever those amounts, the total of the debits amounts must equal the total of the credit amounts
    • Eason Rule- Debits 1st, Credits 2nd (indented) 
  29. 4 Questions for Posting in General Journal
    • 1. What 2 or more specific accounts are effected by this transaction?
    • 2. What types of accounts are they
    • 3. Is this "type" of account increasing or decreasing?
    • 4. Therefore, debit or credit

    • Example: Invest 100K in new company
    • 1. Cash and Common Stock
    • 2. Asset and SE
    • 3. Increase and Increase
    • 4. Debit and Credit
  30. Periodic Inventory
    Inventory is not counted/updated when purchases of merchandise is made from suppliers

    inventory is updated/adjusted only once at the end of the year

    THS COGS account is not updated when a sale of merchandise occurs

    no way to tell from the general ledger accounts the amount of inventory or the COGS
  31. Perpetual Inventory

    Inventory is continuously updated

    inventory account is increased with the cost of merchandise purchased from suppliers and it is reduced by the cost of merchandise that has been sold to customers

    Purchase account(s) do not exist

    COGS debited at the time of each sale for the cost of the merchandise that was sold

    • 2 journal entries:
    • The sale and the cash/Accounts Receivable
    • Reduce inventory and increase COGS
  32. In times of rising costs _____ will always result in the least amount of profit
  33. Two methods for estimating inventory
    • Gross Profit Method
    • Retail Method
  34. Gross Profit Method
    Income Statement

    Sales                                100,000

    • Beginning Inventory            22,000
    • Net purchases       83,000
    • COG Available      105,000
    • Ending Inventory    25,000
    • COGS                                80,000

    Gross Profit                        20,000
  35. Retail Method
                                            Cost      Retail

    • Beginning Inventory            11,000  15,000
    • Net Purchases                    69,000  85,000
    • Goods Available and Cost Ratio 80K   100K
    • Sales at Retail                                 90K
    • Est Ending Inventory at Retail            10K
    • Est Ending Inventory at Cost     8K

    • cost ratio= cost to retail ration= 80K/100K= 80%
    • Ending Inventory at Retail (10K) time the cost ratio 80%= 8K
  36. A manufacturing company
    uses labor and other inputs to transforms raw materials into finished product and then sells the product

    creates products and a merchandiser sells them

    • cost of a finished product includes:
    • cost of materials used directly in that product
    • cost of labor used directly on the product
    • a fair share of overhead, or general costs associated with the production process
  37. 3 elements of production costs
    • direct labor
    • dierct materials
    • overhead
  38. Merchandisers
    include both wholesalers and retailers
  39. Examples



    Purchases-purchase discounts-purchase returns and allowances=Net purchases=Freight In=Net cost of purchases (Net Purchases)

    • Beginning Inventory
    • +Net Purchases
    • =COGAFS
    • -Ending Inventory
    • =COGS

    • Sales (Net Sales)
    • -COGS
    • =Gross Profit or Gross Margin
    • -Operating Expenses
    • =Net Income or Loss
  40. operating expenses
    • Freight out
    • administrative expenses
    • selling expenses
  41. 3/10, net 30
    if you pay within 10 days you will receive a 3% discount, otherwise the total amount is due in 30 days
  42. FOB
    Free on board
  43. FOB Destination US to China
    Stays on US books until it reaches the dock in China

    remained inventory in US
  44. FOB Shipping Point US to China
    • Once the inventory reaches the point where it ships it is no longer on US books, it is on China's books
    • (regardless of how it is shipped or how long it takes)
  45. Process costing
    white tee shirt example (all the same no way to identify)
  46. job costing
    prices change, inflation
  47. LIFO
    conformity rule, if you use LIFO for tax reporting you must also use it for financial reporting

    usually results in lower taxes (in times of increasing costs)

    Results in lower net income
  48. current ratio
    current assets divided by current liabilities

    if less than 1, there are not enough assets to cover liabilities
  49. FIFO
    in times of rising prices results in higher net income, "better" for investors, Higher taxes
  50. FIFO  LIFO  AVG Inventory Example
    •                         FIFO   LIFO  AVG
    • Sales                1020   1020  1020
    • COGS                356     471    415
    • Gross Profit       664      549   605
    • Operat Exp        400      400   400
    • Net Income       264      149   205
  51. Dual Aspect Concept
    Assets that remain after liabilities are taken into account will be claimed by the equity investors


    Assets= Liabilities + SE
  52. Money Measurement Concept
    By converting dofferent facts to monetoary amounts we can deal with them arithmetically
  53. Entity Concept
    Accounts are kept for entities, rather than for the persons who own, operate or otherwise are associated with those entities

    mom and pop stores that do not identify the cost of merchandise they withdraw for personal use, telephone calls etc.. do NOT follow the entity concept, thus the financial statements are not accurate.
  54. Asset Measurement Concept
    if reliable information is available, an asset is measured at its fair value
  55. Securities
    stocks and bonds
  56. Marketable securities
    securities that are expected to be converted to cash within a year
  57. Prepaid expense
    intangible asset
  58. Non current assets
    • Buildings/ Trucks, machines
    • Investments (securities and bonds)
    • Patents and trademarks
    • Goodwill
  59. Double Entry System
    Each transaction causes at least 2 changes on the balance sheet
  60. Profit
    • aka
    • earnings
    • surplus
    • income
  61. Types of Assets
    • Tangible
    • intangible
    •        - monetary
    •        - nonmonetary
  62. income statement has ______ accounts
  63. balance sheet has _____ accounts
  64. COGS
    Cost of the same products whose revenues are included in the sales amount
Card Set
Accounting 1
Accounting 1