Acct 201 test 1

  1. Business
    an organization in which basic resources (inputs) such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers
  2. Profit
    the difference between the amounts recieved from the customers for goods and services and the amounts paid for the inputs used to provide the goods or services
  3. Service businesses
    provide services rather than products to customers
  4. Merchandising businesses
    sell products they purchase from other businesses to customers
  5. Manufacturing businesses
    change basic inputs into products that are sold to customers
  6. Accounting
    an information system that provides reports to users about the economic activities and condition of a business
  7. The process by which accounting provides information to users:
    • 1. Identify users
    • 2. Assess users' information needs
    • 3. Design the accounting information to meet users' needs
    • 4. Record economic data about business activities and events
    • 5. Prepare accounting reports for users
  8. Management accounting
    Objective is to provide relevant and timely information for managers' and employees' decision making needs, this information is often sensitive and not distributed outside the business
  9. Private accounting
    accountants are employed by a business firm or a not-for-profit organization
  10. Financial Accounting
    The area that provides External users with information

    To provide relevant and timely information for the decision-making needs of external users
  11. Ethics
    Moral principles that guide and conduct individuals
  12. Generally accepted accounting principles (GAAP)
    Generally accepted guidelines for the preparation of financial statements

    • They include:
    • Business Enity Concept
    • Cost Concept
    • Unit of Measure Concept
    • Accounting Equation
    • Matching Concept
  13. business entity concept
    a concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business
  14. Sole Proprietorship
    owned by one individual

    Advantages: easy to start and control because of only 1 owner

    Disadvantages: Unlimited personal liability for business liabilities
  15. Partnership
    owned by two or more individuals

    Advantages: more resources from multiple owners, simple formation

    Disadvantages: Unlimited personal liability for business debts for all owners
  16. Corporation
    organized under state or federal statutes as a seperate legal taable entity

    Advantages: Seperate Legal Entity, Can raise more money for the company with the additional owners, Easy to sell interest, Owners not liable for business debts

    Disadvantages: Legal set-up costs, taxes can be higher
  17. Limited Liability Company (LLC)
    combines the attributes of a partnership and a corporation

    Advantages: Seperate Legal entity, more favorable for tax purposes

    Disadvantages: legal set up costs, differences among state laws
  18. Cost Concept
    amounts are initially recorded in the accounting records at the cost or purchase price
  19. Objectivity Concept
    requires that the amounts recourded in the accounting records be based on objective evidence
  20. unit of measure concept
    requires that economic data be recorded in dollars
  21. Assets
    resources owned by a business

    has to help us in the next period
  22. Liabilities
    Rights of the creditors, or debts of the business
  23. Stockholders' Equity
    The owners' equity in a cororation

    Retained Earnings + Common/Capital Stock
  24. Accounting Equation
    Assets = Liabilities + Stockholder's Equity
  25. Business transaction
    An economic event or condition that directly changes an entity's financial situation or its results in operations
  26. Revenue
    money earned by selling goods and services to its customers
  27. Fees Earned or Service Revenue
    revenue from providing services
  28. Sales
    revenue from the sale of merchandise
  29. Accounts Payable
    when we owe suppliers money

  30. Account recievable
    claim against the customer

    when a customer owes us money

  31. Expenses
    Assets used in earning revenue
  32. Dividends
    Are distributions of earnings to stockholders
  33. Retained Earnings
    the stockholders' equity created from business operations through revenue and expense transactions
  34. Financial Statements
    Financial reports that summarize the effects of events on a business

    • Income Statement
    • Statement of Retained Earnings
    • Balance Sheet
    • Statement of Cash Flows
  35. Income Statement
    a summary of the revenue and expenses for a specific period of time, such as a month or a year

    Revenues - Expenses = Net Income

    Purpose: To show Net Income
  36. Statement of Retained Earnings
    A summary of the changes in the retained earnings for a specific period of time, such as a month or a year

    • Begining RE
    • + Net Income
    • - Dividends
    • = Ending RE
  37. Balance Sheet
    A list of assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year

    • Assets = Liabilities
    • + Stockholders Equity
  38. Statement of Cash flows
    A summary of the cash reciepts and cash payments for a specific period of time, such as a month or a year

    How a company is using their cash

    3 types: Operating, Investing and Financing
  39. Net income
    the excess of the revenue over the expenses
  40. Net Loss
    Expenses exceed the revenue
  41. Account Form
    The form of balance sheet that resembles the basic format of the accounting equation, with assets on the left side and liabilities and Stockholders' Equity sections on the right side
  42. Management Discussion & Analysis (MD&A)
    Written by management to describe financial and non financial trending, a narrative about what happened during the period

    Not objective information because the report is prepared by management
  43. Notes to the Financial Statement
    Legend to the financial statements

    states the principles and methods used to account for transactions

    Qualitative and Quantitative

    provide additional descriptions and disclosures
  44. Sabanes - Oxley Act
    In response to corporate scandals

    • Provisions
    • - Create PCAOB (board for additional oversight of auditors)
    • - Evaluate controls
    • - Auditor independence
    • - Board of directors are responsible
    • - Management must certify accuracy of financials
  45. Account
    an accounting form that is used to record the increases and decreases in each financial statement
  46. T Account
    • Image Upload 2
    • the simplest form of an account
  47. debit
    amount entered on the left side of the account
  48. credit
    amount entered on the right side of an account
  49. balance of the account
    The amount of the difference between the debits and credits that have been entered into an account
  50. Ledger
    a group of accounts for a business
  51. chart of accounts
    a list of the accounts in the ledger
  52. normal balance of an account
    can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits
  53. Journal
    the intitial record in which the effects of a transaction are recorded
  54. journalizing
    the process of recording a transaction in the journal
  55. posting
    the process of transfering the bebits and credits from the journal entries to the accounts
  56. correcting Journal entry
    an entry that is prepared when an error has already been journalized and posted
  57. ADE
    Assets Dividends and Expenses

    are increased with a debit!
  58. unadjusted trial balance
    a summary listing os the titles and balances of accounts in the ledger prior to the posting of adjusting entries
  59. transposition
    and error in which the order of the digits is changed
  60. slide
    an error in which the entire number is moved one or more spaces to the right or left
  61. Rules of Debit and Credit, and Normal Balances
    Image Upload 4
  62. Cash Method
    Revenue is when we recieve cash, and expense is when we pay it

    Not used in this class
  63. Accrual Method
    GAAP requires that we use this

    Revenue is recognized when it is earned, and Expenses are recognized when incurred
  64. Revenue Recognition Concept
    Revenue is recognized when it is earned
  65. Matching Principle
    Recognize expenses in the same period which we used item to generate revenue
  66. Adjusting process
    The analysis and updating for accounts at the end of the period before financial statements are prepared
  67. Adjusting Entries
    The journal entries that bring the accounts up to date at the end of the accounting period

    Will always involve a revenue or an expense account and an asset of liablity account
  68. Accrued Expense
    unrecorded expenses that have been inccured and for which cash has yet to been paid

    Ex: Electric Bill for the month of September, recieved in October, We used the electric to bring in revenue, must post this in september

    Expense and Liability
  69. Prepaid Expenses
    Are the Advance Payment of future expenses and are recorded as assets when cash is paid

    Ex: Paid $600 in advance for 6 months of insurance, at the end of each month, a portion needs to be moved over to an expense acount because we needed the insurance to generate revenue

    Asset and expense
  70. Contra-asset
    An asset that normally has a credit balance

    Ex: Accumulated Depriciation
  71. Accumulated Depriciation
    How much we've charged to expense since we have owned the asset
  72. Depriciation Expense
    How much we've charged to expense this period
  73. Unearned Revenues
    Advance reciept of future revenues and are recorded as liablities when cash is recieved

    Ex: Paid Down Payment on service in September, not expecting to preform service till october, Recorded in September as a liability(unearned revenue), at the end of october moved from unearned revenue to fees earned

    Liability and Revene
  74. Accrued Revenue
    unrecorded revenues that have been earned for which cash has yet to be recieved

    Ex: Preformed service for customer in september, billed in october, we record the revenue in september because we have already earned it

    Asset and Revene
  75. Book Value of an asset
    The amount we have yet to move to expense

    Cost of the asset minus the accumulated depriciation of the asset
  76. Asset (4 Categories)
    • Current Assets- Expected to be used up in one year
    • - Cash
    • - accts recievable
    • - supplies
    • - prepaid expenses
    • - inventory
    • Long Term Investments - more than one year
    • - Investments in Stocks or bonds
    • - Investments in subsidiaries
    • Property, Plant, and Equipment
    • - Land
    • - Equipment
    • - Vehicles
    • - Buildings
    • - (Accumulated Depriciation)
    • Intangible Assets
    • - Copywrights
    • - Trademarks
    • - Patents
  77. Liabilities (2 Categories)
    • Current Liablities - Expected to be paid out within a year
    • - Accts payable
    • - wages payable
    • - unearned revenue
    • - Current Maturities of Log term debt
    • Longterm Liabilites - more than a year
    • - loans payable
    • - notes payable
    • - bonds payable

    Notes payable and Loans payable may be in either category depending on the term
  78. Temporary accounts
    Need to be reset every period, they only relate to that period

    revenue and expense accounts
  79. Permanent Accounts
    Roll over from year to year

    Assets, Liabilities, all balance sheet accounts
  80. Closing the books
    Process of zeroing out all temporary accounts and transfering them to permanent accounts
  81. Closing Process
    • 1. Zero Out Revenue Balances
    • 2. Zero Out Expense Balances
    • 3. Zero Out Income Summary
    • 4. Zero Out Dividends
  82. Income Summary
    a temporary account that is only used during the closing process
  83. Internal Financial Statement Users
    Marketing, Production, Human resources, Finance, Management
  84. External Financial Statement Users
    Investors, Creditors, Government, Competitors, Suppliers
  85. Correlation Between Financial Statements
    • Must Complete in Order
    • Net Income also appears on Statement of Retained Earnings
    • Retained Earnings Balance also appears on Balance Sheet
    • Ending Cash balance on Statement of Cash Flows must agree to Balance Sheet
  86. Double Entry Accounting
    Whenever a Transaction occurs, it must affect atleast 2 accounts
  87. Accounting Cycle
    • 1. Transactions are analyzed and recorded in the Journal
    • 2. Transactions are posted to the ledger
    • 3. an unadjusted trial balance is prepared
    • 4. Adjustment data are assembled and analyzed
    • 5. Spread Sheet is prepared
    • 6. Adjusting entries are journalized and posted to the ledger
    • 7. An Adjusted trial Balance is prepared
    • 8. Financial statements are prepared
    • 9. Closing entries are journalized and posted to the ledger
    • 10. A post-closing trial balance is prepared
  88. Post- Closing trial Balance
    is prepared after the closing entries have been posted

    the purpose is to verify that the ledger is in balance at the begining of the next period
  89. Auditor's Report
    • independent party
    • Certified public accountant (CPA)
    • reports opinion if financial statements are prepared in accordance with GAAP
Card Set
Acct 201 test 1
Financial Accounting