time period assumption
an organization's activities can be divided into specific time periods. (month, 3 months, year)
Quarterly, monthly, semiannually, Annually
interim financial statements
cover 1,3,6 months of activity
consists of any 12 consecutive months or 52 weeks
natural business year
when sales activities are at their lowest level for year. ex: Natural business year for Wal-mart is Jan 31 after the holiday season.
Accrual basis accounting
uses the adjusting process to recognize revenues when earned and expenses when incurred (matched with revenues)
Cash basis accounting
recognizes revenues when cash is received and records expenses when cash is paid.
aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. major part of adjusting process
revenue recognition principle
requires that revenue be recorded when earned, not before, not after.
prepaid (deferred) expenses
items paid for in advance of receiving their benefits. ASSETS BITCH.
long-term tangible ASSETS used to produce and sell products and services. provide benefits for more than one period. ex:building, machines, vehicles, etc.
process of allocating the costs of the plant assets over their expected useful life.
allocates equal amounts of the asset's net cost to depreciation during its useful life.
account linked with another account, it has an opposite normal balance and it is reported as a subtraction from the other accounts balance
indicates that this account includes total deprecation expense for all prior periods for which the asset was used
or net amount. Asset cost-accumulated depreciation account=NET AMOUNT.
cash received in advance of providing products or services. also called deferred revenues. when products or services are provided they become earned revenue
costs that are incurred in a period but are both unpaid and unrecorded. must be recorded on the income statement of the period when incurred.
refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets) Ex if only one third of job is done then must record only one third of the expected billing as revenue for that period. INCREASE ASSETS (DEBIT) INCREASE REVENUE(CREDIT)
unadjusted trial balance
list of accounts and balances prepared BEFORE adjustments are recorded
adjusted trial balance
list of accounts and balances prepared AFTER 0adjusting entries have been recorded in ledger.
internet documents. one widely used working paper is work sheet.
an important step at the end of accounting period after the financial statements have been completed. prepares accounts for recording the transactions and events of the next period.
1. identify accounts for closing
2. record and post closing entries
3. prepare a post-closing trial balance
temporary (nominal) accounts
accumulate data related to one accounting period include all income statement accounts, the withdrawals account, and the income statement account. open at beginning close at the end
report on activities related to one or more future accounting periods. Carry their ending accounts into the next period and consists of all balance sheet accounts. q
transfer the end-of-period balances in revenue, expense, and withdrawals, accounts to the permanent capital account. needed at end of each year after financial statements are prepared.
temporary account (only used for closing process) that contains a credit for the sum of all revenues (and gains) and a debit for the sum of all expenses (and losses). have a ZERO balance
post-closing trial balance
list of permanent accounts and their balances from the ledger after closing entries have been journalized and posted. Lists balances for all accounts not closed.
steps in preparing financial statements. steps are repeated each reporting period.
unclassified balance sheet
items are broadly grouped into assets, liabilities, and equity.
classified balance sheet
organizes assets and liabilities into important subgroups that provide more information to decision makers
the time span from when cash is used to acquire goods and services until cash is received from the sale of the goods and services. Most are less than one year.
cash and other resources that are expected to be sold, collected, or used within one year or the companies operating cycle which ever is longer. Examples: cash, short-term investments, accounts receivable, short-term notes receivable, merchandise, inventory, and prepaid expenses.
notes receivable and investment stocks and bonds are long-term assets when they are expected to be held for more than one year or operating cycle. Land for future operations is also long-term.
long-term resources that benefit business operations, usually lack physical form, and have uncertain benefits. (patents, trademarks, copyrights, franchises, goodwill)
obligations due to be paid or settled within one year or the operating cycle, whichever is longer. they are usually settled by paying out current assets such as cash. Ex: accounts payable, notes, payable, wages payable, taxes payable, interest payable, and unearned revenue.
obligations not due withing a year or operating cycle, whichever is longer. Notes payable, mortgages payable, bonds payable, and lease obligations.
owner's claim on assets.
earns net income by buying and selling merchandise
intermediary that buys products from the merchandisers or other wholesalers and sells them to retailers or other wholesalers.
intermediary that buys products from manufacturers or wholesalers and sells them to consumers.
cost of goods sold
revenues from selling merchandise is sales, and the term used for the expense of buying and preparing the merchandise
or gross margin, equals the net sales less the cost of goods sold
products that a company owns and intends to sell.
products a company owns and expects to sell in its normal operations.
perpetual inventory system
continuously updates accounting records for merchandising transactions specifically for those records of inventory available for sale and inventory sold.
periodic inventory system
updates the accounting records for merchandise transactions only at the end of a period.
include the amounts and timing of payments from a buyer and seller. usually reflect an industries practices
n stands for net 10 days. and EOM means end of month. when sellers require payment 10 days after the end of the month of the invoice date. if 30 days it would be n/30.
amount of time allowed before full payment is due
encourages buyers to pay earlier.
is the buyers view of a cash discount.
sellers view of cash discount
2/10, n/60 if the buyer pays before 10 days he will receive 2 percent discount. if not the buyer must pay before 60 days. the discount period is the 10 days in which the buyer can receive discount.
free on board. determines who pays transportation costs.
FOB shipping point
or factory shipping point. buyer accepts ownership when the goods depart the seller's place or business
ownership of goods transfers to the buyer when the goods arrive at the buyers place of business.
reported as a selling expense in the seller's income statement
refer to information outside the usual general ledger accounts.
on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts
merchandise that customers return to the seller after sale
refer to reductions in the selling price of merchandise sold to customers. damaged goods a buyer is willing to buy with a reduced price.
informs a buyer or the seller's credit to the buyer's Account Receivable.
loss inventory and it is computed by comparing a physical count of inventory with recorded amounts.
multiple-step income statement
detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.
1. gross profit determined by net sales less cost of goods
2. income from operations determined by gross profit less operating expenses.
3. net income determined by income from operations adjusted for non operating items.
expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering, goods to customers.
general and administrative expenses
support a companys overall operations and include expenses related to accounting, human resource management, and financial management.
single-step income statement
widely used format. lists costs of goods sold as another expense and shows only one subtotal for total expenses.
or quick ratio. ( Cash and cash equivalents+short-term investments+current receivables) divided by current liabilities.
gross margin ratio
net sales - cost of goods sold divided by net sales.
sells goods for the owner
goods on consignment are goods shipped by the owner.
when each item in inventory can be identified with a specific purchase and invoice.
first-in, first-out. method of assigning costs to both inventory cost of goods sold assumes that inventory items are sold in the order acquired.
method of assigning cost requires that we use the weighted average cost per unit of inventory at the time of each sale. Weighted average cost per unit at the time of each sale equals the cost of goods available for sale divided by the units.
prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods.
beginning inventory + net purchases -ending inventory = Cost of goods sold
day's sales in inventory
ratio that reveals how much inventory is available in terms of the number of days' sales. number of days one can sell from inventory if no new items are purchased. (ENDING INVENTORY/COST OF GOODS SOLD) times 365 = day's sales in inventory.