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sole proprietorship

business owned by 1 person, simple to establish, owner controlled, tax advantages, owner personally liable, financing difficult


2+ owners, simple to establish, shared control, broader skills and resources, tax advantages, personal liability


separate legal entity owned by stockholders, easy to transfer ownership, greater capital raising potentioal, lower legal liability, unfavorable tax treatment


Debit Expenses Assets Dividends


Credit Liabilities Equity Retained Earnings

monetary unit

include in the accounting records only those things that can be expressed in terms of money

economic entity

every economic entity can be separately identified and accounted for

time period

the economic life of a business can be divided into artificial time periods

going concern

the enterprise will continue in operation long enough to carry out its existing objectives


record assets at cost

full disclosure

disclose circumstances and events taht make a difference to financial statement users

debt to total assets ratio

total liabilities/total assets

current ratio

current assets/current liabilities

accounting equation

assets=liabilities+stockholder's equity

debit and credit

[assets: increase dr./decrease cr.] [liabilities: decrease dr./increase cr.] [stockholders equity: decrease dr./increase cr. (common stock: decrease dr./ increase cr. retained earnings: decrease dr./increase cr dividends: increase dr./decrease cr.)] [revenue: decrease dr./increase cr.] [expense: increase dr./decrease cr.]

normal balances for all types of accounts

cash-debit; acct payable-credit; acct receivable-debit; service revenue-credit; common stock-credit; salaries expense-debit; dividends-debit; building-debit; taxes patable-credit; unearned revenues-credit; prepaid insurance;debit; rent expense-debit

matching principle

requires taht expenses be recorded in the same period which the revenues they helped produce are recorded.

revenue recognition

dictates taht revenue be recognized in the accounting period where it was earned (earnes=when the service has been provided, or when goods are delivered)

cash basis accounting

transactions are only recorded when cash is paid or when cash is received; does not follow GAAP

acccrual based accounting

the main difference has to do with timing of the transactions; adjusting journal entries are needed to record revenues and expenses in their proper time period because sometiems: cash is paid or collected before transaction (prepaid) or transaction occurs before cash is paid or collected (accrual)

prepaid expenses

(paid in cash and recorded as assets before they are used or consumed) dr. expense/cr. asset; increase exp; decrease asset; increase exp=decrease net income and decrease equity

annual depreciation expense

(cost-salvage value)/useful life


purchases - purchases returns - purchase discounts + freight in costs - ending inventory

Gross profit rate

gross profit/net sales

gross profit

sales - returns - discounts - COGS

net income

gross profit - expenses + interest income

ending retained eaernings

biginning - dividends + net income

current assets

acct. receivable, supplies on hand, prepaid insurance (anything that can be paid within the year)

long term assets

equipment, furniture, acc. depreciation (anything that takes longer then a year to pay off)

long term liabilities

notes and bonds payable

freith out is...

operating expenses

freight in is...


total operating expenses

operating exp + insurance exp + rent exp + supplies exp + wages exp

income from operations

gross profit - operating expenses

income befoer taxes

income from operations - interest exp + interest income


First In First Out - earliest goods purchased are the first to be sold. in a period increasing prices FIFO will approximate current costs dring rising prices FIFO will produce the hightest net income


Last In First Out - latest goods purchased are the first to be sold in a period of increasing prices LIFO will be significantly understated during rising prices companies use LIFO (higher cogs, lower net income, lower income taxes)

weighted average

(cost of goods available for sale)/(total units available for sale)

F.O.B. shipping points

ownership transfers to buyer before in truck

F.O.B. desination

after signing for good the ownership transfers

lower of cost or market

when the value of inventory is lower than its cost, companies "write down" the inventory to its market value in the period where the price decline occurs. *market value = colst of replacing good

inventory turnover ratio

COGS/average inventory

days in inventory

365/inventory turnover ratio

steps in bank reconciliation

1. determine deposits in transit 2. determine outstanding checks 3. note any errors discovered 4. make adjustments for items reported on the bank statement but not recorded on the company's books

net accounts receivable

accounts receivable - allowance for douabtful accounts

business sells merchandise to a customer on account...

accounts receivable is debited, and sales credited

business receives returned merchandise previously sold to a customer on account...

sales returns and allowances is debited and accounts receivable is credited

collection of accounts receivable if...

if a customer pays off balance due

calculation of interest for full and partial year

(face value of note)(annual interest rate)(time in terms of one year)

receivables turnover ratio

(net credit sales)/(average net receivables) *use net sales if net credit sales is not provided

average collection period

(365)/(receivables turnover ratio)

straight line method

(cost-salvage value)/(assets useful life in years)

return on assets ratio

(net income)/(average total assets)

asset turnover ratio

(net sales)/(average total assets)

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