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ACC 101 Unit 1

Terms in this set (167)

Why is accounting important?
Accounting information impacts all of us
Recording Example
Preparing and entering a list of checks issued or using a cash register to enter sales
Identifying Example
Entering a list of sales invoices, including the prices and quantities, for the record keeper
Communicating Example
Interpreting information from financial reports and preparing financial statements for creditors
Record keeping
The accounting practice of maintaining and organizing all business records; the recording of transactions and events only, either manually or electronically.
Accounting
an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities
External Users
customers, contractors, suppliers, lenders, shareholders, consumer groups, and external auditors
Internal Users
research and development managers, purchasing managers, human resource managers, marketing managers, production managers
Financial Accounting
The area of accounting aimed at serving external users by providing them with general purpose financial statements
Managerial Accounting
the area of accounting that serves the decision-making needs of internal users
financial opportunities
Preparation, analysis, auditing, regulatory, consulting, planning, criminal investigation
managerial opportunities
general accounting, cost accounting, budgeting, internal auditing, consulting, controller, treasurer, strategy
taxation opportunities
Preparation, planning, regulatory, investigations, consulting, enforcement, legal services, estate plans
accounting-related opportunities
Lenders, Consultants, analysts, traders, directors, underwriters, planners, appraisers, FBI investigators, market researchers, systems designers, merger services, business valuation, forensic accountant, litigation support, and entrepreneurs.
________ included opportunities in general accounting
Managerial accounting
The "Big 4" Public Accounting Firms
The four largest international accounting and professional service firms; Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG
The majority of accounting opportunities are in ...
Private accounting
Private accounting
Employees working for business
Public Accounting
auditing and taxation and advisor services; includes the Big 4
Government and not-for-profit Accounting
Business regulation and law enforcement
Accounting certifications includes:
CPA
Which of the following is a proper reflection of the sequence of steps when deciding on the preferred course of action in making an ethical decision?
identify ethical concerns, analyze options, make ethical decision
In the fraud triangle, when a person feels an incentive to commit fraud, this is referred to as ________.
pressure
The Fraud Triangle
The three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization.
The organization that is primarily responsible for developing GAAP for use by all U.S. companies is the:
FASB (Financial Accounting Standards Board)
FASB
Financial Accounting Standards Board, is the private sector body given the primary responsibility to work out the detailed rules that become GAAP. Develops accounting principles that comprise GAAP.
GAAP
Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities.
SEC
Securities and Exchange Commission, a government agency oversees the proper use of GAAP by companies that issue their stock on the US stock exchanges. It has legal authority to set GAAP for SEC registrants to the FASB.
The organization that is responsible for issuing International Financial Reporting Standards is the:
IASB
Goal of Accounting
provide users of accounting information with relevant, timely information that helps them make better economic decisions
GAAP Principles
Measurement (cost principle), full disclosure, revenue recognition, expense recognition
GAAP Assumptions
going concern, monetary unit, time period, business entity
GAAP constraint
Cost-benefit
Expense Recognition Principle
A company records the expenses incurred to generate revenue reported
Revenue Recognition Principle
Revenue is recognized when goods re provided to the customer at the Mount expected to be recieved.
Full-Disclosure Principle
A company reports the details behind financial statements that would impact user's decisions.
Measurement/ Cost Principle
accounting information is based on actual cost
Going Concern Assumption
presumes that a business will continue to operate.
Business Entity Assumption
A business is accounted for separately from other business entities and its owner
Monastery Unit Assumption
Transaction and events are expressed in units of money
Time Period Assumption
The life of the company can be divided into specific time periods.
If equity is $30,000 and liabilities are $19,000, then assets must equal
$49,000
Assets = Liabilities + Equity
accounting equation
Assets
money and other valuables belonging to an individual or business, resources
Liabilities
Amounts owed to creditors
Equity
a condition in which people receive from a relationship in proportion to what they give to it
Owner Capital - Owner Withdrawals + Revenues - Expenses
During its first year of operations, Mario Lupo formed Lupo Company and personally invested $15,000 in the business. The owner of Lupo Company withdrew $2,000 cash for personal use. The company earned $35,000 of revenues and incurred $23,000 of expenses. At the end of the year, the company's equity totaled:
$25,000
Transaction
An exchange of economic consideration between two parties
Examples: Exchanges of products/services/money/and rights to collect money.
External Transations
Exchanges of value between two entities which yield changes in the accounting equation
Internal Transactions
Exchanged within an entity which may or may not affect the accounting equation
Events
Happenings that affect the accounting equation and are reliably measured
Include: business events (changes in market value of certain assets and liabilities) and natural events (floods/fires that destroy and cause loss)
Tyler invests $2,000 cash to form a consulting business set up as a proprietorship. This Transation will...
increase equity
On January 31, Jean Consulting Company receives a bill for that month's utilities in the amount of $500. Jean sets it aside because she does not plan to pay the bill until its due date of February 15. What effect, if any, does this event have on the company's accounting equation as of January 31?
The business must record this event, which would increase liabilities and decrease equity on January 31.
If purchased on credit, the transition gets logged...
in accounts payable, it increases
Once the promise to pay has been fulfilled, accounts payable decreases as to take out the same amount on a different date
If a company recieved a promise to pay from a customer
Accounts receivable increases and Revenue increases.
Once the payment has been fulfilled cash increases and accounts receivable decrease but revenue stays the same.
The four basic financial statements are
Income Statement, Statement of owner's equity, Balance sheet, and Statement of cash flows.
Which items belong on the income statement?
revenues - expenses = net income
Net Loss
expenses exceed revenues.
Which items belong on the statement of owners equity?
Beginning Capital + Owner Investments + Net Income (or -net loss) - Owner Withdrawals
Which items belong on the Balance Sheet?
Assets = Liabilities = Equity
Cash, Accounts Receivable and Owner Capital
Which items belong on the Statement of Cash Flows?
Cash flows from investing, operating and financing activities
Operating Activities
cash receipts and cash payments for transactions relating to revenue and expense activities
Investing Activities
Cash paid for equipment
Financing Activities
Cash investments and Withdrawals from owner
Account
A detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period.
Ledger
Record containing all accounts (with amounts) for a business; also called general ledger.
The process to get from Transactions and Events to Financial Statements
1) Identify each transaction and event from source documents
2) Analyze each transaction and event using the accounting equation
3) Record relevant transactions and events in a journal
4) Post journal information to ledger accounts
5) Prepare and analyze the trial balance and financial statements
Source Documents
identify and describe transactions and events entering the accounting process
Sales reciepts, checks, purchase orders, bills from suppliers, employee earnings records, and bank statements
Source Document Examples
Telephone bill, sales reciept, invoice from a supplier, and a bank statement
Trail balance
a proof of the equality of debits and credits in a general ledger
Assets
Cash account, accounts receivable, note receivable, prepaid accounts, supplies, equipment, and buildings
Key Words for Assets
Prepaid and Recievable
Key Words for Liabilities
Payable and Unearned
Which of the following statements are true about the chart of accounts?
Different companies use different charts of accounts based on individual company need; The chart of accounts should be ordered in a logical sequence based on type of account
Debits
The left side of a T-account; decrease equity
Credits
The right side of a T-account, increase equity
T Account
a tool for analyzing a business's financial position by showing, in a single table, the business's assets/debits (on the left) and liabilities/credits (on the right).
The left side of an account is the normal balance for assets, owner, withdrawals, and expenses, and the right side is the normal balance for liabilities, owner, capital, and revenues.
Double-entry accounting
At least two accounts are affected and the total debits will equal the total credits
account balance
the difference between the increases and decreases in an account
Indicate how to increase each of the accounts listed:

1. Cash
2. Accounts Payable
3. Supplies
4. Accounts receivable
1. Cash is an asset so DEBIT would increase it.
2. Accounts Payable is a Liability so CREDIT would increase it.
3. Supplies is an asset so DEBIT would increase it.
4. Accounts receivable is an asset so DEBIT would increase it.
Debit for Increases (Normal Balance) and Credit for Decreases
Assets
Debit for decreases and Credit for Increases (Normal Balance)
Liabilities and Equity
Owner Capital and Revenues
Debit for decreases and Credit for increases
Owner Withdrawls and Expenses
Debit for Increases and Credit for Decreases
Correctly identify steps 3 and 4 of the accounting process
Step 3: record transactions into the journal; Step 4: post entries into the ledger.
Accounting Process Steps
1. Identify transactions and source documents
2. Analyze transactions useing the accounting equation
3. Record journal entry (journalizing)
4. Post entry to ledger
Journal
complete record of each transaction in one place (showing debits and credits)
Why are posting references entered in the journal when entries are posted to the ledger accounts?
So we know that the entry has been posted
Posting References (PR)
ID Number of ledger accounts entered in the journal to recognize that the entry has been posted.
Alex invested $30,000 cash in his business. How will this entry be posted in the ledger accounts?
* The $30,000 will be posted to the DEBIT side of the Cash account.
* The $30,000 will be posted to the CREDIT side of the Owner's Capital account.

Cash is an asset account and Owners Capital is an equity account.
On December 1, Don Smith invested $3,000 cash to start his company, Fantastic Tea.

Complete the necessary journal entry by selecting the account names from the pull-down menus and entering dollar amounts in the debit and credit columns.
Cash = Debit $3,000
D. Smith, Capital = Credit $3,000
On December 31, the company purchases supplies for $1,000 on credit.

Complete the necessary journal entry by selecting the account names from the pull-down menus and entering dollar amounts in the debit and credit columns.
Supplies = $1,000 DEBIT
Accounts Payable = $1,000 CREDIT

Accounts Payable is a liability that increased with a credit. Here both accounts are increased.
November 30, the company received an invoice from the electric company for $200. The company will pay the invoice in December.
Utilities Expense= 200 DEBIT
Accounts Payable = 200 CREDIT

An expense in increased with a debit and liability's is increased with a credit.
Which of the following statements is true?
The trial balance is completed in ensure that debits and credits are equal in the General Ledger.
Trail Balance
An internal tool used in the accounting process to prove that the total debits and total credits posted during an accounting period are equal. It then forms the basis for the preparation of the formal financial statements: Balance Sheet, Income Statement, and Statement of Owner's Equity
The order in which accounts appear in the formal financial statements:
Assets, Liabilities, Equity, Revenue, and Expenses
If a credit balance in Unearned Revenue (a liability account) is incorrectly listed as a credit balance in the Sales Revenue account (a revenue account), is the trial balance still in balance?
Yes, the trial balance still balances. However, when preparing the financial statements liabilities would be understated and revenue would be overstated. Remember, just because debits equal credits does not ensure that account balances are correct!
Reporting time period: Period of time
Income statement, statement of owners equity, and statement of cash flows
Reporting time period: Point in time
Balance Sheet
Order financial statements are prepared
1. Income Statement
2. Statements of Owners Equity
3. Balance Sheet
Identity the normal balance (debit/credit) for each of the following accounts:

1. Prepaid rent
2. Owner, Capital
3. Notes Receivable
4. Accounts Payable
5. Accounts Receivable
6. Equipment
7. Interest Payable
8. Unearned Revenue
9. Land
10. Prepaid Insurance
11. Owner, Withdrawals
12. Utilities Expense
1. Debit
2. Credit
3. Debit
4. Credit
5. Debit
6. Debit
7. Credit
8. Credit
9. Debit
10. Debit
11. Debit
12. Debit
An account increases based on its location in the accounting equation and decrease on the opposite side. The Normal ending balance for an account is the same side it increases.
True
Owner, Capital and Revenues always increase equity while Owner, Withdrawals and Expenses always decrease equity
True
Revenue Recognition Principle
revenue is recognized (recorded) when it is earned, regardless of when the cash is received.
Contra-Asset
An account with a credit balance that is deducted from the related asset account on the balance sheet.; Accumulated Deprecation.
Interim Financial Statements
Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.
Annual Financial Statements
reports covering a one-year period
Time Period Assumption
presumes that an organization's activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year
The primary difference between the accrual basis and the cash basis of accounting is:
The accrual basis records revenues when services or products are delivered and records expenses when incurred and the cash basis records revenues when cash is received and records expenses when cash is paid.
Accrual Basis
recognizes revenues when earned and expenses when incurred (regardless of when the actual cash is received or dispersed). Required by GAAP and better reflects business performance and increases comparability.
Cash Basis
recognizes revenues when cash is received and records expenses when cash is paid. Useful for several of business decisions.
Aurora Corporation operated without insurance coverage for the first month of operations. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the accrual basis. How much insurance expense will be reported on the company's income statement for their first year ended December 31?
$2,200

Explanation: The expense recognized is the amount of insurance that was used during the year. The premium payment of $4,800 divided by 24 months, results in a monthly premium of $200. Eleven months of premium were used (that is, expired) during the year (February through December). Premium of $200 per month × 11 months = $2,200 of insurance expense for the first year. Alternatively, multiply the total insurance premium by the fraction used. That fraction will equal the number of months the company was covered by insurance during the year divided by the total number of months covered by the premium. $4,800 × (11/24) = $2,200.
Aurora Corporation operated without insurance coverage for the first month of operations. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the cash basis. How much insurance expense will be reported on the company's income statement for their first year ended December 31?
$4,800
The revenue recognition principle requires that revenue be recorded:
When the goods or services are provided to customers.
Expense Recognition Principle (Matching Principle)
The principle that records expenses in the same accounting period as the revenues that are recognized as a result of those expenses.
The Three Stop Adjusting Process
Step 1: Determine what the current account balance equals.
Step 2: Determine what the current account balance should equal.
Step 3: Record an adjusting entry to get from step 1 to step 2.
The 4 Types of Adjustments
Deferral of expense, Deferral of revenue, Accrued expense, Accrued revenue
An adjusting entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded.
True
Each adjusting entry affects:
one/more balance sheet account and one/more income statement account
Every adjusting entry includes:
A debit to an expense account and a credit to a revenue account OR a debit to a revenue account and a credit to an expense account.
Prepaid (deferred) expenses
Assets paid for in advance of receiving benefits; Reflect transactions when cash is paid before the related expense is recognized
Each adjusting entry for prepaid expense decreases an ________________ (balance sheet) account and increases an _______________ (income statement) account.
Asset; expense
Prepaid expenses reflect transactions when cash is paid:
before the related expense is recognized
When prepaid expenses (assets) are used, their costs become expenses.
TRUE
Plant Assets
Buildings, machines, vechiles, and equipment
- The costs of these assets are initially deferred by must be gradually reported as expenses in the income statement over the assets.
Deprecation
The process of allocating the costs of plant assets over their expected useful lives.
The expense resulting from the use of plant assets is called ......
Deprecation Expense
Accumulated Depreciation - Equipment
Plant Asset - Contra Account, Balance Sheet, Credit
Straight Line Depreciation Method
(cost - salvage value) / useful life (mo.)
(Net cost) / Useful Life (mo.)
ONLY DIVIDE BY MONTHLY IF ADJUSTMENTS HAVE BEEN MADE
On January 1, the company purchased equipment that cost $10,000. The equipment is expected to be worth about (or has a salvage value of) $1,000 at the end of its useful life in five years. The company uses straight-line depreciation. It has not recorded any adjustments relating to this equipment during the current year. Complete the journal entry.
Depreciation expense : Debit 1,8000
Accumulated expense : Credit 1,800

This adjustment relates to a prepaid (deferred) expense. It requires a debit to an expense account, Depreciation Expense, as the equipment's net cost is allocated to depreciation during its useful life. The Accumulated Depreciation account, a contra asset account, needs to be credited so that the ending balance equals the allocation through this date. The amount of this adjustment, which covers the entire year, equals $1,800 (or the net cost of the equipment of $9,000 [(or the cost of $10,000 − the salvage value of $1,000) ÷ useful life of 5 years]. Since no adjustments have been made, there is no need to determine a monthly amount.
Unearned Revenues
cash received and a liability recorded before services are performed
each adjusting entry for an unearned (deferred) revenue decreases an_______________ (balance sheet) account and increases a _______________ (income statement) account
Unearned (Liability); Revenue

Debit adjustment in liability and credit adjustment in revenue
On November 1, the company rented space to another tenant. A check in the amount of $9,000, representing three months' rent in advance, was received from the tenant on that date. The payment was recorded with a credit to the Unearned Rent Revenue account.

Complete the necessary December 31 adjusting journal entry.
Unearned revenue : $6,000 Debit
Rent Revenue : $6,000 Credit

This adjustment relates to an unearned (deferred) revenue. It requires a credit to a revenue account, Rent Revenue, for the two months of rent earned for November and December. The Unearned Rent Revenue account needs to be debited so that the ending balance equals the amount of rent, or one month's worth, still owed to the tenant. The amount of this adjustment equals $6,000 (or $9,000 × 2/3).
The company employs a single employee who works all five weekdays and is paid on the following Monday. The employee works the entire week ending on Friday, December 30. The employee earns $800 per day.

Complete the necessary December 31 journal entry...
Salaries Expense : $4,000 Debit (increase)
Salaries Payable : $4,000 Credit (increase)

$800 per day x 5 days = 4000
Each adjusting entry for an accused expense increase a liability (credit adjustment/balance sheet) account and increases an expense (debit adjustment/income statement) account
True
On Saturday, December 31, the company's owner provided ten hours of service to a customer. The company bills $100 per hour for services provided on weekends. Payment has not yet been received. The owner did not stop in the office on Saturday; as such, on December 31, the services were unbilled and unrecorded.

Complete the necessary December 31 journal entry...
Accounts Recievable : 1,000 Debit
Service Revenue: 1,000 Credit


This adjustment relates to an accrued revenue. It requires a credit to a revenue account, Service Revenue, for the amount that was earned that day. The Accounts Receivable account also needs to be increased with a debit to reflect the amount owed by the customer.
Accrued Revenues
revenues for services performed but not yet received in cash or recorded
Each adjusting entry for an accrued revenue increases an asset (balance sheet) account and increases a revenue (income statement account)
true
Before the adjusting entry for a deferral of expense, the expenses will be ____________ and the assets will be ________
Understated; Overstated
Assume that the Accumulated Depreciation account has an unadjusted normal balance of $120,000. The company's list of adjusting entries includes one that debits Depreciation Expense and credits the Accumulated Depreciation account for $20,000. The adjusted balance in the Accumulated Depreciation account is a:
Credit balance of $140,000

Accumulated Depreciation, which is a contra asset account, has a normal credit balance. The unadjusted credit balance of $120,000 plus the credit of $20,000 from the related adjusted entry will result in an adjusted credit balance of $140,000.
Revenue and expense balances are reported on the income statement. Asset, liability, and equity balances are reported on the balance sheet. We usually prepare statements in the following order: income statement, statement of owner's equity, balance sheet, and statement of cash flows.
True
adjusted trial balance
a list of accounts and balances prepared after recording and posting adjusting entries. Financial statements are often prepared from the adjusted trial balance.
An adjusted trial balance includes which of the following accounts:
all accounts and their balances
Classify the following accounts into the correct financial statement:
1. Consulting Revenue
2. Rent Expense
3. Owner, Withdrawls
1. Income Statement
2. Income Statement
3. Statement of Owner's Equity
Accural Basis accounting
Increases the comparability of financial statements from period to period
Cash received in advance from clients for legal services is recorded in Unearned Revenue. The end-of-period adjusting entry to record the portion of revenue that has been earned is:
Debit Unearned Revenue and Credit Legal Revenue
Prior to recording adjusting entries, the Office Supplies account had a $380 debit balance. A physical count of the supplies showed $103 of unused supplies available. The required adjusting entry is:
Debit Office Supplies Expense $277 and credit Office Supplies $277.

380-103=277
Which of the following does not require an adjusting entry at year-end?
Cash invested by owner
On April 1, a company paid the $4,350 premium on a three-year insurance policy with benefits beginning on that date. What amount of insurance expense will be reported on the annual income statement for the year ended December 31?
$1,087.50

36/9 = 4 9 is accounting for the months from April-December
4350 / 4 = 1,087.5
Unearned revenue is reported in the financial statements as:
A liability on the balance sheet.
The purpose of the closing process is to:
1. resets revenue, expense, and withdrawal account balances to zero at the end of each period (which updates the owner's capital account for inclusion on the balance sheet)
2. Helps summarize a periods revenues and expenses
Steps in the closing process
1. Identify Accounts for Closing
2. Record and Post the Closing Entries
3. Prepare a Post-Closing Trial Balance
All of the following accounts are temporary except:
Assets
Temporary accounts
Revenues, expenses, owner withdrawals, income summary
Closed at period end
Permanent Accounts
assets, liabilities, and owner's capital
Not closed at period end
Closing entries
Transfer the end of year balance in revenue, expenses, and withdrawal accounts to the permanent capital accounts
Closing entries are necessary for
temporary accounts only
4 Step Closing Process
1. close income statement credit balances (to close revenue accounts)
2. close income statement debit balances (to close expenses accounts)
3. close income summary account (to close income summary account)
4. close dividends account (to close the withdrawals account)
post-closing trial balance
A list of permanent accounts and their balances after a company has journalized and posted closing entries. Verifies that total credits = total debits
Accounts that would appear on the post-closing trail balance
Cash, accounts receivable, supplies, prepaid insurance, equipment, accumulated deprecation, accounts payable, salaries payable, unearned consulting revenue, and owners capital
The Accounting Cycle
1. analyze transactions
2. journalize - record accounts in a journal
3. post - transfer debits and credits from journal to ledge
4. prepare unadjusted trial balance - summarize unadjusted ledger accounts and amounts
5. adjust and post accounts - record adjustments to bring account balances up to date; then journalize and post adjustments
6. prepare adjusted trial balance - summarize adjusted ledger accounts and amounts
7. prepare statements - use adj. trail balance to prepare financial statements
8. close - journalize and post eateries to close temporary accounts
9. prepare post-closing trial balance - test clerical accuracy of the closing procedures.
10. reverse (optional) - prepare reversing and posting entries.
An unclassified balance sheet
Broadly groups assets, liabilities and equity
Classified Balance Sheet
organizes assets and liabilities into subgroups, such as "current" and "noncurrent"
Operating Cycle
The time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash.
The company's unclassified balance sheet reported the assets listed in the above table. The total current assets that would be reported on a classified balance sheet prepared for the company are:
$30,750

Current assets are cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer. Cash $12,000 + Merchandise inventory $6,000 + Short-term notes receivable $1,000 + Prepaid insurance $1,500 + Short-term investments $10,000 + Supplies $250 = Current assets of $30,750.
The most common categories in a current balance sheet:
- Current assets : Cash and other assets that are expected to be sold, collected, or used within one year (Cash, Short-term investments, accounts Receivable, short-term notes Receivable, merchandise inventory, and prepaid expenses.
- Long-term Investments ( Notes Receivable and investments in stocks and bonds)
- Plant Assets (equipment, machinery, buildings, and land)
- Intangible Assets (trademarks, patents, copyrights, franchises, and goodwill)
-Current Liabilities (accounts payable, wages payable, taxes payable, interest payable, and unearned revenues) ordered of those to be settled first
- Long-term Liabilities (Notes payable, mortgages payable, bonds payable, and lease obligations)
Proprietorship
A business owned by one person
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