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47 Cards in this Set
- Front
- Back
Accounting is a system that ________, ________, and ___________ information that is __________, ________, ___________ to help users make better decisions.
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identifies; records; communicates; relevant; reliable; comparable
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Objectivity Principle
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Accounting information is supported by independent, unbiased evidence that is verifiable.
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Cost Principle
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Accounting info is based on actual cost.
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Going-Concern Principle
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Reflects assumption that the business will continue operating instead of being closed or sold.
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Monetary Unit Principle
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Express transactions and events in monetary, or money, units.
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Revenue Recognition Principle
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1. Recognize revenue when it is earned
2. Proceeds need not be in cash 3. Measure revenue by cash received plus cash value of items received |
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Business Entity Principle
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A business is accounted for separately from other business entities, including its owner.
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Net Income/Net Loss
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Revenues - Expenses
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Income Statement--Purpose
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Describes a company's revenues and expenses alone with the resulting net income or loss over a period of time due to earnings activities.
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Financial Statement Heading
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1. Company's Name
2. The Statement Title 3. The Date or Time Period (income statement, statement of retained earnings, and statement of cash flows are prepared for a period of time; the balance sheet is prepared as of a point in time) |
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Income Statement--Format
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-Revenues reported first
-Expenses reported after revenues -Net income/loss is reported at the bottom of the statement |
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Statement of Retained Earnings--Purpose
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Explains changes in retained earnings from net income (or loss) and from any dividends over a period of time.
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Statement of Retained Earnings--Format
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Beginning retained earnings
+ events that increase it (net income) -events that decrease it (dividends and net loss) =ending retained earnings Beg. Ret. Earnings + Net Income - Dividends = End Ret. Earnings |
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Balance Sheet--Purpose
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Describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.
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Balance Sheet--Format
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-Assets are listed on the left side
-Liabilities are listed on the upper right side -Equity is listed on the bottom right side under Liabilities; Ret. Earnings is used to compute equity |
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Statement of Cash Flows--Purpose
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Identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
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Statement of Cash Flows--Format
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There are three sections:
1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities -Outflows are in parentheses to denote subtraction |
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Equation to find Ending Equity
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Beg. Equity + Net Income + Stock Issuances - Dividends = Ending Equity
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Steps to Post a Journal Entry to a Ledger Account
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1. Identify the debit acct in the ledger
2. Enter the date 3. Enter the amount and description 4. Enter the journal reference 5. Compute the balance 6. Enter the ledger acct number in the PR column of the journal 7. Repeat 1-6 for credit entries and amounts |
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Steps in the Analyzing and Recording Process
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1. Analyze each transaction and event from source documents
2. Record relevant transactions and events in a journal 3. Post journal information to ledger accounts 4. Prepare and analyze the trial balance |
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Steps to Prepare a Trial Balance
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1. List each acct title and its amount in the trial balance
2. Compute the total of debit balances and the total of credit balances 3. Verify total debit balances equal total credit balances |
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If the trial balance does not balance, the error(s) must be found and corrected by tracing steps backwards with these steps until the error is found:
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1. Re-add up the columns of the trial balance
2. Ensure that postings from the ledger are accurate 3. Recompute balances in ledger 4. Ensure postings from journal to ledger are accurate 5. Ensure accuracy of journal entries |
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The trial balance can be used to prepare the financial statements in this order:
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1. Income Statement
2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows |
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Accrual Basis Accounting
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Revenues are recognized when earned and expenses are recognized when incurred.
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Matching Principle
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Expense Recognition: Record Expenses that were incurred to generate the Revenues recorded in the accounting period.
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Deferred adjusting entries
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-Cash is paid before expense is recognized (prepaid (deferred) expenses)
-Cash is received before revenue is recognized (unearned (deferred) revenues) |
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Accrued adjusting entries
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-Cash is paid after expense is recognized (accrued expense)
-Cash is received after revenue is recognized (accrued revenue) |
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Prepaid (Deferred) Expenses
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Resources paid for prior to receiving the actual benefits.
Adjusting Entry: Dr. Expense Cr. Asset |
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Depreciation--Deferred Expense
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Straight-Line Depreciation Expense = (asset cost - salvage value)/useful life
Adjusting Entry: Dr. Depreciation Expense Cr. Accumulated Depreciation **On balance sheet plant asset is shown net of accumulated dep.** |
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Unearned (Deferred) Revenues
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Cash received in advance of providing products or services.
Adjusting Entry: Dr. Liability Cr. Revenue |
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Accrued Expenses
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Expenses incurred in a period that are both unpaid and unrecorded.
Adjusting Entry: Dr. Expense Cr. Liability |
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Accrued Revenues
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Revenues earned in a period that rae both unrecorded and not yet received.
Adjusting Entry: Dr. Asset Cr. Revenue |
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Prepaid Expenses--Effects on financial statements before adjusting
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Balance Sheet:
-Asset overstated -Equity overstated Income Statement: -Expense understated |
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Unearned Revenues--Effects on financial statements before adjusting
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Balance Sheet:
-Liability overstated -Equity understated Income Statement: -Revenue understated |
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Accrued Expenses--Effects on financial statements before adjusting
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Balance Sheet:
-Liability understated -Equity overstated Income Statement: -Expense Understated |
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Accrued Revenues--Effects on financial statements before adjusting
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Balance Sheet:
-Asset understated -Equity understated Income Statement: -Revenue understated |
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We use the adjusted trial balance to prepare financial statements in the following order:
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1. Income Statement
2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows |
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Recording Closing Entries:
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1. Close revenue accts to Income Summary
2. Close expense accts to Income Summary 3. Close Income Summary to Retained Earnings 4. Close Dividends acct to Retained Earnings |
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Post-Closing Trial Balance
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-Trial balance prepared after the closing entries have been posted
-The purpose is to ensure that all nominal or temporary accts have been closed -The only accts on the trial balance should be assets, liabilities, and equity accts |
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Steps in the Accounting Cycle
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1. Analyze transactions
2. Journalize 3. Post 4. Prepare unadjusted trial balance 5. Adjust 6. Prepare adjusted trial balance 7. Prepare statements 8. Close 9. Prepare post-closing trial balance |
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Classified Balance Sheet
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Organizes assets and liabilities into important subgroups
Typical Asset categories: -Current assets -Noncurrent assets -Long-term investments -Plant assets -Intangible assets Typical Liabilities and Equity categories: -Current liabilities -Noncurrent liabilities -Equity Current items are those expected to come due (either collected or owed) within one year or the company's operating cycle, whichever is longer. |
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Classified Balance Sheet--Current Assets
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1. Cash
2. Short-term Investments 3. Accts Receivable 4. Short-term Notes Receivable 5. Inventory for Sale 6. Prepaid Expenses --listed in the order of how quickly they will be converted to cash |
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Classified Balance Sheet--Long-term Investments
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Includes notes receivable and investments in stocks and bonds when they are expected to be held for the longer of one year or the operating cycle
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Classified Balance Sheet--Plant Assets
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Plant assets are tangible assets that are both long lived and used to produce or sell products and services.
I.E. equipment, machinery, buildings, etc |
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Classified Balance Sheet--Intangible Assets
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Long-term resources that benefit business operations; usually lack physical form and have uncertain benefits. Their value comes from the privileges or rights granted to or held by the owner.
I.E. patents, trademarks, copyrights, etc |
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Classified Balance Sheet--Current Liabilities
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1. Accts Payable
2. Notes Payable 3. Wages Payable 4. Taxes Payable 5. Interest Payable 6. Unearned Revenue |
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Classified Balance Sheet--Long-term Liabilities
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Obligations not due within one year or the operating cycle, whichever is longer.
I.E. notes payable, mortgages payable, bonds payable, and lease obligations |