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38 Cards in this Set
- Front
- Back
accrual basis of accounting
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Revenues are recognized when EARNED and expenses are recognized when INCURRED.
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Revenue recognition principle
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-revenues are recorded in the acct period they were EARNED
-revenues are EARNED when products are delivered or services are performed |
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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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ADJUSTING ACCOUNTS
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AN ADJUSTING ENTRY IS RECORDED TO BRING AND ASSET OR LIABILITY ACCOUNT BALANCE TO ITS PROPER AMOUNT AND ENSURE THAT THE REVENUE RECOGNITION AND MATCHING PRINCIPLE ARE FOLLOWED
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DEFERRED ADJUSTMENT
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PAID OR RECEIVED CASH *BEFORE* EXPENSE OR REVENUE RECOGNIZED
-PREPAID (DEFERRED) EXPENSE -UNEARNED (DEFERRED) REVENUES -CASH BEFORE ACTION |
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ACCRUED ADJUSTMENT
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PAID OR RECEIVED CASH *AFTER* EXPENSE OR REVENUE RECOGNIZED
-ACCRUED EXPENSE ACCRUED REVENUES |
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Prepaid insurance adjustment
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This is when you pay ahead of time and the service of insurance coverage is deferred/owed
after a month, 1/12th of the amount paid for a year's coverage of insurance expires debit insurance expense (service incurred so expense can be recognized) credit prepaid insurance (this was an asset but through the passage of time it became an expense recordable) it's one less month you're covered |
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Plant assets
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assets expected to provide benefits for many periods
ex: buildings, machines, vehicles, etc. they are prepaid expenses (current assets) that depreciate overtime--meaning, their costs are deferred and then recorded under an expense account |
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straight-line depreciation
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allocates equal amounts of an asset's new cost to depreciation during its useful life
purchase for $26,000 expect worth in 48 months = $8,000 Net cost $18,000 allocated over 48 months = $375 per month NOT adjusting due to depreciation would understate expenses and overstate net income. also, would overstate assets and equity on balance sheet |
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ACCUMULATED depreciation
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is a CONTRA asset account
it means: total depreciation expense for all prior periods (expense of just one period's worth of depreciation goes under expense account) |
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example of deferred REVenue
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for YOU to journalize this adjustment it would mean that someone paid you first before you supplied a product or service such as a mag company owing 12 magazines to those who paid a full year subscription
once a month passes record as: debit UNEARNED SUBSCRIPTION REVENUE for that month you provided service credit SUBSCRIPTION REVENUE for the month you EARNED at the time of the mag subscription was paid by customer, you would recognize your cash debited and unearned revenue credited |
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example of an accrued expense
(when action comes before cash) |
accrued salaries expense - when an employee earns three days of pay (A) before he is paid and (B) before and acct period ends -- he gets paid every two weeks
the company must record these 3 days the employee earned pay even though he has not been paid and the acct per is over orig. entry: debit salaries expense credit salaries payable adjusting entry: debit salaries expense (for the two days he worker after the period) debit salaries payable (for the three days before the period) credit cash (total salaries) |
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accrued revenues example
(when YOU did something and a customer OWES you) |
this is when a customer purchases something on account with you. you give them their one month of consulting (could have paid for three months on credit) and record your revenue because you earned it for that one month of service even if you dont have the physical cash in hand)
entry for earnings: debit accounts receivable credit consulting revenue adjusting (as they pay) debit cash credit a/r |
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temporary/nominal accounts
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accumulate data related to one accounting period
ex: income statement accounts, dividends account, income summary account THESE ARE CLOSED AT THE END OF A PERIOD TO GET READY FOR THE NEXT PERIOD |
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order of recording closing entries
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1. revenues
2. expenses 3. income summary 4. dividends : debit revenues credit expenses debit retained earnings credit dividends : revenues (less expenses) plus retained earnings (less dividends) |
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ch.1
Securities and Exchange Commission (SEC) |
the government group that establishes reporting requirements for companies that issue stock to the public
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Objectivity Principle
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accounting information is supported by independent, unbiased evidence
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cost principle
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accounting information is based on actual costs incurred in business transactions. cost is measured on a cash or equal-to-cash basis
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going-concern principle
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accounting information reflects the assumption that the business will continue operating instead of being closed or sold
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monetary unit principle
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transactions and events are expressed in monetary, or money, units (generally the currency of the country in which the business operates)
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revenue recognition principle
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provides guidance on when a company must recognize revenue (meaning when they record it)
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business entity principle
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a business is accounted for separately and distinctly from its owner(s)
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Reporting income for a Merchandising Company
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NET SALES - COGS = GROSS PROFIT - EXPENSES = NET INCOME
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Trade Discounts
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used by manufacturers and wholesalers to offer better prices to for greater quantities purchased
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purchase discount
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(for credit sales) to induce early payment of the amount due, seller grants the buyer a deduction from the invoice price
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FIFO vs LIFO
when prices are rising |
FIFO cogs are lower but ending inventory, net income, equity, and income taxes are higher
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FIFO vs LIFO
when prices are falling |
FIFO cogs are higher, but ending inventory, net income, equity, and income taxes are lower
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when you OVERSTATE your ending inventory,
YR 1... YR 2... |
YR 1
you understate your COGS, overstate your net income, equity, assets, gross profit, but your beginning inventory, net purchases, and merchandise available for sale are all OK YR 2 your beginning inventory, merchandise available for sale, and COGS will be over, your gross profit and your net income will be under, and net purchases, ending inventory, assets, and equity will all be OK |
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analyzing and recording process
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analyze source documents
journalize post journal info to ledger accounts prepare and analyze trial balance |
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Financial Accounting
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rules for recording money on paper--how you make your financial statements
it's for outsiders (investors) |
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managerial accounting
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is information for people INSIDE the company--it's not about rules it's about makeing the right decisions for your company
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Financial Accounting Standards Board
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organization SEC put in charge for changing and adding to GAAP
their decisions on paper are called financial accounting standards FAS |
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sole proprietorship
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started by and owned by one person..when he dies so does th company
you have unlimited liability --if someone sues you, they can take your car, house, etc not jsut the bus's assets you only get taxed once for income tax |
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partnerships
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proftis shared between partners some have unlimited liability and some are limited
if someone sues you the most they can get are the assets from your business not your house or car get taxed once for income tax |
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corporations
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can sell stock on the open market and sell pieces of the co.
limited liability taxed twice--when the corp makes money, and when shareholder gets dividends he pays income tax on it |
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2009 top ten corps
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2008 was wal-mart but 2009 is exxon mobil
walmart is number 2 |
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classified balance sheet format and includes
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format assets followed by liabilities and equities
assets are broken down to current (meaning close to cash: cash, A/R) and noncurrent (longterm investments, plant assets, intangibles:building, land, accu depre) liabilities and equity current and noncurrent |
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classified multistep income statement
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NS
-cogs =GP -Op Exp =income from op +nonop rev -nonop exp =income before taxes -income tax =net income |