Exam 1 - Review

1
Exam 1 - Review

• Chapter 1-4

2
Getting Started in Business

• Nature of Business Activities
• Financing
• Borrow
• Note Payable
• Account Payable
• Bond Payable
• Issue Common Stock
• Investing
• Purchase Assets inventory, equipment, land,
  building
• Operating
• Sell your product
• Revenue and expenses

3
Terms to Know

• - Economic Entity Assumption keep business
  and personal separate
• Historical Cost Principle record assets at
  purchase price
• Going Concern Assumption business to continue on
  into future
• Time Period Assumption- ability to prepare timely
  statements
• Full Disclosure Principle provide sufficient
  information
• Liquidity- ability to pay short term debt
• Revenue Recognition record revenue when earned
• Matching Concept match revenue with expense in
  same acct. period
• Monetary Unit Assumption express transactions
  in US
• Comparability compare 2 companies in same
  industry
• Consistency allows comparison within a company
• Materiality amounts large enough to influence
  user
• Conservatism dont overstate assets/revenues.
  Dont understate
• liabilities/expense
  s
• _ Relevance capacity of information to make a
  difference
• _ Faithful Representation dependable,
  accurate information

4
Purpose of Accounting

• Users of Financial Statement
• Internal Management, CEO, CFO
• External investors, creditors
• Four Financial Statements
• 1. Classified Balance Sheet Assets
  Liabilities Equity
• Assets Liabilities
• Current xx Current
  xx
• xx
  xx
• xx
  xx
• Total Current xx Total
  Current xx
• Investments xx Long-term
  note xx
• Fixed Assets xx Bond
  Payable xx
• Accum. Depr. (xx)
• Intangibles xx
• Total Assets xx Total
  Liab. xx
• 
  Common Stock xx
• 
  Retained Earnings xx

5

• 2.Multi-step Income Statement Revenues and
  Expenses
• shows Gross Profit and Income from Operations
• Revenue
• - COGS
• Gross Profit
• - Operating Expenses
• Income from Operations
• Gains and Losses
• Interest Rev. or Int. Exp.
• ______________________
• Net Income
• 3. Statement of Retained Earnings or Statement or
  Stockholders Equity Shows changes in equity
• Retained Earnings Statement Beg. R.E.
  (Jan. 1)
• 
  Net Income
• 
  - Dividend
• 
  End. R.E. (Dec. 31)

6
The Accounting Equation

• Assets Liabilities Stockholders Equity
• Ex
• Burlin Co. starts the year with 100,000 in
  assets and 80,000 in liabilities. Net income
  for the year is 25,000, and no dividends are
  paid. How much is owners equity at the end of
  the year.
• Beg. A L SHE
• 100,000 80,000 20,000 beg. SHE
• 0
  new stock
• 
  25,000 net income
• 
  0 - dividend
• 
  45,000 end. SHE

7
The Accounting Cycle

• General Journal Entries
• Rules of Debits and Credits
• Use DEAD Debits increase expenses, assets
• and dividends
• So then Credits increase liabilities, equity,
  and
• revenue CLEAR

8
Examples of Journal Entries

• A bank loans a company 5,000.
• Cash 5,000
• Note Payable 5,000
• (assets increase and liabilities
  Increase)
• A company pays wages of 300
• Salary expense 300
• Cash
  300
• (expenses increase and assets
  decrease)
• A company received cash from credit customers for
  collection of accounts for 400.
• Cash 400
• Account Rec.
  400
• (assets increase and assets
  decrease)
• A utility bill is received for 100. It will be
  paid next month.
• Utility Expense 100
• Account Payable
  100
• (expenses increase and
  liabilities increase)
• The company earned 6,000. Cash sales were
  2,000, the rest were on credit.
• Cash 2,000
• Acct. Rec. 4,000

9
Accounting Cycle, cont.

• Post to Ledger (T-accounts)
• Remember A debit in an entry on the left and
  a credit is an entry on the right.
• DR CR

10
Accounting Cycle, cont.

• Unadjusted Trial Balance
• Purpose to prove total debits total credits

11
Accounting Cycle, cont.

• Adjusting Entries
• Purpose to update revenue (if now earned) and
  expense accounts (if now incurred)
• Two rules (1) never use cash as an account title
  (2) one account is from the income statement and
  one account is from the balance sheet.
• In a deferral the cash comes first.
• 1. Deferred Revenue unearned revenue
• 2. Deferred Expense prepaid expense
• In an accrual the cash comes later.
• 3. Accrued Asset creates a receivable
• 4. Accrued Liability creates a payable

12
Examples of Adjusting Entries

• 1. Supplies were purchased during the year for
  500 and debited to the
• supplies account. At year end, 300 of
  the supplies had been used.
• Supplies Expense 300
  (deferred exp.)
• Supplies
  300
• 2. Of the 4,000 unadjusted balance in
  unearned revenue, one-fourth was still unearned
  at year-end.
• Unearned revenue 3,000
  (deferred rev.)
• Revenue
  3,000
• Accrued salaries at the end of the year amounted
  to 600.
• Salary Expense
  600 (accrued liab)
• Salary Payable
  600
• Rent earned but not yet received at year end
  totaled 800
• Rent Receivable 800
  (accrued asset)
• Rent Revenue
  800

13
More Adjusting Entries

• ABC Co. signs a six month note on Oct. 1,
  2009. The note of 4,000 and interest at 8 is
  due on April 1, 2010. Make the necessary
  adjusting entry at Dec. 31, 2009.
• Interest Expense
  80
• (4,000 x .08 x 3/12)
• Interest Payable
  80
• Depreciation on office equipment is 2,000
  per year.
• Depr. Exp. 2,000
• Accum. Depr.
  2,000

14
Backwards adj. entry

• On May 1, a company paid annual rent of 18,000
  and debited the amount to rent expense.
• 12/31 Adjustment used 8 months - 18,000/12
  1500 per month x 8 mos. 12,000
• So this is the amount we want in
  the rent expense account back out the excess.
• 
  Rent
  Expense
• Prepaid Rent 6,000
  
• Rent Expense
  6,000 18,000
  
• 
  
  6000 adj
• 
  
• 
  
  12,000

15
Accounting Cycle, cont.

• Adjusted Trial Balance
• 4 Closing Entries close all temporary accounts
  to zero and transfer information to Retained
  Earnings.
• Close Revenue to Income Summary
• Close Expenses to Income Summary
• Close Income Summary to Retained Earnings
• Close Dividend to Retained Earnings.