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Accounting
Accounting is the art of recording, summarizing, reporting, and
analyzing financial transactions.
Accountancy is the process of communicating financial information
about a business entity to users such as shareholders, owners, partners
and managers. The communication is generally in the form of financial
statements that show in money terms the economic resources under the
control of management; the art lies in selecting the information that is
relevant to the user. (wiki)
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Accountants
Accountants use the work done by bookkeepers to produce and analyze
financial reports. Although accounting follows the same principles and
rules as bookkeeping, an accountant can design a system that will
capture all of the details necessary to satisfy the needs of the
business managerial, financial reporting, projection, analysis, and tax
reporting.
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Debits and Credits
Increases with Debits
The Debit side of an account
represents increases in asset
accounts, expense accounts, and
Drawing.
Increases with Credits
The Credit side of an account
represents increases in liability
accounts, revenue accounts,
and Capital.
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Natural Balance
Assets, Liabilities, Equities, Revenues, or Expenses. These account
types all have natural balances that are debits or credits.
The natural balances of each account type are:
Assets: Debit
Liabilities: Credit
Equities: Credit
Revenues: Credit
Expenses: Debit
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Business Activities
Financing Activities
Financing activities are transactions that are involved with
financing the company and/or individual customer financing.
Any transaction like a loan or anything bought on credit
would be this type. Any monies paid on principle or interest
paid would be considered a financing activity and would go
in that section of the Statement of Cash Flows. Dividends
paid to shareholders or the repurchase of stock would also
be considered a financing activity.
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Business Activities
Investing Activities
Investing transactions are those that are not part of daily
operation of the company and are used solely for investing
purposes. Small term investments would be considered
obviously, but any loans made to customers or other entities
would also be considered an investing transaction. Dividends
and interest earned on investments would also qualify under
the investing category for Statement of Cash Flows.
Purchases of long term investments such as land, equipment
or property will also be viewed as an investment.
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Business Activities
Operating Activities
Operating activities are all the different activities a company
will do in their day-to-day business practices involved with
running the company. This would be anything from paying
bills, employees and utilities expenses. Product cost and
delivery cost are also operating activities, expenditures made
to keep the company running. Sales and income from
operations are also put in the operating section.
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GAAP and FASB
GAAP- generally accepted accounting principles: a collection of rules
and procedures and conventions that define accepted accounting practice;
includes broad guidelines as well as detailed procedures.
FASB- Financial Accounting Standards Board: designated private sector
organization in the U.S. that establishes financial accounting and
reporting standards.
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Business Structures
PARTNERSHIP
• Business owned by at least two people
• legal existence of partnership is extension of partners
• may have any number of employees
• Pay single taxation
• Must be in writing for more than one year
• Owners are fully liable- Unlimited liability
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Business Structures
CORPORATION
• an entity created by a state stature
• exists separately from and independently of the owners
• may have one of more owners
• owners are called shareholders or stockholders
• ownership evidenced by stock certificate
• Limited Liability by owners
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Ratio to Assess Liquidity
A company’s liquidity refers to home much cash a company has and
how easily the company’s current assets can be converted into cash.
This is crucial because companies must have cash or high liquid assets to
pay debts, Shareholders, investors, and executives.
Company may have to sell more stock to raise capital/funds to pay their
bills.
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Quick and Current Ratio
Quick Ratio= Current Assets - inventory
Current liabilities
Current Ratio= Current Assets (including inventory)
Current Liabilities
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Revenue Recognition Principle
The revenue recognition principle states that, under the accrual basis of
accounting, you should only record revenue when an entity has
substantially completed a revenue generation process; thus, you record
revenue when it has been earned.
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Accrual vs. Cash
In accrual basis accounting, income is reported in the fiscal period it is
earned, regardless of when it is received, and expenses are deducted in
the fiscal period they are incurred, whether they are paid or not. In other
words, using accrual basis accounting, you record both revenues and
expenses when they occur. Use for all medium and larges businesses.
In cash basis accounting, revenues are recorded when cash is actually
received and expenses are recorded when they are actually paid (no
matter when they were actually invoiced). Mostly use by small
businesses like mom and dad.
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Accrual vs Cash
Under the accrual basis, companies record transactions that change a
company's financial statements in the periods in which the events occur.
recognize revenues when earned and recognizing expenses when
incurred (rather than when paid). Follow GAAP
Under cash-basis accounting, companies record revenue when they
receive cash. They record an expense when they pay out cash.
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Accrual vs. Cash
Companies pay for some types of expenses after the services have been
performed. Examples are employee salaries and commissions. Pioneer
last paid salaries on October 26; the next payday is November 9. As the
calendar
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Why adjusting entries
A company must make adjusting entries every time it
prepares financial statements.
It analyzes each account in the trial balance to determine
whether it is complete and up-to-date.
Adjusting entries are needed to
enable financial statements to
conform to GAAP
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Adjusting Entries
1
.
Some events are not recorded daily because it is not efficient to do so. For example,
companies do not record the daily use of supplies or the earning of wages by
employees.
2
.
Some costs are not recorded during the accounting period because they expire with the
passage of time rather than as a result of daily transactions. Examples are rent,
insurance, and charges related to the use of equipment.
3
.
Some items may be unrecorded. An example is a utility bill that the company will not
receive until the next accounting period
The trial balance—the first summarization of the transactiondata
may not contain up to date and complete data for the following reasons:
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Adjusting entries are classified
as either deferrals or accruals
Deferrals are either prepaid expenses or unearned revenues.
Companies make adjustments for deferrals to record the portion of
the deferral that represents the expense incurred or the revenue
earned in the current period.
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Costs for a merchandising
The flow of costs for a merchandising company is as follows: Beginning
inventory is added to the cost of goods purchased to arrive at cost of
goods available for sale. Cost of goods available for sale is assigned to
the cost of goods sold (goods sold this period) and ending inventory
(goods to be sold in the future). Companies use one of two systems to
account for inventory: a perpetual inventory system or a periodic
inventory system.
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Prepare a multiple-step
income statement
Debit Credit
Cash 14,500 Accumulated Depreciation 18,000
Accounts Receivable 11,100 Notes Payable 25,000
Merchandise Inventory 29,000 Accounts Payable 10,600
Prepaid Insurance 2,500 Larry Falcetto, Capital 81,000
Store Equipment 95,000 Sales 536,800
Larry Falcetto, Drawing 12,000 Interest Revenue 2,500
Sales Returns and Allowances 11,700 673,900
Cost of Goods Sold 363,400
Advertising Expense 19,600
Salaries Expense 56,000
Utilities Expense 18,000
Rent Expense 24,000
Depreciation Expense 9,000
Insurance Expense 4,500
Interest Expense 3,600
673,900
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Income Statement Solution
Income Statement
For the Year Ended December 31, 2010
Sales revenues
Sales $536,800
Less: Sales returns and allowances $11,700
Net sales 525,100
Cost of goods sold 363,400
Gross profit 161,700
Operating expenses
Salaries expense 56,000
Rent expense 24,000
Utilities expense 18,000
Advertising expense 19,600
Depreciation expense 9,000
Insurance expense 4,500
Total operating expenses 131,100
Income from operations 30,600
Other revenues and gains
Interest revenue 2,500
Other expenses and losses
Interest expense 3,600 -1,100
Net income $ 29,500
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Perpetual Inventory
In a perpetual inventory system, companies keep detailed records of the
cost of each inventory purchase and sale. These records continuously—
perpetually—show the inventory that should be on hand for every item
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Periodic Inventory
In a periodic inventory system, companies do not keep detailed
inventory records of the goods on hand throughout the period.
Instead, they determine the cost of goods sold only at the end of the
accounting period—that is, periodically. At that point, the company
takes a physical inventory count to determine the cost of goods on hand.
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Cost of goods sold
*Amount charged to cost of goods sold depend on the inventory system.
There are three assumed cost flow methods:
1. First-in, first-out (FIFO)
2. Last-in, first-out (LIFO)
3. Average-cost
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Determine the cost of goods sold
The accounting records of AGM show the following data.
Beginning inventory 4,000 units at $ 3
Purchases 6,000 units at $ 4
Sales 7,000 units at $12
Determine the cost of goods available for sale, ending inventory units,
and cost of goods sold during the period under:
(a) the FIFO method,
(b) the LIFO method,
(c) the average-cost method.