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It's the process of recording, summarizing, and analyzing financial transactions for informed decision-making.
Luca Pacioli, who observed double entry bookkeeping used by italian merchants in the 1600s.
The Accounting Equation
Assets = Liabilities + Equity
A method of recording transactions in at least two accounts using debits and credits.
Preparing financial statements for a company's external users.
Providing financial information to internal users for decision-making.
Company's owners, executives, managers, employees, etc.
Investors and other outside individuals.
Pressure, Opportunity, Rationalization
Assets, Liabilities, Equity, Revenues, and Expenses
OWN
A valuable resource owned or controlled by a company with expected future benefit.
Assets
Assets
Amount expected to receive from customers in future.
Performing services or selling inventory "on credit".
They represent the right to collect cash in the future.
Cash, Supplies, Receivables, Prepaids, Inventory, Buildings, Land, etc.
An asset expected to benefit within one year.
An asset expected to benefit for more than one year.
Cash, Supplies, Accounts Receivable, Short Term Notes Receivable, etc.
Buildings, Machines, Equipment, Land, Patents, Trademarks, Copyrights, etc.
Asset
Drainage systems, fencing, landscaping, parking lots, walkways, etc.
Non-physical resources providing real value.
Goodwill, Patents, Trademarks, Copyrights, and other intellectual property.
The amount paid in excess over the market value of a business's assets and liabilities during acquisition.
Business reputation, brand name, licenses and permits, etc.
Land, Buildings, Machinery, Equipment, Office Equipment, etc.
Plant Assets except Land.
Land Improvements, Buildings, Machinery, Equipment, etc.
Value reduction of plant assets over time due to use or obsolescence.
Contra Account
Contra Asset account.
It reduces the value of plant assets.
Either by cash or on credit.
Acquiring an asset immediately but paying for it later.
OWE
Something a person or company owes, typically a sum of money.
Liabilities
Amount of cash owed to be paid in the future.
Purchasing an asset "on credit".
Accounts Payable, Salaries Payable, Wages Payable, etc.
Cash received in advance for services/products not yet provided.
It represents owed services/products.
- Receiving an upfront payment for a consulting contract yet to be fulfilled. (Cash has been received in advance, but the revenue isn’t considered “earned” until the contract is completed.)
- Selling tickets for a concert occurring in the future. (Cash has been received in advance, but the revenue isn’t considered “earned” until the concert successfully takes place.)
- Selling subscriptions to a magazine that won’t be delivered until a later date. (Cash has been received in advance, but the revenue isn’t considered “earned” until the magazines are shipped.)
Many other examples exist!
Liability no longer owed.
Yes, unpaid portion remains.
Liability settled within 1 year.
Liability settled after 1 year.
Accounts Payable, Salaries Payable, etc.
Typically current, sometimes long-term.
Long Term Notes Payable, Bonds Payable.
OWNERSHIP, VALUE, NET WORTH
Book value after deducting liabilities from assets.
Common Stock, Paid in Capital, Retained Earnings
Accumulated Net Income less any dividends paid.
The amount in retained earnings is tied to a company's value.
Tracks value contributed from owners/investors.
Stock distributed to owner/investor.
FALSE
A - L = E
Contra Equity.
Shared Retained Earnings paid to owners/investors.
Reduces Retained Earnings.
EARN
Earnings from goods or services provided to customers.
EARNED
Service Revenue, Fees Earned, etc.
No, it's a liability account.
Cash records cash flows, accrual records when earned/incurred.
When cash is received.
When goods sold/services performed.
Revenue recognized when product/service delivered.
When cash is paid.
When cost incurred.
FALSE
TRUE
COST
Cost of operations to generate revenue.
Wages Expense, Depreciation Expense, etc.
Expenses must be recognized in the same period as the revenues they helped generate.
FALSE
Captures cost of sold goods.
COST OF GOODS SOLD
Asset
Expense
Expense
Liability
Asset
Revenue
Revenue
Liability
Equity
Asset
Asset
Asset
Asset
Contra Equity
Contra Asset
Record Journal Entries.
Post to Ledger (aka T Accounts).
Combined debits and credits from Journal Entries in a T Account.
Unadjusted Trial Balance creation
A list of accounts with debit and credit columns ensuring total debits = total credits
To validate correct journal entries & posting; total debits should equal total credits
Adjusting Entries
Preparing Adjusted Trial Balance
TRUE
Preparing Financial Statements
Closing Entries
Post-closing Trial Balance
Journal Entries > Posting > Unadjusted Trial Balance > Adjusting Entries > Adjusted Trial Balance > Financial Statements > Closing Entries > Post Closing Trial Balance
Income Statement, Statement of Retained Earnings, Balance Sheet
1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet
Revenues and Expenses only
Assets, Liabilities, and Equity only
Total Revenues - Total Expenses = Net Income or Net Loss
Expenses > Revenues
Revenues > Expenses
Beginning R/E + Net Income (or - Net Loss) - Dividends = Ending R/E
Net Income or Loss from Income Statement is needed
Net Income increases, Net Loss and Dividends decrease Retained Earnings
Dividends reduce Retained Earnings
Net Income increases Retained Earnings
Zero
No formula; more like a LIST showing ending balances of Assets = Liabilities + Equity.
Balance Sheet
Requires ending balances from other statements
Balance Sheet
It captures ending balances at a specific date
Income Statement and Statement of Retained Earnings
They report data over a period
FALSE
FALSE
TEMPORARY Accounts
PERMANENT Accounts
They reset to zero each period via Closing Entries
They carry forward balances year to year. For instance, $100,000 cash at year-end becomes the starting balance for the next year.
Method where transactions are recorded in 2+ accounts, total debits must equal total credits
A = L + E
Decreases Equity
Increases Equity
Decreases Equity
Increases both Assets and Equity by $15,000
No effect, traded one asset for another
Increases both Assets and Liabilities by $100
Decreases both Assets and Liabilities by $50
Decreases both Assets and Equity by $5000
Increases both Assets and Equity by $250
Decreases both Assets and Equity by $1000
No effect, traded one asset for another
Increases both Assets and Liabilities by $500
Decreases both Assets and Equity by $2000
Revenue should be recorded when earned, not when cash is received
Reporting financial results in consistent periods
Report all necessary financial information
Choose option less likely to overstate assets or income
Transactions initially recorded at their original cost
Company can meet its obligations and continue its business for the foreseeable future
Record Long Term Assets on the balance sheet at their historical cost
Benefits of reporting should outweigh the costs
Information is material if it changes the view of a reasonable person
All transactions can be measured in terms of currency
A non-profit organization that sets accounting standards in the U.S.
To establish U.S. accounting and financial reporting standards.
It sets financial reporting standards for U.S. state and local governments.
Oversees and administers FASB and GASB.
FALSE
FALSE
Generally Accepted Accounting Principles
Agency overseeing U.S. stock market and financial reporting standards.
FASB and SEC
TRUE
Sets global accounting standards (IFRS).
To establish International Financial Reporting Standards (IFRS).
International Financial Reporting Standards
2010 financial reform law in response to 2008 financial crisis.
2010
Dodd Frank Act
Regulatory agency protecting consumers in the financial marketplace.
Protect consumers, regulate financial laws, promote fair practices.
2002 law setting new financial reporting requirements for U.S. companies.
2002
Oversees audits of public companies to protect investors.
To ensure accuracy and independence of audit reports.
Sarbanes Oxley Act of 2002
Regulates commodity futures and options markets in the U.S.
Oversee futures trading, ensure fair markets, protect participants.
National organization of Certified Public Accountants in the U.S.
Certified Public Accountant
Auditing (AUD), Business Environment (BEC), Financial Reporting (FAR), Regulation (REG)
Senior executive overseeing financial activities and strategies of a company.
Manages financial operations, accounting systems, and financial reporting of a company.
Deloitte, PWC, EY, KPMG
Public accounting provides services for clients vs in-house roles within organizations.
Objective examination of financial statements of an organization.
Financial review by a non-associated party.
Review conducted by managers within the company.
Examination and verification of an organization's financial statements by an independent auditor.
OPINION, FAIRLY
FAIR REPRESENTATION
Business owned and personally liable by one person.
Business co-owned and managed by two or more people.
Business owned by shareholders; a separate legal entity.
Corporate profits being taxed at corporate level and again at individual owner level.
Business entity with limited liability protection and partnership-like tax advantages.
Business with pass-through taxation and limited liability protection.
(PLLC) is a business structure that offers liability protection for business owners in licensed occupations, such as medicine and law.
Business with pass-through taxation and limited liability.
A tool used for financial modeling, budgeting, data analysis, and reporting.
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