I. Concepts

a. Entity Concept

1. An organization stands apart from other organizations as separate economic unit.

b. Reliability Concept

1. Accounting records must be based on the most reliable (verifiable by an independent observer) data available.

c. Cost Principle

1. Assets/services acquired are recorded at actual, historical cost.

d. Going Concern Principle

1. Entity will continue to operate in future long enough to recover cost of its assets.

e. Stable Monetary Unit

1. Basis for ignoring inflation

II. Basis & Principles

a. Accrual Basis Accounting

1. Impact of events recognized as they occur

2. Transactions are recorded even when cash has not been received or paid.

3. Required by GAAP (Generally Accepted Accounting Principles)

b. Cash Basis Accounting

1. Impact of events not recognized until cash is paid or received.

c. The Accounting Period

1. Usually one year ending December 31

2. Fiscal year end on any other date of the year

d. Revenue Principle

1. Establishes when to record revenue, usually when earned

2. Revenue is earned when the business has completed rendering services to the customer

3. Amount to recorded is equal to cash value of services or goods

e. Matching Principle

1. Expenses matched against revenues in same accounting period

f. Time Period Concept

1. Report information at regular intervals.

 

III. The Accounting Equation, Assets = Liabilities + Owner’s Equity

a. Assets

1. Economic resources expected to benefit company in the future

a. Cash – money, certificates of deposit, and checks

b. Notes Receivable – Promissory notes

c. Accounts Receivable – Oral or implied promises, usually arise from sales made to customers, no promissory note exists.

d. Land – Property the business owns and uses in operations

e. Building – Cost of an office, warehouse, garage, etc.

f. Equipment, Furniture, & Fixtures – Accounts that record the cost of office equipment and store equipment.

b. Liabilities

1. Economic obligations, debts

a. Notes Payable – amounts the company must pay as a result of signing a promissory note for goods or services.

b. Accounts Payable – Oral or implied promise to pay debts which arose from credit purchases

c. Taxes payable – Wages payable, Salary payable

c. Owner’s Equity

1. Claims held by owners, divided into two main categories

a. Contributed or Paid in Capital (amounts invested in corporation by owners)

b. Retained Earnings

i. Expenses – decreases in retained earnings resulting from operations

ii. Revenues – increases in retained earnings resulting from operations.

iii. Dividends – distributions of assets to shareholders decreases retained earnings.

IV. The Accounting Cycle

a. Financial Statements

1. Steps in the cycle

a. Open ledger accounts

b. Journalize transactions

c. Post to the ledger

d. Calculate unadjusted balances

e. Develop trial balance on a work sheet

f. Journalize and Post adjusting entries

i. Match revenues and expenses to period earned and incurred

ii. Correct measurement of period’s income

iii. Bring related asset and liability accounts up to date

g. Prepare Financial Statements

h. Journalize and Post closing entries

i. Prepare post closing trial balance

b. 5 Categories of adjusting Entries

1. Prepaid expenses – Expire or are used up in next period

2. Accrued expenses – Expenses incurred but not yet paid

3. Depreciation – Systematically spreads cost of assets over periods

4. Accrued revenue – Revenue earned, but cash not yet received

5. Unearned revenue – Revenue not earned by business but has already received

c. The Adjusting Process

1. Purpose is to measure income correctly

a. Accrual Method

2. Each entry affects one income statement account (revenue or expense)

3. Each entry also affects one balance sheet account (asset or liability)