Accounting Final

Accountants divide the economic life of a business into artificial time periods

Generally a month, a quarter, or a year.
Fiscal year vs. calendar year

Companies recognize revenue in the accounting period in which it is earned.
In a service enterprise, revenue is considered to be earned at the time the service is performed.

expenses matched with revenues in the period when efforts expended to generate revenues

-"let the expenses follow the revenues

Transactions recorded in the periods in which the events occur.
Revenues are recognized when earned, even if cash was not received.
Expenses are recognized when incurred, even if cash was not paid.

Revenues are recognized only when cash is received.
Expenses are recognized only when cash is paid.
Prohibited under generally accepted accounting principles (GAAP).

needed to ensure that the revenue recognition and expense recognition principles are followed.

make it possible to report correct amounts on the balance sheet and on the income statement

Revenues earned but not yet received in cash or recorded.

Expenses incurred but not yet paid in cash or recorded.

An adjusting entry serves two purposes:
(1) Records the obligations, and
(2) Recognizes the expenses.

Each account is analyzed to determine whether it is complete and up-to-date.

Prepaid expenses
OR
Unearned revenues

insurance
supplies
advertisingrent
equipment
buildings

contra asset account.

Appears just after the account it offsets (Equipment) on the balance sheet.

Receipt of cash that is recorded as a liability because the revenue has not been earned.

Cash reciept BEFORE Revenue recorded

Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

Revenues earned and
OR
Expenses incurred
in the current accounting period that have not been recognized through daily entries.

Revenue Recorded BEFORE Cash reciept

After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts

the permanent stockholders’ equity account—Retained Earnings.

prove the equality of the permanent account balances that the company carries forward into the next accounting period.

All temporary accounts will have zero balances

1. Analyze business transactions
2. Journalize the transactions
3. Post to ledger accounts
4. Prepare a trial balance
5. Journalize and post adjusting entries: Deferrals/Accruals
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance

Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

sold is the total cost of merchandise sold during the period.

Ownership of the goods remains with the seller until the goods reach the buyer.

Freight costs incurred by the seller are an operating expense

Maintain detailed records of the cost of each inventory purchase and sale.
Records continuously show inventory that should be on hand.
Company determines cost of goods sold each time a sale occurs.
Traditionally used for merchandise with high unit values.
Provides better control over inventories.
Requires additional clerical work and additional cost to maintain inventory records.

Made using cash or credit (on account).

Normally recorded when goods are received.

Purchase invoice should support each credit purchase.

Highlights the components of net income.
Three important line items:
gross profit, income from operations, and net income.

Latest goods purchased are first to be sold.

Seldom coincides with actual physical flow of merchandise.

Exceptions include goods stored in piles, such as coal or hay.

Earliest goods purchased are first to be sold.

Often parallels actual physical flow of merchandise.

Generally good business practice to sell oldest units first.

Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.

Assumes goods are similar in nature.

Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.

Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
Practice is relatively rare.
Most companies make assumptions (Cost Flow Assumptions) about which units were sold.

Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
when the business is closed or business is slow.
at end of the accounting period.

Methods and measures adopted to:
Safeguard assets.
Enhance accuracy and reliability of accounting records.
Increase efficiency of operations.
Ensure compliance with laws and regulations.

Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances.
Reconciling Items:
Deposits in transit.
Outstanding checks.
Bank memoranda.
Errors.

All publicly traded U.S. corporations are required to maintain an adequate system of internal control.
Corporate executives and boards of directors must ensure that these controls are reliable and effective.
Independent outside auditors must attest to the adequacy of the internal control system.
SOX created the Public Company Accounting Oversight Board (PCAOB).

Control environment.

Risk assessment.

Control activities.

Information and communication.

Monitoring.

Establishment of Responsibility
Control is most effective when only one person is responsible for a given task.
Segregation of Duties
Related duties should be assigned to different individuals.
Documentation Procedures
Companies should use prenumbered documents and all documents should be accounted for.
Independent Internal Verification
Records periodically verified by an employee who is independent.
Discrepancies reported to management.
Human Resource Controls
Bond employees.
Rotate employees’ duties and require vacations.
Conduct background checks.

Cash balance per bank statement $15,907.45
Deposit in transit 2,201.40
Outstanding checks (5,904.00)
Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45
Error in check No. 443 36.00
NSF check (425.60)
Bank service charge (30.00)
Collection of notes receivable 1,035.00
Adjusted cash balance per books $12,204.85

Companies estimate uncollectible accounts receivable.
Debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account) when estimate is made.
Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time the specific account is written off as uncollectible.

Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts receivable 10

Direct Write-Off
Theoretically undesirable:
No matching.
Receivable not stated at net realizable value.
Not acceptable for financial reporting.
Allowance Method
Losses are estimated:
Better matching.
Receivable stated at net realizable value.
Required by GAAP.

pp&e assests and intangible assets

Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account
Includes all expenditures necessary to make the improvements ready for their intended use.
Includes all costs related directly to purchase or construction
Include all costs incurred in acquiring the equipment and preparing it for use

Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.

Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Debit - the plant asset affected.

straight-line, units of activity, double declining

Expense is same amount for each year.
Depreciable cost = Cost less salvage value

Suited to equipment whose activity can be measured in units of output, miles driven, or hours in use.
Calculate depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is cost less salvage value.

Double declining-balance rate is double the straight-line rate. Formula = 2 X (1/life)

9/12

Accounted for in the period of change and future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.

Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account

Amortization of Intangibles:

Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.

Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to provide cash flows.
No amortization.