accounting 1 learning outcomes

8/6/2019 Accounting 1 Learning Outcomes

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1. Define accounting and describe its role in making informed decisions.

Accounting - The information system that identifies, records, and communicates the economic

events of an organization to interested users.

Financial information that helps internal and external users make business decisions.

Internal users are usually company managers who use accounting information to decide how

to plan and control operations on a daily and long-term basis.

External users are existing or potential investors, creditors, analysts, financial advisers,

regulatory authorities, unions, and the general public. They use accounting

information to make a myriad of decisions about whether to buy, hold, sell, lend,

continue a relationship, or make an agreement.

2. Define financial position, state the accounting equation and show how each are affected by

transactions.

The status of the assets, liabilities, and owners equity (and their interrelationships) of an

organization, as reflected in its financial statements.

The basic accounting equation: Assets = Liabilities + Owners Equity

Each business transaction must have a dual effect on the accounting equation. For example, if an

individual asset increases, there must be a corresponding (1) decrease in another asset, or (2)

increase in a specific liability, or (3) increase in owners equity.

3. Indentify the four basic financial statements.

1. Income Statement- presents the revenues and expenses and resulting net income or net loss of a

company for a specific period of time.

2. Owners Equity Statement- summarizes the changes in owners equity for a specific period of

time.

3. Balance Sheet- reports the assets, liabilities, and owners equity at a specific date.

4. Statement of Cash Flow- summarizes information about the cash inflows (receipts) and

outflows (payments) for a specific period of time.

* These statements provide relevant financial data for internal and external users *

1. Explain the terms account, general ledger, book of original entry, and double entry system.


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Account- is a record of increases and decreases in specific asset, liability, and owners equity items.

Journal- is referred to as the book of original entry. For each transaction the journal shows the debit

and credit effects on specific accounts.

General ledger- is the most basic form of journal. A ledger that contains all asset, liability, and

owners equity accounts. A general journal has spaces for dates, account titles

and explanations, references and two amount columns.

1. It discloses in one place the complete effects of a transaction

2. It provides a chronological record of transactions

3. It helps to prevent or locate errors because the debit and credit amounts for

each entry can be easily compared.

Double-entry system- a system that records in appropriate accounts the dual effect of each

transaction

1. Explain the rules for debits and credits and use them to analyze and record transactions in the journal

and in the ledger.

The terms debit and credit are directional signals; Debit indicates left and credit indicates right. They

indicate which side of a T account a number will be recorded on. Entering an amount on the left side

on an account is called debiting the account. Making an entry on the right side is crediting the

account.

Debits to a specific asset account should exceed the credits to that account. Credits to a liabilityaccount should exceed debits to that account. The normal balance of an account is on the side where

an increase in the account is recorded. The asset accounts normally show debit balances, and liability

accounts normally show credit balances.

2. Prepare a trial balance and explain its purpose.


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Trial balance- is a list of accounts and their balances at a given time.

The primary purpose of a trial balance is to prove (check) that the debits equal the credits after

posting. The sum of the debit balances in the trial balance should equal the sum of the credit

balances. If the debits and credits do not agree, the company can use the trial balance

to uncover errors in journalizing and posting.

Example Trial Balance:

3. Explain the concept of accrual accounting and how the matching concept and adjusting entries arerelated to accrual accounting.

Accrual-basis accounting means that companies record events that change a companys financial

statements in which those events occur, rather than in the periods in which the company receives or

pays cash.

The matching concept requires that expenses be appropriately matched to revenues within the

period. For example, Revenue Recognition requires that revenues are recorded after all events of a

transaction have been satisfied. Therefore, if a portion of the revenue must be deferred, then the

matching portion of the expense must also be deferred. And an example of this is % of completion of

long term contracts.

Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for

accruals to record revenues earned and expenses incurred in the current accounting period that have

not been recognized through daily entries.


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4. Recognize accounts that may require adjustment, calculate the amounts, record the necessary journal

entries, and prepare financial statements from an adjusted trial balance.

5. Explain the steps in the accounting cycle.

The required steps in the accounting cycle are: (1) analyze business transactions, (2) journalize the

transactions, (3) post to ledger accounts, (4) prepare a trial and balance, (5) journalize and post

adjusting entries, (6)prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize

and post closing entries, and (9) prepare a post-closing trial balance.

6. Explain the closing process and journalize the entries required to close accounts.

Closing the books occurs at the end of an accounting period. The process is to journalize and post

closing entries and then rule and balance all accounts. In closing the books, companies make


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separate entries to close revenues and expenses to Income Summary, Income Summary to Owners

Capital, and Owners Drawings to Owners Capital. Only temporary accounts are closed.

Revenues:Close all revenues to Income Summary.

Service Revenue XXX

Income Summary XXX

Expenses:

Close all Expenses to Income SummaryIncome Summary XXX

Salaries Expense XXX

Supplies Expense XXX

Rent Expense XXX

Insurance Expense XXX

Interest Expense XXX

Depreciation Expense XXX

Income Summary:Close the balance of Income Summaryinto Retained Earnings when it is a netIncome.

Income Summary XXX

Retained Earnings XXX

Close the balance of Income Summaryinto Retained Earnings when it is a netloss.


Income Summary XXX

Dividends:Close Dividends into Retained Earnings


Dividends XXX


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7. Distinguish between the periodic and the perpetual inventory systems.

Periodic inventory system- An inventory system under which the company does not keep detailed

inventory records throughout the accounting period but determines the cost of goods sold only at the

end of an accounting period. (System that utilizes a Purchase account and does not update inventorywith each sell; Inventory is updated by physical count at the end of accounting periods.)

Characteristics of a periodic system

Only records inventory purchases to Purchase account

Inventory records only updated during the closing process.

Thus, it provides no real-time data about inventory levels or gross profit.

Managers need to know what is selling, and what is not selling, in order to optimize

business success.

Many successful merchants use sophisticated computer systems to implement perpetual

inventory management.

Perpetual inventory system- An inventory system under which the company keeps detailed records

of the cost of each inventory purchase and sale and the records continuously show the inventory that

should be on hand. (Real-time inventory system that updates inventory records with each purchase

and sale.)

Each purchase or sale results in an immediate update of the inventory and cost of sales

data.

Purchases account is not needed

Inventory account and Cost of Goods Sold account are constantly adjusted as transactions

occur. Freight-in is added to the inventory account

Discounts and returns reduce the inventory account.

Cost of Goods Sold is simply referenced by accounts balances rather than calculated

** Perpetual System

Not always easier

Difficult to determine the cost of each item of inventory as it is sold

Difference between the computer record and physical quantity on hand will arise.

Due to theft, spoilage, waste, errors, etc. Merchants must still undertake a physical count and adjust the inventory accounts to reflect

what is actually on hand.


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COMPARISON OF ENTRIES FOR PERPETUAL AND PERIODIC INVENTORY SYSTEM

TRANSACTION PERPETUAL INVENTORY

SYSTEM

PERIODIC INVENTORY

SYSTEM

Purchase of merchandise on credit

Merchandise Inventory

Accounts Payable

Purchases

Accounts Payable

Freight costs on purchases


Cash

Freight-in

Cash

Purchase returns and allowances

Accounts Payable


Accounts Payable

Purchase Returns

and Allowances

Payment on account with a

discount

Accounts Payable

Cash


Accounts Payable

Cash

Purchase Discounts

Sale of merchandise on credit

Accounts Receivable

Sales Revenue

Cost of Goods Sold


Accounts Receivable

Sales Revenue

No entry for cost of goods sold

Return of merchandise sold

Sales Returns and Allowances

Accounts Receivable


Cost of Goods Sold

Sales Returns and Allowances

Accounts Receivable

No entry

Cash received on account with a

discount

Cash

Sales Discount

Accounts Receivable

Cash

Sales Discounts

Accounts Receivable


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1. Calculate the components of the income statement for a merchandising company.

2. Prepare adjusting entries, closing entries, and an income statement for a merchandising company.

3. Define accounts receivable and explain two methods to estimate losses from bad debts, addressing

the contra-account allowance for uncollectible accounts.

Accounts receivable- Amounts owed by customers on account.

Companies record credit losses as debits to Bad Debts Expense (or Uncollectible Accounts

Expense). The two methods used in accounting for uncollectible accounts are:

1. The direct write-off method

2. The allowance method

Direct write-off method- A method of accounting for bad debts that involves expensing accounts at the

time they are determined to be uncollectible.

Bad Debts Expense XXX

Accounts Receivable


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* Under this method, Bad Debts Expense will show only actual losses from uncollectibles.

Allowance Method- A method of accounting for bad debts that invoices estimating uncollectible

accounts at the end of each period.

Bad Debts Expense XXX

Allowance for Doubtful Accounts XXX

*Companies debit estimated uncollectible to Bad Debts Expense and credit them to Allowance for

Doubtful Accounts (a contra-asset account) through an adjusting entry at the end of each period

Accounts Receivable

Less: Allowance for doubtful accounts

1. Define and describe a promissory note, make calculations involving notes, and journalizetransactions involving notes receivable and notes payable.

2. Define merchandise inventory, and show how inventory measurement affects income determination.

3. Calculate the cost of inventory, cost of goods sold, and gross profit by applying the following

methods: (1) Specific-Identification, (2) first-in, first-out, (3) last-in, first-out, and (4) weighted

average. Address how each method affects the determination of net income.


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4. Identify expenditures related to the cost of property, plant, and equipment.

5. Define depreciation, state the factors that affect its computation, and make the proper journal entry.

6. Compute depreciation under several different methods of application.

7. Compute depreciation, when considering the following: (a) partial years, (b) using revised rates, (c)

for items of low cost, (d) for groups of similar items.

8. Account for the disposal (all types) of depreciable assets.


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9. Identify intangible asset accounting issues, including research and development cost and goodwill.

Compute amortization of intangible assets.

10. Prepare journal entries for bond issuance, bond redemption, bond conversion, and interest payments.

11. List and describe the various kinds of stock.

12. Present in proper form the stockholders equity section of a balance sheet.

13.Record the issuance of stock for cash and other assets.

14. Determine book values of preferred and common stock.


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15. Identify the different sources of paid-in capital and describe how to present them on a balance sheet.

16. Record a cash dividend, stock dividend, and account for appropriation of retained earnings.

17.Record the acquisition and re-issuance of treasury stock.

18. Prepare and income statement for a corporation, including required disclosures.

19. Describe the features of bonds and distinguish from stocks.


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20.List the advantages and disadvantages of financing with long-term debt and discuss examples

illustrating the use of leverage.

21.Explain how interest rates affect bond prices and what causes bond to sell at a premium or a

discount.

22. List the values commonly associated with common stock.

23. Prepare a statement of cash flows and understand the statement purposes and uses.

24. Prepare and use ratios, horizontal, and vertical analysis for decision making.

accounting 1 learning outcomes

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