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1. THE LANGUAGE OF ACCOUNTING
ACCOUNTING DEFINED WHO USES ACCOUNTING?TYPES OF ACCOUNTING
INFORMATION ACCOUNTING PRINCIPLES,
ASSUMPTIONS / CONCEPTS FORMS OF BUSINESS ORGANIZATION FINANCIAL STATEMENTS TYPES OF ACCOUNTS
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TYPES OF ACCOUNTING INFORMATION
Financial: Used by management and external
users... Ex. financial statements
Internal Auditing: Evaluating system of internal
control... reports are accurate and reliable
(Income) Tax Accounting: Must pay Uncle
Sammy
Management (cost) Accounting: Internal
use... (CMA)
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GAAP (Generally Accepted Accounting Principles)
Broad rules adopted by the accounting profession. Sources;
1. FASB: Financial Accounting Standards Board
2. SEC: Securities & Exchange Commission
3. AICPA: American Institute of CPA's
4. GASB: Government Accounting Standards Board
5. AAA: American Accounting Association
6. CMA: Certified Management Accountants
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ACCOUNTING PRINCIPLES, ASSUMPTIONS / CONCEPTS
Cost principle Ongoing concern concept Business entity concept Objectivity principle Stable-dollar concept Realization principle Monetary unit assumption
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Types of accounts
Balance Sheet Accounts Assets - Liabilities + Owner's Equity "Real", "Permanent"
Income Statement Accounts Revenues - Expenses "Nominal", " Temporary"
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2. The recording processTRANSACTIONS Source documents Journal (General Journal):ACCOUNT TERMINOLOGY DOUBLE ENTRY ACCOUNTING CHART OF ACCOUNTS JournalizingPOSTING TRIAL BALANCE
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Transaction
All financial dealings of the business must be: identified - source document recorded - in "journal" summarized - statements and reports
Business Paper: Source document... proof transaction happened. Ex.- check, invoice, receipt, etc.
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ACCOUNT TERMINOLOGY Asset: Resources owned by a business.
Ex.: Cash, Accounts Receivable, Supplies, Building, Land, etc. Liabilities: Creditorship claims on total assets (debts).
Ex.: Accounts Payable, Notes Payable, Unearned Revenue, etc. Owner's Equity Accounts: The ownership claim on total
assets. Ex.: capital account, withdrawal account (drawing) "Real" Accounts: Balance sheet accounts.
Ex.: assets, liabilities, owner's equity "Nominal" Accounts (Temporary): Income statement
accounts. Ex.: revenues, expenses “T” Accounts: Used for working papers, teaching
technique, etc. - not part of accounting records. Balance-column Accounts: Ledger accounts.
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DOUBLE ENTRY ACCOUNTING
Every transaction affects and is recorded
in two or more accounts with equal debits
and credits. Debit - (Dr) Left side of an account
Credit - (Cr) Right side of an account
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CHART OF ACCOUNTS
Is a numeric listing of all the entity's assets, liabilities, equity, revenue and expense accounts;
Is used to code each transaction entered into the accounting system, and
Facilitates the uniform reporting process.
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3. ADJUSTING AND CLOSING ENTRIES
WHAT ACCOUNTS ARE ADJUSTED? WHY ADJUST? Depreciation Accrual Relationships Types of Entries INCOME STATEMENT PREPARATION BALANCE SHEET PREPARATIONClosing Entries
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WHY ADJUST?
Time Period Concept/Periodicity: The idea that the life of a business is
divisible into time periods of equal length. Ex: monthly, quarterly, annual... financial reports;
1. fiscal year
2. calendar year
3. natural business year
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WHY ADJUST? (Cont.)
Realization Principle requires that revenue be assigned to the accounting period in which it is earned, rather than to the period it is collected in cash (this is the basis for accrual accounting)
Matching Principle requires that revenues and expenses be matched; all expenses incurred in earning a revenue must be deducted from the revenue in determining net income
"True picture" -- accuracy
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Adjusting -- Posting of Adjusting Entries
Exercise: The following unadjusted accounts and related balances are provided at September 30: Accounts Receivable$2,400 Supplies1,200 Salary Payable-0- Unearned Revenue500 Revenue15,000 Salary Expense2,100 Depreciation Expense-0- Accumulated Depreciation3,000
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Instructions:
Open T-accounts and post the adjusting entries indicated from the following data:
(a) Supplies on hand, $200
(b) Revenue earned but not accrued, $900
(c) Unearned revenue earned but not recorded, $400
(d) Salary owed to employees, $700
(e) Depreciation of $200 is recognized.
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Closing Entries
PURPOSE OF CLOSING ENTRIES
WHAT ACCOUNTS ARE CLOSED?
STEPS IN MAKING CLOSING ENTRIES
SUMMARY OF THE CLOSING
PROCESS
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PURPOSE OF CLOSING ENTRIES
Closing Entries are made to clear and close nominal accounts (Revenue and Expense) and to transfer the amount of net income or loss to capital accounts (i.e. Owner's Equity).
Accounts to be closed are; Revenues, expenses, drawings, income.
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STEPS IN MAKING CLOSING ENTRIES
Transfer credit balances from income statement to Income Summary
Transfer the debit balances from income statement to Income Summary
Transfer the Income Summary balance to the Capital account
Transfer the Withdrawals account balance to the Capital account