Accounting Revision 03-11-2023

BIT28-B
All Chapters: Revisions
 Accounting is the process of identifies, communicates and recording financial
transactions pertaining to a business.

 Three steps in accounting process:

Identifies

Records

Communicates

 The building blocks of an accounting:

Ethics

Principles

Assumptions

 General Accepted Accounting Principles (GAAP) Standards that are general accepted
and universally practiced.

 Measurement principles:

Historical cost principles

Fair value principles

 Historical cost principles dictates that companies record assets at their cost.

 Fair value principles states that assets and liabilities should be reported at fair value.

 Assumptions

Monetary unit assumption

Economic entity assumption

 Monetary unit assumption states that a company must record its business transactions in
dollars or some other unit of currency.

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  Economic entity assumption states that each entity or unit must be separate from all others
for accounting purposes.

 Forms of business ownership

Proprietorship

Partnership

Corporation

 Proprietorship owned by one person.

 Partnership owned by two or more persons.

 Corporation ownership divided into shares of stock.

 Assets resources a business owns

Cash

Supplies

Prepaid incurrence

Equipment

Account receivable

Inventory

Accumulated depression

 Liabilities claims against asset

Accounts Payable

Notes Payable

Unearned service Revenue

Salaries and Wages Payable

Interest payable

 Owner's Equity ownership claim on total assets

Investment by owners and revenues (+) ———>> As a Liabilities

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 Drawings and expenses (-). ———>> As a Assets

 Investments by owner are the assets the owner puts into the business.

 Revenues result from business activities entered into for the purpose of earning income.

 Drawings an owner may withdraw cash or other assets for personal use.

 Expenses are the cost of assets consumed or services used in the process of earning
revenue.

 Transactions are a business’s economic events recorded by accountants.

 Four financial statements:

Income Statement = TOTAL REVENUE —TOTAL EXPENSES

Owner’s Equity Statement

Balance Sheet

Statement of Cash Flows

 Income statement reports the revenues and expenses for a specific period of time.

 Own’ equity reports the changes in owner’s equity for a specific period of time.

 Balance sheet reports the assets, liabilities, and owner's equity at a specific date.

 Cash flows information on the cash receipts and payments for a specific period of time.

 Debits increase assets and decrease liabilities (Debits are the left side).

 Credits decrease assets and increase liabilities (Credits are the right side).

 Steps in the Recording Process:

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger accounts

 Journal transactions recorded in chronological order.

 General Ledger contains all the asset, liability, and owner’s equity accounts.

 Posting transferring journal entries to the ledger accounts.

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  Time period assumption states that he economic life of a business can be divided into
artificial time periods.

 Accrual-Basis Accounting:

Revenues recognize when they perform services (rather than when they receive cash).

Expenses are recognized when incurred (rather than when paid).

 Cash-Basis Accounting:

Revenues recognized when cash is received

Expenses recognized when cash is paid

 Types of Adjusting Entries:

Deferrals

Accruals

 Deferrals:

Prepaid Expenses expenses paid in cash before they are used or consumed.

Unearned Revenues Cash received before services are performed.

 Accruals:

Accrued Revenues revenues for services performed but not yet received in cash or
recorded.

Accrued Expenses expenses incurred but not yet paid in cash or recorded.

 Trial Balance each account is analyzed to determine whether it is complete and up-to-
date.

 Depreciation is the process of allocating the cost of an asset to expense over its useful
life.

 Book value is the difference between the cost of any depreciable asset and its
accumulated depreciation.

 Worksheet Multiple-column form used in preparing financial statements.

 Steps in Preparing a Worksheet:

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 Trial balance

Adjustments

Adjusted trial balance

Income statement

Balance sheet

 Standard Classifications of assets

Current assets

Long-term investment

Property plant and equipment

Intangible assets

 Standard Classifications of Liabilities:

Current liabilities

Long-term liabilities

 Temporary accounts these account are closed:

All revenue accounts

All expenses accounts

Owners drawing accounts

 Permanent accounts these accounts are not closed:

All asset accounts

All liabilities accounts

Owners capital accounts

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Midterm Exam