Accrual Basis versus Cash Basis
*Accrual basis: uses the adjusting process to recognize revenues when earned and expenses when incurred (matched with revenues)*Cash basis: recognizes revenues when cash is received and records expenses when cash is paid.
The revenue recognition principle
Requires that revenue be recorded when earned, not before and not after.
Expense recognition principle
Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses.
Adjusting entry
recorded to bring an asset or liability account balance to its proper amount. This entry also updates the related expense or revenue account.
Prepaid expenses
items paid for in advance of receiving their benefits.
Prepaid expenses, also called deferred expenses, are assets. As the assets are used, their costs become expenses.
Depreciation
the process of allocating the cost of plant assets over their expected useful lives.
Book value
a term used to describe the asset less its contra-asset (accumulated-depreciation).
Calculate Profit Margin
Calculated as net income divided by net sales revenues
Steps in closing process
1) Identify accounts for closing2) record and post the closing entries3) prepare a post-closing trail balance
Temporary Accounts
-Accumulate data related to one accounting period.
Such as revenues, expenses, owner withdrawals, and income summary.
Permanent accounts
-Report on activities related to one or more future accounting periods.assets, liabilities, and owner capital
Recording Closing Entries
A) Close credit balances in revenue (and gain) accounts by debiting the accounts and crediting Income Summary. This transfers revenue balances to the credit side Income Summary.B) Close debit balances in expense (and loss) accounts by crediting the accounts and debiting Income Summary.
This transfers the expense balances to the debit side of Income Summary.C) Close the Income Summary account to the owner's capital account. D) Close withdrawals account by crediting the account and debiting the owner's capital account
The ten steps repeated each accounting cycle are as follows
1. Analyze transactions 2. Journalize3.
Post4. Prepare unadjusted trial balance5. Adjust 6. Prepare an adjusted trial balance7. Prepare statements8.
Close9. Prepare a post-closing trial balance.10. Reverse (Optional)
Classified Balance Sheet
Organizes assets and liabilities into important subgroups that provide more information to decision makers.
Current assets
Are cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle.
Long-term investments
Notes receivable and investments in stocks and bonds are long-term assets when they are expected to be held for more than the longer of one year or the operating cycle.
Plant assets
Are tangible assets that are both long-lived and used to produce or sell products and services.
Intangible assets
Are long-term resources that benefit business operations, usually lack physical form, and have uncertain benefits.
Current liabilities
Obligations due to be paid or settled within one year or the operating cycle.
Long term liabilities
Are obligations not due within one year or the operating cycle.
Equity
Is the owner's claim on assets.
Calculate Current Ratio
Calculation: total current assets divided by total current liabilities
