Financial

Accounting
Study Guide: Exam One
 Basic Accounting Rule

Liabilities
Assets = +
Owners’
Equity
 Assets
**Normal Debit Side**

Current Assets Long-Term Assets

(Less than a Year) (Greater than a Year)

• Cash • Land
• Accounts Receivable • Buildings
• Money people owe us
• Equipment
• Notes Receivable • Notes Receivable
• Loans or promises of money
• Accumulated Depreciation
people owe us
• Contra Asset!!!
• Prepaid Expenses • Normal Credit Side
• Office Supplies, Prepaid
Insurance, Prepaid Rent

e
Accounts Receivable

O m
u
 Liabilities
**Normal Credit Side**

Current Liabilities Long-Term Liabilities

(Less than a Year) (Greater than a Year)

•Accounts Payable • Mortgage Payable

• Money we owe
• Bonds Payable
• Notes Payable • Notes Payable
• Loans or promises of money
we owe
• Unearned Revenue
• Revenues earned but that we
have not provided service for yet
•Other Liability Accounts
• Ex. Wages Payable
 Owners’ Equity
**Normal Credit Side**

Retaining Earnings ED drinks RC cola…

Beginning RE Normal Credit

Revenues (Normal Credit)
+ Net Income
-- Dividends Normal Debit Expenses (Normal Debit)

Retained Earnings

Beginning RE
Common Stock + Net Income
- Dividends
•Shares of ownership in the equity of a company + Common Stock
•Receive dividends (shares of the company’s profits) Total Owners’ Equity
•Shareholders are given voting rights
Beginning RE
+ Common Stock
Total Beginning
Owners’ Equity
 •Total revenues higher or lower?
•Percent change in total revenues?

Income Statement Analysis

2004 2004 2003 2003
Total Revenues $150 100% $112 100%
Total Expenses $95 63.3% $72 64.3%
Net Income $55 36.7% $40 35.7%

1. Total revenues higher or lower?

2. Percent change in total revenues?

increase

3. Percent of total expenses to total revenues increasing or decreasing?

• Decreasing: From 64.3% to 63.3% Not significant, but still favorable.
• Causes net income percent to increase favorable
 Balance Sheet Analysis
2004 2004 2003 2003
Total Assets $180 100% $142 100%
Total Liabilities $110 61.1% $112 78.9%
Total OE $70 38.9% $30 21.1%
Total Liab & OE $180 100% $142 100%

1. Total assets higher or lower?

2. Percent change of Assets?

3. Percent of total liabilities to total liabilities + owners’ equity increasing or decreasing?

Decreasing- From 78.9% to 61.1% Favorable
 ($.93 in Revenues for each dollar invested in Assets)

Integrative Income Statement

& Balance Sheet Analysis

Company operating efficiently?

Total Asset Turnover- Higher number more favorable; shows a business is operating
with a smaller asset investment to generate a given level of total revenues.

($.93 in Revenues for each dollar invested in Assets)

 ($.93 in Revenues for each dollar invested in Assets)

Integrative Income Statement

& Balance Sheet Analysis

Company operating efficiently?

Return on Assets (ROA) –Higher number more favorable; shows a business is using the
least amount of asset investment to generate a given level of net income – based on
profit margin total asset turnover
 •Total revenues higher or lower?
•Percent change in total revenues?

Journalizing Entries
Cash Investment by Owner Cash
(Purchase shares of stock) Common Stock
Land/Building/--
Assets Purchased for Cash
Cash
Assets Purchased on Account Furniture
(Paid Furniture with Credit Card) Accounts Payable
Liability Paid with Cash Accounts Payable
(Paid Credit Card Bill) Cash
Cash
Revenue Earned for Cash
Revenue
Revenue Earned on Account Accounts Receivable
(Sent Bill to Customer) Revenue
Receivable Collected in Cash Cash
(Customer Paid Bill) Accounts Receivable
 •Total revenues higher or lower?
•Percent change in total revenues?

Journalizing Entries
Expense Incurred for Cash Expense
(Paid an Expense with Cash) Cash
Expense Incurred on Account Expense
(Paid Expense with Credit Card) Accounts Payable
Dividends
Cash Dividends Declared and Paid
Cash
Made a Loan Notes Receivable - John
(Lend money to John) Cash
Receive Money from Loan Cash
(John pays you back) Notes Receivable - John
Take out a Loan Cash
(You borrow money) Notes Payable
Payback Loan Notes Payable
(You payback money you borrowed) Cash
 •Total revenues higher or lower?
•Percent change in total revenues?

Adjusting Entries
**Accounts are adjusted at the end of each fiscal period (typically the end of the year)**

Two Types of Adjusting Entries:

• Deferrals- Payment of the service in advance; Receive a cash revenue in advance
• Accruals- Recognize revenues/expenses that have been accumulated but not recorded

Real/Permanent Account
Account Name •Accounts that do not get closed at
the end of the fiscal period
Original Entry Original Entry •The amounts carry over to the period

Temporary Account
•Accounts that close out at the end
of the fiscal period
*WISH* *WISH* •Expense and Revenue accounts
•(Not Unearned Revenue!)
 •Total revenues higher or lower?
•Percent change in total revenues?

Adjusting Entries - Deferrals

Prepaid Expenses
Example: Paid insurance premiums for one-year

Real Account: Prepaid Insurance

Temporary Account: Insurance Expense

Adjustment to Inventory
Example: Adjust the value of office supplies at
hand for the end of the year

Real Account: Office Supplies

Temporary Account: Office Supplies Expense
 •Total revenues higher or lower?
•Percent change in total revenues?

Adjusting Entries - Deferrals

Unearned Revenue
Example: You were paid one year in advance for rent

Real Account: Unearned Revenue (Rent)

Temporary Account: Rent Revenue

Depreciation of Assets
Example: Long-term assets
(like cars, equipment, land, Straight-line Depreciation:
buildings) lose value overtime

Always Use this Entry!

Depreciation Expense (Debit)
Accumulated Depreciation (Credit)
 •Total revenues higher or lower?
•Percent change in total revenues?

Adjusting Entries - Accruals

Accrued Revenue: Interest
Example: You made an interest-bearing loan to a customer.
Must show the interest earned (even if it hasn’t been paid yet)

Always Use this Entry!

Interest Receivable (Debit)
Interest Revenue (Credit)

Accrued Expenses: Wages

Example: Employees are paid weekly. The month ends on
a Monday. You need to record the unpaid expense.

Always Use this Entry!

Wages Expense (Debit)
Wages Payable (Credit)
 •Total revenues higher or lower?
•Percent change in total revenues?

Adjusting Entries - Accruals

Accrued Expenses: Income Tax
Example: Your company must pay income taxes and record
them every fiscal period.

Always Use this Entry!

Income Tax Expense (Debit)
Income Tax Payable (Credit)
 •Total revenues higher or lower?
•Percent change in total revenues?

Closing Entries
• At the end of each fiscal period, the temporary accounts need to be closed
• This is done AFTER adjusting entries are recorded

Transaction Entry
1 Revenues (Debit)
Close Revenues Income Summary (Credit)

2 Income Summary (Debit)

Close Expenses Expenses (Credit)

3 NET INCOME (Revenues Higher)

Income Summary (Debit)
Retained Earnings (Credit)
Close Income Summary
NET LOSS
Retained Earnings (Debit)
Income Summary (Credit)

4
Retained Earnings (Debit)
Close Dividends Dividends (Credit)