.

FDNACCT
Lecture vids, modules

mcgraw connect
 Accounting
Accounting provides financial information for a business or a non-profit organization. These financial information are needed in order to make

decisions. Accounting is used to communicate financial information, it is open called as the "language of business"

The need for financial information progresses as the business grows to evaluate the company's performance and make financial decisions in the

future.

Accounting is a process which financial information is recorded, Classified, summarized, interpreted, and communicated to owners

Accounting system is designed to collect acta about the business' affairs, classify meaningful data, and summarize in periodic reports known as

financial statements.

The accountant:

- establishes records and procedures that make up the accounting system

- supervises operations of the system

- interprets results of financial information

Bookkeepers and accountants are responsible for keeping records and providing financial information

Bookkeeper:

- responsible for recording business transactions, they may also supervise accounting clerks in large firms

- usually requires one to two years of accounting education and an experience as an accounting clerk

Accounting clerk:

- responsible for record-keeping part of the system

- usually require one to two accounting courses and little to no experience

Accountants:

- usually supervise bookkeepers and prepare the financial statements

- usually require a bachelor degree, sometimes filled by experienced bookkeepers

Bookkeeping, accounting and auditing clerks produce financial records for organization. They record financial transactions, update statements and
check financial records
Budget analysts help public and private institutions organize their finances. They prepare budget reports and monitor institutional spending
cost estimators collect and analyze data to estimate requirements for manufacturing, projects, or services
Financial analysts provide guidance to businesses in making investments decisions. They assess investment performances (stock, bond, etc.)
Financial managers are responsible for the financial health of the business. They produce financial reports, direct investments, and develop plans
Management analysts (management consultants) propose ways to improve the efficiency of the business. They advise managers
Personal financial advisors give financial advice to people. they help with investments tax, and insurance decisions
Post secondary teachers instruct students beyond high school level. They also conduct research and publish scholarly papers and books
Tax examiners, collectors & revenue agents review tax returns, conduct audits, identify tax owed, and collect overdue tax payments
Top executives plan direct, and coordinate operational activities to devise strategies and policies to ensure that the business meets its goals

Certified bookkeeper exam

4 parts:

}
(1) adjustments and error corrections
75-1 .

(2) payroll and depreciation

(3) inventory
(4) internal control and fraud prevention } 701 .
Public accounting
Public accountants work for public accounting firms.
Public accounting firms provide accounting services for companies. (1) auditing (2) tax accounting (3) management advisory services
* auditing - review of financial statements to assess their fairness and adherence to GAAP
* tax accounting - involves tax compliance and tax planning. (1) tax compliance deals with preparation of tax returns and the audit of
those returns (2) tax planning involves giving advices on structuring financial affairs to reduce tax liability
* management advisory services involve helping clients improve their information systems or business performance

Managerial accounting
Managerial accountants perform wide range activities such as
- establishing accounting policies
- managing the accounting system
- preparing financial statements
- interpreting financial information
- providing financial advice to management
- preparing tax forms
- performing tax planning services
- preparing internal reports for management
Managerial accounting (private accounting) involves working for a single business in industry

Governmental accounting
Governmental accounting involves keeping financial records and preparing financial reports as part of federal,state, local governmental units

- governmental units do not earn profits

- governmental units receive and pay huge amounts of money and need procedures for recording and managing this money
The results of the accounting process are communicated to many individuals and organization

Owners and manageRs

Internal controls are company policies and procedures in place to safeguard assets, ensure reliability of accounting data, promote compliance

with management policies and applicable laws. This is to prevent fraud

Fraud is an intentional or reckless acts that result in the confiscation of assets or MIsinterpretation of the accounting data

Suppliers
A number of people interested in the financial information of your business

Banks
They decide whether to make a loan and the terms of loan

Tax authorities
State and local authorities are interested in financial information of the business to determine the tax base (1) income Taxes which are based

on taxable income (2) sales taxes which are based on sales income and (3) property taxes which are based on assessed value of building,

equipment, and inventory

Regulatory agencies and investors

an industry is regulated by a governmental agency. They have to supply financial information to the regulating agency

Customers
They pay special attention to financial information about the forms which they do business

Employees and unions

Employees are often interested in the financial information of the business that employs them because it may affect their income
regulatory agencies any investors
Accounting - the action or process of keeping financial accounts
It is the way toward recording monetary exchanges relating to a business
Accounting process - incorporates summing up, investigating, And announcing these exchanges to oversight

History of accounting
Ancient civilization - China, Babylonia, Greece, and Egypt used accenting to keep track the cost of labor and materials
Ancient Egypt - 4th century bc: audit system, 5300 bc: bode labels attached to bags
450 papyrus was used to record the pharaoh's assets during the Egyptian period
Ancient Greece - bankers used books to record transactions and keep track of money going around banks
Romans - records are kept by the head of the family
Double-entry system - leaned and used in 1th century by Jewish and Italian merchants
Amatino manucci - Florentine merchant, used this system under The farolfi firm in late 13th century
Giovanni di bocci de' medici - introduced this to the Medici bank in 14th century
Luca pacioli - published the first known description of the dowble-entry system (summa de arithmetica, geometrica, proportion et
proportionalite) in Venice, November 1494.
Industrial revolution- the pace of accounting development increased as the economies of developed countries began to mass-produce goods
- merchandise are priced based on the manager's hunches but increased competitions require sellers to adopt a more advanced accounting
system
Queen Victoria of The united kingdom of great Britain and Ireland - 1854, allowed a royal charter to the institute of accountants in Glasglow
which created the profession of chartered accounts
1800s - several chartered accomtents from Scotland and Britain flew to the u.s. To audit British investments. Some staged and helped which led
to emergence of accounting firms in America
Great Depression - 1929-1939, stock market crashed
stock market - venue for speculation (glorified gambling) where participants would manipulate the transactions
at this point, accounting went down hill due to world war 2
Accounting supplied the concept of income. The government played a role in leading more development in the accounting field when it started
income tax
The government made sure that the information used to make decisions are reliable by requiring a strict accountability in the business
community

Accounting in the Philippines

1923 - act no. 3105 was approved by the legislature. it is an act regulating the practice of public accounting
1967 - the accountancy act of 1967 was approved
1975 - PD no. 692, the revised accountancy law was implemented
Under the stewardship of Prc (professional regulation commission) boa (board of accountancy) - discharges its mandate with authority and
distinction
PRC accreditation of picpa (Philippine institute of certified public accountants) as a bona fide professional organization representing cpa's
to strengthen the profession
Philippine financial reporting standards (pfrs)
Objective of general purpose financial reporting
- provide financial statements for primary users
- cannot provide all the information

Statement of financial position - assets, liabilities, owner's equity

Statement of income - income, expense

Recognition of the elements of financial statements

Asset -
Liability - recognized when something has to be paid
Owners equity
Introduction to fundamentals of accounting
Aicpa (American institute of certified public accountants) - accounting is the art of recording,Classifying, and summarizing in a significant
manner and in terms of money, transactions and events that are, in part at least, of a financial character, and interpreting the results
Picpa (Philippine institute of certified public accountants) - accounting is a system that measures business activities, processes given
information into reports, and communicates those findings to decision- makers
Accounting is the language of business because it is the medium to communicate the financial activities
Business - a big multinational corporation or a mini store or anything between the two
all types of business utilize accounting
Warren Buffett - accounting is the language of business
The primary objective of accounting is to provide useful information for decision making
Tax accounting - more about tax, small part of accounting
Management accounting - designed to help businesses make decisions on business strategies

Financial accounting - designed to help financial users (primary or external and other or internal)

primary or external - needs financial information for investment and lending purposes. They are the main providers of funds to the entities
other or internal - needs accounting data to help them decide on a particular transaction to be taken by an entity

Financial accounting (for external users) Managerial accounting (for internal users)
- produces general or multi-purpose financial reports - prepares reports specifically made for a specific company
- has rules to follow - has no specific rules

Financial statements
1. Statement of profit and loss (income statement) (statement of comprehensive income)
- Shows results of business operations for a period of time whether net income or net loss
- Revenues generated and expenses incurred in operating the business
2. Statement of changes in owner's equity
- presents a summary of the changes that occurred in the equity of the entity during a specific time period (m/y)
3. Statement of financial position
- informs the users of the financial condition of the business at a given date, usually at the end of accounting period
- report of assets, liabilities, and equity
4. Statement of cash flows
- shows the sources of cash and the use of cash for a period of time
- reports current receipts and disbursements of cash
computational notes
Main objective of these reports is to provide understandable and useful information
Owner's equity = stockholder's equity, shareholder's equity, or corporate capital
asset = liabilities + shareholder's equity
asset - liabilities = shareholder's equity
The shareholders' equity section of a corporation's statement of financial position consists of:
- paid-in (contributed) capital (issued capital)
- accumulated profits or retained earnings (earned capital)

Form of business according to ownership Forms of business according to activities

Sole-propietorship - one owner Service - intangible
Partnership - one or more owners Trading or merchandising - tangible
Corporation - group of owners or company Manufacturing - creates own product
Cooperative - member-owners
Conceptual framework for financial reporting
- issued by the international accounting standards board (iasb)
- provides concepts for the preparation and presentation of financial statements
- aims to narrow down differences encountered in preparing financial statements
- assist accounting standard-setting bodies in the development of future accounting standards

Generally accepted accounting principles (gaap)

- ground rules how accountants measure, process, and communicate financial information
- encompass The conventions, rules and procedures necessary to define what is accepted accounting practice
- ensures that financial statements are useful and meaningful
- allows financial statements to be compared from period to period
1. Underlying assumptions (entity/ economic entity/ separate economic entity concept)
- the business has a distinct and separate personality from its owner
Entity is the organizational unit for which accounting records are maintained
personal transactions of the owner must not be combined with the business' transactions
going concern - continuity assumption
- the business is to continue its operations indefinitely
- asset and liabilities are classified a either current or non-current
- permits businesses to report assets at their historical cost
The going concern assumption is not appropriate if there is an evidence that the business will not continue in the indefiide future
Liquidating concern - appropriate assumption when the business will not continue to operate and instead liquidate
monetary unit - money is the unit of measure in preparing financial reports
- enables accounting to quantify and measure economic events
- helps accountants to prepare financial statements of the business
- assumes that money is a constant and stable unit of measure over time
- ignores The effect of inflation
time period or periodicity - assumes that indefinite life of a business can be divided into separate artificial time periods
- allows for a timely measurement of accounting information
- accounting reports, financial statements are prepared
interim period - accounting period shorter than one year
calendar year - twelve month period beginning January 1 and ending December 31
fiscal year - twelve month period that starts from any month of the year other than January
natural business year - length of fiscal period is determined by the nature of the business and frequency of need for
2. general principles
historical cost or cost - assets are to be recorded at their acquisition cost
- assets will continue to be carried at cost, Adjusted for depreciation it there would be any, even if their fair market value differs
revenue recognition (realization principle) - income is only recognized when earned regardless whether cash is received
- revenue represents inflow of new assets resulting from sale of goods or services to an outsider
Service - when the service has been fully -rendered merchandise - when The goods were fully-delivered
matching principle - all expenses incurred to generate revenue must be recorded in The same period that the income is recorded to properly
determine net loss or net profit of the period
Expenses - outflow of resources revenue - inflow of resources
- implies cause and effect relationship
 accrual basis - only record effects of financial transactions when they occur
- income is recorded when earned regardless whether cash has been received or not
- expense i recorded when incurred regardless whether payment has been made
full disclosure - all relevant events affecting the financial condition of the business and results of operation must be communicated to
users of financial statements
- parenthetical comments on the face of financial statements
- disclosure notes/ notes to financial statements
3. Modifying constraints - it permit a company to make basic changes to gaap w/o reducing the usefulness of the reported information
materiality - refer to the relative importance or significance of an item
- an item is a material if the knowledge of it it's inclusion or exclusion in The financial statements will affect the decision of a prudent
decision maker
cost-benefit - the cost of providing accounting information should not exceed the benefit of the information is reporting
- goes hand-in-hand with materiality
conservatism - guides accountants to select the alternative that produces the lowest amount of net income
- in uncertainties, the accounting method with the least impact on equity is prefemed
industry practice - industries with unusual tax law or regulatory requirencts have developed special accounting principles and procedures for
their industry
4. Qualitative characteristics - makes sure that the information in the financial statements and notes is useful to their different users
usefulness - information provided must be useful for decision making
understandability - information presented must be understandable manner assuming users have basic knowledge of business
relevance - information should be appropriate for and have a bearing on decisions made by users
timeliness - information should be reported promptly so it can be useful in current decision-making
relevant information should have predictive value and feedback value
reliability - information should be dependable, free from error and bias
verifiability - supporting documents support the amounts reported and available for examination
representation faithfulness - data shown in financial reports reflect what really happened
neutrality - information should not favor one group of users over another
- information should be helpful and useful to all groups of users
comparability - information should be presented so it can be meaningfully compared with financial statements of other businesses and
previous financial statements of the business.
consistency - an entity has the same accounting treatment for similar events and data from period to period
- consistency compares comparability
Accounting has evolved overtime
Accounting rules, concepts, and terminologies have to be accepted as useful to assure users of financial statements that reports are prepared
in specific ways that they can be trusted
Accounting skills help you understand financial information
The iab's conceptual framework of accounting
- where the rules of accounting are based
Objectives: to improve financial reporting by providing a more complete, clear, and updated set of concepts
May 2015 - exposure draft 2015-3 of conceptual framework for financial reporting
- 2015 draft was more complete than the previously existing framework because it addressed areas that were either not covered or not in
enough detail, clarified some aspects of the previously existing framework, and updated parts of the existing framework that are out of date
March 2018 - Iasb published the revised conceptual framework for financial reporting
- 2018 conceptual framework is structured into an introductory explanation on the status and purpose of The conceptual framework,
has eight chapters and a glossary
Summary of the main aspects of the conceptual framework
states and purpose of the conceptual framework
1. The objective of general purpose financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
glossary
Four levels of concepts in the conceptual framework
1. Qualitative characteristics of financial reports
2. Basic assumptions underlying financial reports
3. Basic accounting principles
4. Modifying constraints
- understanding these elements will benefit you to team how to account for and report various transactions affecting financial statements
Qualitative characteristics of financial reports (relevance, Faithful representation, Comparability, Timeliness, Verifiability, Understandability)
- qualitative characteristics are the qualities that make accounting information usefull for decision making
- traits necessary for credible financial statements
- the framework assumes that financial statements have the basic knowledge and devotes their time to study and analyze statements
- published financial reports are not designed for individuals who do not possess such knowledge
1. Relevance (confirmatory and predictive value)
- information should be relevant to decision makers
- accounting information is capable of making a difference in a decision by the report user
1.1 confirmatory value
- information that helps statement user verify fulfillment or non-fullfillment of prior expectations or decisions
- deals with verifying past expectations and may be careful in predicting future results
1.2 predictive value
- information that helps statement user predict or forecast about the meaning and ultimate outcome of events
- information that is material in nature that is sufficient to affect a decision

framework =

accounting equation
(a 1 to e)=
2. Faithful representation (completeness, neutrality, & freedom from error)
- information should be faithful representation of business activities
- a concept that data shown in financial reports reflect what really happened
2.1 completeness
- information is complete and has everything necessary to reflect business events shown in reports
2.2 neutrality
- information is neutral and objectively prepared and free from bias
- information that is helpful and seen in the same manner by all groups
2.3 freedom from error
- information is free from error if the information is the best avail
- information is expected to reflect unbiased judgements and due diligence in applying appropriate accounting principles
3. Comparability
- information should be presented in a manner that it can be compared with other companies' data
- allows users to identify similarities and differences between accounting periods within financial statements and different entities
4. Timeliness
- information must be disclosed in a timely manner and should be available to users fast enough to use it in decision process
5. Verifiability
- information should have similar results using independent and different measures
6. Understandability
- information must be easy to understand and helps users comprehend data
Underlying assumptions (separate economic entity, going concern, monetary unit, periodicity of income)
1. Separate economic entity assumption
- business is separate from owners transactions
2. Going concern assumption
- to record assets at their cost without being concerned their future cost
3. Monetary unit assumption
- financial events are only meaningful if they are tangible or are in monetary terms
4. Periodicity of income assumption
- income statement covers a certain time period and the balance sheet is prepared as of the end of that time period
General principles (historical cost basis, revenue recognition, matching, full disclosure)
1. Historical cost basis principe
- the cost when an asset is acquired
- an asset is recorded and remains in the account as its original cost
2. Revenue recognition principle
- revenue is recognized when both earned and realized
3. Matching principle
- revenue must match against expired costs in earning the revenue
4. Full disclosure principle
- all information that can affect the business' interpretation and profitability should be disclosed in the financial statements
4.1 supplemental information - information that is helpful to understanding the statements
Moditying constraints (materiality, cost-benefit test, conservatism, industry practice)
1. Materiality
- refer to the significance of a data in relation to other financial data
1.1 material item - information can reasonably be expected to influence the decisions of financial users on the basis of those statements
2. Cost-benefit test
- analyze the benefits and costs to see if the benefit gained is justified by the cost
3. Conservatism
- an accounting idea that " when in doubt, take the conservative action"
- comes in play when there is little evidence or conflicting evidence about the facts or their interpretation
3.1 conservative approach - the one that would result in the least possible reported income or largest reported Loss
4. Industry practice
- unusual operating characteristics of an industry usually based on risks where special accounting principles and procedures were developed
Managerial implications
- management relies on information from financial statements
- management needs to understand underlying principles and to prepare financial statements
- managers of big companies compare financial statements with their competitors
- proper use of gaap can prevent lawsuits by financial statement users
- full disclosure of information and accompanying notes in financial statements prevent possibilities of lawsuits
Chapter 2: analyzing business transactions
Property and financial interest
- accounting process starts with the analysis of business transactions
Business transaction - any financial event that changes the resources of a firm
Steps to analyze the effect of a business transaction
1. Describe the financial event (identify the property, identify the owner of the property, determine the amount of increase and decrease)
2. Make sure the equation is balanced
property = financial interest (remains in balanced)

Owner initial investment

Bt: trayton Eli withdrew 100,000 from personal savings and deposited it in the name of Eli's consulting services
Analysis: a.) business received 100,000 of the property (cash) a.) Eli had 100,000 financial interest in the business
cash: 100,000 | trayton,capital: 100,000

Purchasing equipment for cash

Bt: eli's consulting services issued a 5,000 check to purchase a computer and other equipment
Analysis: b.) the firm purchased new property (equipment) for 5,000 b.) the firm paid out slow in cash
cash: 100,000-5,000 = 95,000 equipment = 5,000 | trayton,capital = 100,000

Purchasing equipment on credit

- this arrangement is called buying on account
Accounts payable - amounts that must be payed in the future Creditors - companies or individuals to whom amounts are owed
Bt: Eli's consulting services purchased office equipment on account from office plus for 6,000
Analysis: c.) the firm purchased new property (equipment) that cost 6,000 c.) the firm owes 6,000 to office plus
cash: 95,000 equipment: 5,000 + 6,000 = 11,000 | accounts payable: 6,000 trayton, capital: 100,000

Purchasing supplies
Bt: eli's consulting services issued a check for 1,500 to office delux, inc., to purchase office supplies
Analysis: d.) the firm purchased office supplies that cost 1,500 d.) the firm paid 1,500 in cash
cash: 95,000 - 1,500 = 93,500 supplies: 1,500 equipment: 11.000 | account payable: 6,000 trayton, capital: 100,000

Paying a creditor
Bt: Eli's consulting services issued a check for 2,500 to office plus
Analysis: e.) the firm paid 2,500 in cash e.) the claim of office plus against the firm decreased by 2,500
cash: 93.500 - 2.500 = 91,000 supplies: 1,500 equipment: 11,000 | accounts payable: 6,000 - 2.500 = 3,500 trayton, capital: 100,000

Renting facilities
- the firm prepaid (paid in advance)
Bt: Eli's consulting services issued a check for 8,000 to pay rent from December to January
Analysis: f.) the firm prepaid 8,000 for rent in the next few months f.) the firm decreased cash balance 8,000
cash: 91,000 - 8,000 = 83,000 supplies: 1,500 prepaid rent: 8,000 equipment: 11,000 | accounts payable: 3,500 trayton, capital: 100,000
Asset - the property a business own (resources) (things of value)
Liabilities - debts or obligations of a business (obligations)
Owner's equity (capital) - owner's financial interest } sources

Balance sheet - the status of the firm's assets, liabilities, and owner's equity
Assets are listed on the left side while liabilities and owner's equity is listed on the right side
Property = left financial interest = right
The balance sheet shows (1) the amount and types of property the business owns (2) the amount owed to creditors (3) the owner's interest

Chapter 3: analyzing t-accounts

Accounts
- separate records
- helps users analyze, record, classify, summarize, and report financial information
- recognized by classification of assets, liabilities, owner's equity
T-account
- consists of a vertical and horizontal line; resembles letter t

A) b) c)
cash Eli, capital cash Equipment Equipment accounts payable

T T T T TT
100,000 100,000 100,000 5,000 5,000 5,000 6,000
6,000
d) e) f)
cash supplies cash accounts payable cash prepaid rent

TT TT TT
100,000 5,000 1,500 100,000 5,000 2,500 6,000 5,000 8,000
100,000 1,500
1,500 1,500 2,500
2,500 8,000

Account balance - difference between amounts on two sides of the account; usually appears on increase side of the amount
Normal balance - increase side of the account
1.) assets- increase (left side); debit
2.) liabilities - increase (right side); credit
3.) owner's equity - increase (right side); credit
Footing - small pencil figures
Right side total > left side total = right side record
Right side total < left side total = left side record
One amount = amount is the balance one side = total amount is the balance

A) cash Eli, capital b) cash Equipment c) Equipment accounts payable

T F- T F- T
100,000 100,000 100,000 5,000 5,000 5,000 6,000
6,000
11,000

d) cash supplies e) cash accounts payable f) cash prepaid rent

TI IF
T F
5,000
100,000 5,000 1,500 100,000 5,000 2,500 6,000 100,000 8,000
1,500 1,500
1,500
2,500 2,500
3,500 8,000
17,000
83,000
Wherever accrued is attached in an expense, it is a current liability (expense not incurred)
Wherever accrued is attached in an revenue, it is a current asset (income not earned)

Non- current assets - resources that will become cash longer than one year
Non- current liabilities - obligations that will become due after one year
Owner's equity - excess of assets and liabilities

financial position- report that shows the worth of assets, liabilities and owners equity
two forms of statement of financial position
Account form - assets in left side, liabilities and owners equity in right side (t-account)
Report form - assets are listed above while liabilities and owners equity follows below

Income statement - report that shows the revenue & expenses of the business; reports the position of the business whether net income/net loss
two forms of income statement
Natural form - arranges all income and expense accounts in one group
Functional - specific sections of income and expenses

Business documents - source documents that serve as a basis for recording business transactions (verifiability & objectivity)
Common business documents
1. Purchase requisition
- issued by sales department to purchasing department with a list of items to be purchased
- could be given by any document

2. Purchase order
- issued by buyer to seller for order of goods

3. Receiving report
- issued by receiving department to purchasing department after inspection, to show the quantity and condition of the goods received

4. Invoice
- issued for delivery of goods
a. Sales invoice - issued by seller to buyer
b. Purchase invoice - issued by buyer to seller

5. Returns or allowances
Returns - actual return of goods
Allowances - no actual return of goods
a. Credit memo - issued by seller to buyer
b. Debit memo - issued by buyer to seller
Reasons for returns/allowances - (1) damaged goods (2) damage during delivery (3) wrong specifications (size,shape,color)
6. Statement of account
- issued by seller (or service provider) to buyer (or client/customer) as a reminder for payment

7. Remittance advice
- issued by buyer to seller to inform that payment is made (through bank transfer)

8. Official report
- issued by seller (or service provider) to buyer (or client/customer) for receipt of payment

9. Promissory note
- a written promise to pay a specified amount on a certain date

10. Voucher
- payments made by cash or by cheque
a. Petty cash voucher - payments from petty cash fund

11. inventory take sheet

- for inventory count, basis for recording closing inventory (usually at the end of the month)

rules of dr and Cr
Debit (dr.) credit (cr.)
- left - right
- debere - credere
- debitum " what is due" - creditum " something entrusted to another"

Account - written record of assets, liabilities, and owner's equity of a business

Chart of accounts - a list of accounts used by a business to record its financial transactions

1) increases are recorded on the normal balance side of an account

2) decrees the recorded on the opposite side of the normal balance

Business transactions - economic activities of a business that involves an exchange of values

a. External transactions - arm's length transactions of the entity with another entity
b. Internal transactions - transactions or events that take place exclusively within the entity
Accounting cycle
- a series of steps performed during each accounting period
- classify, record, and summarize data for a business
- to produce needed financial information
(1) analyzing (2) journalizing (3) posting (4) trial balance (5) worksheet (6) adjustments (7) financial statements (8) closing entries
(9) post-closing trial balance (10) reversing entries

journalizing
- recording business transactions in a journal
- a chronological record of business transactions
- book of original/primary entry
- two types: general & special journal

general journal reminders

1. Write account titles exactly as they appear in chart of accounts
2. a complete journal entry includes a description
2.1 short narrative
2.2 do not use the amount columns (dr&cr)
2.3 include source of information for audit trail
3. leave a blank line between general journal entries

audit trail - a chain of references that makes it possible to trace information, locate errors, prevent fraud

Posting
- transferring information from journal to a ledger
- permanent record
- classified record of all accounts of a business
- book of final entry
- two forms: standard form (t-account form) and balance ledger form (running balance form)
- two types: general ledger and subsidiary ledger

Trial balance
- a statement/report to test the accuracy of total debits and credits after transactions have been recorded and posted

Simple journal entry - one debit, one credit

Compound journal entry - three or more accounts

ahhh = liabilities t equity

Nc
SP stockholder's / shareholder ;
p
ornery Equity
partner's
equity
equity
Chapter 16: notes payable and notes receivables
Negotiable instrument - a financial document, containing a promise or order to pay
Interest - fee that is charged for the use of money (prt)
Notes payable - liability that represents a written promise by the maker of the note (debtor) to pay another party (creditor) at specified time
and amount
Discounting - practice of deducting the interest m advance from the principal on a note payable
Interest expense - non-operating expense, discount charged, listed in other income and expenses section
interest income - non-operating income

Notes receivable - area that represent a creditor's written promise to pay a specified amount and date
Dishonored notes - a note that is not paid at maturity and no arrangements for renewal; do not belong in notes receivable account
notes receivable – discounted - contra-asset account
Contingent liability - shown in financial statements to users are aware that the business might have a liability in the future
Notes receivable register (ledger) - it the company has many notes receivable they should have

Draft - a written order that requires one party to pay a stated sum of money to another party (check)
Bank draft
- check written by bank that orders another bank to pay the stated amount to a specific party
- more readily accepted than personal or business checks
- used to pay debts to suppliers with whom credit has not been established
Cashier's check
- draft on the issuing banks' own funds
- sometimes used to pay bills
- offers more protection than personal or business checks
Commercial draft
- a note issued by one party that orders another party to pay a specified amount on a specified date
- used for special shipment and collection situations
- may be either sight drafts or time drafts
a. Sight draft
- payable on presentation; when issued, no journal entry is made; when honored, it is recorded as a cash receipt
- used to collect past-due receivables
- used to obtain cash on delivery when shipment has been made with poor or no credit
Bill of lading - a business document that lists the goods accepted for transportation by a carrier
b. Time draft
- payable during a specified period of time; when issued, no journal entry is made; when honored, the word "accepted" is written on the draft
and is signed and dated, burthen records acceptance of draft as notes payable (notes receivable when returned in perspective of the drawer)

Trade acceptances
- a form of commercial time draft used in transactions involving sale of goods
- original transaction is recorded as sale on credit
- when draft is accepted, it is accounted for as promissory note
- merchant have fewer credit Losses on trade acceptances than accounts receivables
- can be discounted
Chapter 7: accounting sales and accounts receivable
Three basic types of businesses
1. Service business - sells services
2. Merchandising business - sells good that it purchases for resale
3. Manufacturing business - sells goods that it produces

Retail business - sells goods and services directly to individual consumers

Merchandise inventory - the stock of goods that is kept on hand

Periodic inventory system

- does not keep track of inventory daily
- the cost of inventory on hand must be determined by counting merchandise inventory in stock

Perpetual inventory stock

- know the number of units and the unit cost for inventory on hand at all times
- used by large businesses
- the amount of inventory on hand n adjusted for sale, purchase, or return.

The accounting systems of most merchandising businesses include special journals and subsidiary ledgers for efficient recording of financial data

Special journal - a journal that is used to record only one type of transaction
Subsidiary ledger - a ledger that contains accounts of a single type

Types of journal in merchandising business

Sales - to record sales of merchandise on credit
Purchases - to record purchases of merchandise on credit
Cash receipts - to record cash received from all sources
Cash payments - to record all disbursements of cash
General - to record all transactions that are not recorded in another special journal and all adjusting and closing entries

Types of ledger in merchandising business

General - assets, liabilities, owner's equity, revenue, and expense accounts
Accounts receivable - accounts for credit customers
Accounts payable - accounts for creditors

Sales journal - used to record only sales of merchandise on credit

Recording beginning balances m ledger accounts

1. Enter the date in the date column
2. Enter "balance" in the description column
3. Check mark in post reference column
4. Enter amount in debit or credit balance column
Sales tax
- imposed by state and local governments on retail sales of goods and services
- required to collect by businesses to their customers and send it to proper tax agency at regular intervals
- if sold on credit, sales tax is usually recorded at time of sale even though it will be not collected immediately

Sales tax payable - credited for the sales tax charged

Accounts receivable ledger

- provides detailed information about the transactions with credit customers and the balances owed by such customer at all times
- has individual accounts for all credit customers
- referred to as a subsidiary ledger because it is separate from and subordinate to the general ledger
- makes it possible to verify that customers are paying their balances on time and that they are within their credit limits
- provides a convenient way to answer questions from credit customers.

Accounts for credit customers are maintained in a balance ledger form with three money Columns
This form does not contain a column for indicating the type of account balance
Balances are presumed a debit balances unless overpaymment of amount owed or returned goods that were already paid for

Sale - entered in accounting records when the goods are sold or services are provided
Sales return - defect with the goods or service, firm may take back the goods
Sales allowance - give customer reduction in price

Credit memorandum
- document issued for return or allowance related to a credit sale instead of giving cash refund
- states that customer's account is being reduced by the amount of the return or allowance plus any sales tax

A debit to The sales returns and allowances account is preferred to making a debit to sales to give a complete record as a measure of operating
efficiency

sales returns and allowances account is a contra revenue account.

At the end of accounting period, the balance of sales Returns and allowances account is subtracted from the balance of the sales account in the
revenue section of the income statement
net sales - resulting figure

Increase in contra-revenue = decrease net income and net sales

Control account - serves as a link between a subsidiary ledger and the general ledger; its balance summarizes the balances of its related accounts
in the subsidiary ledger

Schedule of accounts receivable - lists The subsidiary ledger account balances is prepared then the total is compared with the balance of the
accounts receivable account. If the two figures are not equal, error must be located and corrected
Chapter 8: accounting purchases and accounts payable
Purchase requisition
- lists the items to be ordered
- signed by someone with the authority to approve requests for merchandise, usually managers of sales department
Purchasing department - selects supplier that can furnish the goods at a competitive price and then issues a purchase order
Purchase order - specifies the exact items, quantity, price, and credit terms; signed by someone with authority to approve purchases

Receiving report
- prepared to show the quantity and condition of the goods received
- purchasing department receives a copy and compares it to the purchase order

Purchase invoice - shows the invoice, or bill, for items ordered and shipped
Sales invoice - invoice perspective of the supplier

Purchase of merchandise sale = cost of doing business

Purchases account - debit account of purchase of merchandise
Purchases - temporary account classified as a cost of goods sold account
Cost of goods sold - the actual cost to the business of the merchandise sold to customers

Freight charge - cost of shipping the goods from the seller's warehouse to the buyers location
Two ways to handle freight charge paid by buyer
1. Buyer billed directly by transportation company for the freight charge; buyer issues a check directly to the freight company
2. Seller pays the freight charge and includes it on the invoice; invoice includes the price of the goods and the freight charge

Freight In or transportation in account - debit account of freight charge; cost of goods sold account showing transportation charges for
merchandise purchased.

Purchases journal - special journal where credit purchases of merchandise are recorded

Cash discount - it is a discount offered by suppliers to encourage quick payment by customers; recorded when payment is made
Purchases discount - customer perspective of cash discount
Sales discount - supplier perspective of cash discount

Advantages of purchases journal

1. Permit efficient recording
2. Saves time and effort when recording and posting purchases
3. Allows for the division of accounting work
4. Strengthens audit trail
5. All credit purchases are recorded In one place; each entry refers to the number and date of the invoice
Accounts payable ledger
- provides information about the individual accounts for all creditors
- a subsidiary ledger
- contains a separate account for each creditor
- each account shows purchases, payments, returns and allowances
- balance of account shows the amount owed to the creditor

Purchase return - when the business returns the goods

Purchase allowance - when the purchaser keeps the goods but receives a reduction in the price of the goods
Purchase returns and allowances - contra cost of goods sold account; credit normal balance
Purchases account - accumulates the cost of merchandise bought for resale

The income statement of a merchandising business contains a section showing the total cost of purchases
this section combines information about the cost of the purchases, freight-in, and purchases returns and allowances for the period

Internal controls
- company's policies and procedures in place to safeguard assets
- ensure reliability of accounting data
- promote compliance with management policies and applicable laws

Large money spent to purchase goods = develop careful procedures to control purchases and payments
A business should ensure its control process includes sufficient safeguards to:
1. Create written proof that purchases and payments are authorized
2. Ensure that different people are invoked in the process of buying goods, receiving goods, and making payments

Effective systems for small businesses

1. All purchases should be made only after proper authorization has Been given in writing
2. Goods should be carefully checked when received then compared with the purchase order and with the invoice received from supplier
3. The purchase order, receiving report, and invoice should be checked to confirm that information in the document is in agreement
4. The computations on the invoice should be checked for accuracy
5. Authorization for payment should be made by someone other than the person who ordered the goods
6. Another person should write the check for payment
7. Prenumbered forms should be used for purchase requisitions, orders, and checks. The numbers on the documents issued should be verified
periodically to make sure all forms can be accounted for

Voucher system - usually ussed by medium and large sized business