Beruflich Dokumente
Kultur Dokumente
Test #1
Internal Users: Users plan, organized and run companies. They work for
the company. These include finance directors, marketing managers, human
resource personnel, productive supervisors and company officers. Accounting
provides a variety of internal reports such as financial comparisons of
operating alternatives, projections of profit from new sales campaign,
analyses of sales costs, etc.
The life of the proprietorship is limited to the life of the owner. The
business profits are reported as self employment income and taxed on the
owners personal income tax return.
The Reporting Entity Concept: Requires that the economic activity that
can be identified with a particular company be kept separate and distinct
from the activities of the owner and of all other economic activities.
Ex. of Proprietorships: Hair salons, plumbers and mechanics, farms and small
retail stores.
The profits of the partnership are reported as self employment income and
taxed on each partners personal income tax return. Partnerships follow the
reporting entity concept. Partnerships are typically used to organize
professional service businesses such as the practises of lawyers, doctors,
architects, engineers and accountants.
Shareholders are not responsible for corporate debts unless they have
personally guaranteed them. Most shareholders enjoy limited liability since
they only risk losing the amount they have invested in the companys shares.
Business Activities
When a company uses its operating line of credit to cover cash shortfalls
and overdraws its bank account, it results in a liability called bank
indebtedness.
Long term debt can include: mortgage payable, bonds payable, finance
lease obligations and other types of debt securities borrowed for longer
periods of time. A corporation may obtain equity financing by selling shares
of ownership to investors.
As a lender or other creditor, you have the legal right to be paid at the
agreed time. In the event of a non-payment, you may force the company to
sell assets to pay its debts.
Goodwill: results from the acquisition of another company when the price
paid is higher than the value of the purchased companys net identifiable
assets.
Operating: Results from day to day operations can include revenues and
expenses and related accounts such as receivables, supplies, inventory and
payables.
When goods are sold, they are no longer an asset with future benefits but
an expense, the cost of inventory sold is an expense called cost of goods
sold. Expenses: the cost of assets that are consumed or services that are
used in the process of generating revenues. Examples of expenses include:
Cost of goods sold, operating and administrative expenses, interest expense
and income tax expense.
Accounts Payable: The obligations to pay for goods, it may also have
interest payable on the outstanding liability amounts owed to various
lenders and other creditors, Dividends payable to shareholders, Salaries
payable to employees, Property tax payable to the municipal and
provincial governments and Sales tax payable to the provincial and federal
governments.
When revenues are more than expenses a Profit results, when expenses
exceed revenues a loss occurs. Revenues - Expenses = Profit.
The statement of changes in equity also shows the amount and causes of
changes in retained earnings. The profit for the period is added and dividends
are deducted from the beginning balance to calculate the retained earnings
at the end of the period. Revenues - Expenses = Profit (or loss) +
Retained Earnings (Beginning of the period) - Dividends = Retained
Earnings
Determines such things as whether the company has enough assets to pay
its debts as they come due and the claims of short term and long term
creditors and lenders on the companys total assets.
Assets
Assets include those resources whose benefits will be realized within one
year (current assets) and those resources that will be realized over more that
one year (non current assets).
Current Assets: Assets that are expected to be converted into cash or will
be sold or used up within one year of the companys financial statement date
or its operating cycle, whichever is longer. Common types of current assets
include: Cash, trading investments, accounts receivables, notes receivables,
merchandise inventory, supplies, prepaid expenses.
Non Current Assets: Assets that are not expected to be converted into
cash, sold or used up by the business within one year of the financial
statement date or its operating cycle. Common types of non current assets
include: Investments, Property plant and equipment, Intangible assets and
goodwill, and other assets.
Liabilities
Obligations that result from past transactions, classified as current and non
current.
Current Liabilities: Obligations that are to be paid or settled within one
year of the companys statement date or its operating cycle. Common
examples of current liabilities include: Bank indebtedness, Accounts payable,
unearned revenue, Notes payable, current maturities of long term debts.
Accrued payables: Expenses incurred by the company have not yet been
paid in cash
Shareholders Equity
Shareholders equity is divided into two parts: Share Capital and Retained
Earnings.
Share Capital: Shareholders purchase shares in a company by investing
cash. When the company receives these assets, it issues ownership
certificates to these investors in the form of common or preferred shares, the
total of all classes of shares issues is classified as Share Capital.
Retained Earnings: The cumulative profits that have been retained for
use in a company are known as retained earnings. The ending balance of
share capital and retained earnings are combined and reported as
shareholders equity on the statement of financial position.
Order of Liquidity
Current Assets, Non Current Assets, Current Liabilities, Non Current
Liabilities, Shareholders Equity.
Liquidity
Ability to pay obligations that are expected to become due within the next
year. Liquidity Ratios: Measure a companys short term ability to pay its
maturing obligations and to meet unexpected needs for cash. Two Examples
include: Working Capital and Current Ratio.
Ex. 0.1: 1 means that for every dollar of current liabilities, you have 10 cents
of current assets. For a company to be in good shape it should exceed a value
of at least 1 to 1. The current ratio does not take into account the
composition of the current assets.
Solvency:
Ability to pay interest as it comes due and to repay the face value of debt
at maturity. Solvency Ratios: Measure a companys ability to survive over a
long period of time by having enough assets to settle its liabilities as they fall
due.
Debt to Total Assets Ratio: Measures the percentage of assets that are
financed by lenders and other creditors rather than shareholders. Financing
provided by lenders and creditors is riskier than financing by shareholders
because debt must be repaid at specific point in time, equity does not have
to be repaid and there is no requirement for companies to pay dividends.
Total Debt (Current + Non Current Liabilities)/Total Assets
The higher the percentage of debt to total assets, the greater is the risk
that the company may be unable to pay its debts as they come due.
Profitability
Earnings Per Share: Measures the profit earned on each common share.
Profit - Preferred Share Dividends/Common Shares
Price Earnings Ratio: Measures the ratio of the stock market price of
each common share to its earnings per share. Market Price per Share/
Earnings per Share. The price earnings ratio shows what investors expect
of a companys future profitability, this ratio will be higher if investors think
that current profits will increase and it will be lower if investors think that
profits will decline.
Cost Constraint: A pervasive constraint that ensures that the value of the
information provided in financial reporting is greater than the cost of
providing it. The benefits of financial reporting information should justify the
cost of providing it and using it.
Underlying Assumption
1. Historical Cost:
2. Fair Value:
Fair Value of Accounting: States that certain assets and liabilities should
be recorded and reported at fair value (The price that would be received to
sell an asset or paid to transfer a liability).
Payments of expenses that will benefit more than one accounting period
are assets and are identified as prepaid expenses or prepayments.
Each transaction must be analyzed for its effect on the three primary
components of the accounting equation (assets, liabilities and shareholders
equity) and the two sides of the equation must always be equal.
The Account
Consists of three parts: the title of the account, a left or debit side and a
right or credit side. The alignment of these parts of an account is referred to
as a T account.
Debit and Credit are merely directional signals in the recording process to
describe where entries are made in the accounts.
An account will have a debit balance if the total of the debit amounts
recorded exceed the total of the credit amounts recorded and vice versa.
At all times the credit movements in the accounts must equal the debit
movements in the accounts.
Asset accounts normally show debit (left side) balances, debits to a specific
asset account should exceed credits to that account which results in a debit
balance.
Liability accounts normally show credit (right side) balances, credits to a
specific liability account should exceed debits to that account which results in
a credit balance.
Regardless of the number of accounts used in the journal entry, the total
debit and credit amount must be equal.
The retained earnings balance that is listed on the trial balance is the
retained earnings balance at the beginning of the period.
Errors may exist in a trial balance even though the trial balance column
agree. The trial balance may balance when: a transaction is not journalized, a
correct journal entry is not posted, a journal entry is posted twice, incorrect
accounts are used in journalizing or posting, errors that cancel each others
effect are made in recording the amount of a transaction
This means recognizing revenues when they are earned rather than only
when cash is received. Likewise, expenses are recognized in the period in
which goods are consumed or services are used, rather than only when cash
is paid.
For revenues to be recorded in the period in which they are earned and for
expenses to be recorded when incurred, we may have to record Adjusting
Entries to update accounts at the end of the accounting period.
Adjusting entries are necessary because the trial balance may not contain
complete and up to date data. This is true because:
Some events are not recorded daily because it would not be useful or
efficient to do so, ex. supplies and the earning of salaries.
Some costs like rent, insurance and depreciation are not recorded during
the accounting period as they expire with the passage of time
Some items may be unrecorded like utilities expense which is not received
until the next accounting period.
*Refer to Pg. 169 - 170 for how the transaction is posted and
adjusted*
Insurance: Insurance payments made in advance are normally
recorded in the asset account Prepaid insurance. At the financial
statement date, it is necessary to make an adjustment to increase
(debit) Insurance expense and decrease (Credit) Prepaid insurance for
the cost of insurance that has expired during the period.
Results when cash is received in advance for items like rent, magazine
subscriptions and customer deposits - received for services that will provided
in the future.
Reasons for Adjustments: Revenues have been earned but not yet
received in cash or recorded.
Ex. a bank loan for 5,000$, repayable in 3 months at a annual interest rate
of 6% results in a total interest of 75$ (5,000 x 6% x 3/12) for three months.
Debit interest expense and credit interest payable.
Salaries: Ex. Salaries are paid every 2 weeks, Four employees are
to be paid, each receive a salary of 500$ a week for a five day
workweek. Accrual salaries are 2000$ (5 days x $100/day x 4
employees). Debit salaries expense and credit salaries payable.
Reasons for Adjustment: Expenses have been incurred but not yet
paid in cash or recorded.
* Refer to Pg. 181 - 182 for a journal entries and general ledger on
the 2 subcategories (Prepayments and Accruals)*
After all adjusting entries have been journalized and posted, another trial
balance is prepared from the general ledger accounts. This trial balance is
called an Adjusted Trial Balance.
The Adjusted trial balance lists the accounts in the general ledger and
proves that the totals of the debit and credit balances in the ledger are equal
after all adjustments have been recorded and posted (similar to the
unadjusted trial balance)
* Refer to Pg 184 for Example and Pg. 185 to see affects in Financial
Statements*
Closing Entries: Formally record in the general journal and the ledger the
transfer of the balances in the revenue, expense, and dividends accounts to
the Retained Earnings account, thereby updating that account to its end of
period balance.
After closing entries are recorded and posted, the balance in retained
earnings is the end of period balance. Before then it was the balance at
the beginning of the period.
*Refer to Pg. 189 - 191 for Closing Journal Entries, Closing General
ledger and post closing trial balance.*
Make sure that after closing the entries you check that:
The balance in the Income Summary before the final closing entry
to transfer the balance to the Retained Earnings accounts, should
equal the profit ( or loss) reported on the Income Statement.
After all the closing entries are journalized and posted, another trial
balance, called the Post Closing Trial Balance is prepared from the ledger,
it lists all permanent accounts and their balances after closing entries are
journalized and posted. The preparation of the post closing trial balance is the
last step in the accounting cycle: