CHEAT SHEET  Going concern

 Monetary unit
Account --- a record of increases and decreases in a  Time period
specific asset, liability, equity, revenue, or expense.  Business entity
There are 2 kinds:

 Permanent Accounts are general accounts that

must be carried over to the next business Accumulated Depreciation --- a separate contra
period. It includes all balance sheet accounts account. A contra account is an account linked with
such as assets, liabilities, and capital account. another account, it has an opposite normal balance, and
 Nominal Accounts or Temporary Accounts are it is reported as a subtraction from that other account’s
general ledger account that must be closed at balance.
the end of the reporting period and its balances
are transferred in a permanent account. It
includes all income statements accounts, Accrual Basis Accounting --- records revenues when
withdrawals, and income summary. services and products are delivered and records
expenses when incurred (matched with revenues).

--- under the GAAP, accrual

Accounting --- an information and measurement system accounting should be used instead of cash basis
that identifies, records, and communicates an accounting as it better reflects comparability of financial
organization’s business activities. statements.
--- language of business because it
communicates data that help people make better
decisions. Accrued liabilities --- amounts owed that are not yet
paid. Examples are wages payable, taxes payable, and
--- as four areas of opportunities: financial, interest payable.
managerial, taxation, and accounting related.

Accounts payable --- are promises to pay later. Payables

Accounting Convection --- guidelines used to help can come from purchases of merchandise-for-resale,
companies determine how to record business supplies, equipment, and services. We record all
transactions not fully covered by accounting standards. increases and decreases in payables in the Accounts
Payable account.

Accounting Cycle --- the steps in preparing financial

statements: Accounts receivables --- are held by a seller and are
1. Analyze transactions promises of payment from customers to sellers.
2. Journalize Accounts receivables are increased by credit sales or
3. Post sales on account (or on credit). They are decreased by
4. Prepare unadjusted trial balance customer payments.
5. Adjust and post
6.  Prepare adjusted trial balance
7.  Prepare financial statements Adjusting Entries - made at the end of an accounting
8. Close accounts period that reflects a transaction or event that is not yet
9. Prepare post-closing trial balance recorded. An adjusting entry affects one or more
10. Reverse and post (optional step) income statement accounts and one or more balance
sheet accounts (but never the Cash account).

Accounting Postulates or Assumptions --- there are four:

  Classified Balance Sheet

Assets --- resources a company owns or controls. These

resources are expected to yield future economic Boards of Directors --- oversee organizations. Directors
benefits. use accounting information to evaluate the
performance of executive management

Balance Column Account Format --- similar to a T-

account in having columns for debits and credits. It is Bookkeeping --- also known as recordkeeping ;
different in including transaction date and explanation recording of transactions and events.
columns. It also has a column with the balance of the
account after each entry is recorded.
Cash Basis Accounting --- records revenues when cash is
received and records expenses when cash is paid. Cash
basis income is cash receipts minus cash payments.

Chart of Accounts --- a list of all ledger accounts and has

an identification number assigned to each account
Balance Sheet – has 2 kinds:

 Unclassified Balance Sheet

Closing Process --- applies only to temporary or nominal
accounts. Transfer the end-of-period balances in
revenue, expense, and withdrawals accounts to the
permanent capital account. Closing entries are
necessary at the end of each period after financial
statements are prepared because:

 Revenue, expense, and withdrawals accounts

must begin each period with zero balances.
 Owner’s capital must reflect prior periods’
revenues, expenses, and withdrawals.

Cost --- measured on a cash or equal-to-cash basis.

Current Ratio --- one measure of a company’s ability to
pay its short-term obligations. A current ratio of over
External users of accounting information do not directly
1.0 means that current obligations can be covered with
run the organization and have limited access to its
current assets.
accounting information. These users get accounting
information from general-purpose financial statements.
Following is a partial list of external users and decisions
they make with accounting information.

Customers --- use financial reports to assess the stability Equipment is an asset. When equipment is used and
of potential suppliers wears down, its cost is gradually reported as an expense
(called depreciation). Equipment often is grouped by its
purpose—for example, office equipment and store
Depreciation --- the allocation of the costs of these equipment. Office equipment includes computers and
assets over their expected useful lives. Depreciation desks
expense is recorded with an adjusting entry similar to
that for other prepaid expense.
Financial Accounting --- focuses on the needs of
external users by providing general-purpose financial
Double-entry accounting demands the accounting statements.
equation remain in balance, which means that for each
Fraud Triangle --- shows that three factors push a
transaction:
person to commit fraud.
 At least two accounts are involved, with at least
 Opportunity. A person must be able to commit
one debit and one credit.
fraud with a low risk of getting caught.
 Total amount debited must equal total amount
 Pressure, or incentive. A person must feel
credited.
pressure or have incentive to commit fraud.
 Rationalization, or attitude. A person justifies
fraud or does not see its criminal nature.
Equity --- the owner’s claim on assets and is equal to

assets minus liabilities. Equity is also called net assets or
residual equity. Financial Statements

Ethics --- beliefs that separate right from wrong. They

are accepted standards of good and bad behavior.
Financial Statements Analysis

1. liquidity and efficiency

External Independent Auditors --- examine financial 2. solvency
statements to verify that they are prepared according to 3. profitability
generally accepted accounting principles. 4. market prospects
 Internal users of accounting information directly
manage the organization. Internal reports are designed
Financing activities --- provide the resources
for the unique needs of managerial or executive
organizations use to pay for assets such as land,
employees, such as the chief executive officer (CEO).
buildings, and equipment. The two sources of financing
are owner and nonowner. Owner financing refers to Investing activities are the acquiring and disposing of
resources contributed by the owner along with any assets that an organization uses to buy and sell its
income the owner leaves in the organization. Nonowner products or services. Some organizations require land
(or creditor) financing refers to resources loaned by and factories to operate. Others need only an office.
creditors (lenders). Invested amounts are referred to as assets. Creditor and
owner financing hold claims on assets. Creditors’ claims
are called liabilities, and the owner’s claim is called
Fiscal Year --- an accounting period consisting of any 12 equity. This yields the accounting equation: Assets =
consecutive months or 52 weeks. Liabilities + Equity.

Income Summary --- a temporary account only used for Journal --- a complete record of each transaction in one
the closing process that contains a credit for total place. It also shows debits and credits for each
revenues (and gains) and a debit for total expenses (and transaction.
losses).

Ledger --- the collection of all accounts and their

balances. On the other hand, Subsidiary Ledgers are for
AR and AP with names of example, debtors or suppliers.

Lenders --- (creditors) loan money or other resources to

an organization. Banks, savings and loans, and mortgage
companies are lenders. Lenders use information to
assess if an organization will repay its loans.

Managerial Accounting --- focuses on the needs of

internal users.

Nonmanagerial and nonexecutive employees and labor

unions --- use external information to bargain for better
wages.

Internal transactions --- exchanges within an entity,

which may or may not affect the accounting equation.
Note Payable --- a written promissory note to pay a
future amount. It is recorded as either a short-term
note payable or a long-term note payable, depending  Revenue recognition principle requires that
on when it must be repaid. revenue be recorded when goods or services
are provided to customers and at an amount
expected to be received from customers.
Note Receivable, or Promissory Note --- a written Adjustments ensure revenue is recognized
promise of another entity to pay a specific sum of (reported) in the time period when those
money on a specified future date to the holder of the services and products are provided.
note; the holder has an asset recorded in a Note (or  Expense recognition (or matching) principle
Notes) Receivable account. requires that expenses be recorded in the same
accounting period as the revenues that are
recognized as a result of those expenses.
Operating activities --- involve using resources to
research, develop, purchase, produce, distribute, and
market products and services. Sales and revenues are Profit Margin or Return on Sales --- a ratio that is useful
the inflow of assets from selling products and services. to measure a company’s operating results; the ratio of
Costs and expenses are the outflow of assets to support its net income to net sales.
operating activities.

Operating Cycle --- the time span from when cash is

used to acquire goods and services until cash is received
from the sale of goods and services. Public Accounting --- involves accounting services such
as auditing and taxation.

Plant Assets --- are long-term tangible assets used to

produce and sell products and services. Plant assets Regulators --- have legal authority over certain activities
provide benefits for more than one period. Examples of of organizations. For example, the Internal Revenue
plant assets are buildings, machines, vehicles, and Service (IRS) requires accounting reports for computing
fixtures. All plant assets (excluding land) eventually taxes.
wear out or become less useful.

Return on assets (ROA), also called return on

Post-Closing Trial Balance --- a list of permanent investment (ROI) --- Net income is from the annual
accounts and their balances after all closing entries. It income statement, and average total assets is
lists the balances for all accounts not closed. A post- computed by adding the beginning and ending amounts
closing trial balance verifies that (1) total debits equal for that same period and dividing by 2.
total credits for permanent accounts and (2) all
temporary accounts have zero balances.

Prepaid accounts (or prepaid expenses) --- are assets

from prepayments of future expenses (expenses Revenue --- recognized (1) when goods or services are
expected to be incurred in future accounting periods). provided to customers and (2) at the amount expected
When the expenses are later incurred, the amounts in to be received from the customer. Revenue (sales) is
prepaid accounts are transferred to expense accounts. the amount received from selling products and services.

Principles in Adjusting Process: Reversing entries --- are optional. They are recorded in
response to accrued assets and accrued liabilities that
were created by adjusting entries at the end of a
reporting period. Reversing entries simplify
recordkeeping.

Risk --- the uncertainty about the return we will earn.

Sarbanes-Oxley Act, also called SOX --- to help stop

Unearned revenue --- or deferred revenues, a liability to
financial abuses. SOX requires documentation and
settle in the future by delivering products or services.
verification of internal controls and emphasizes
When customers pay in advance for products or
effective internal controls. Management must issue a
services (before revenue is earned), the seller records
report stating that internal controls are effective.
this receipt as unearned revenue.

Shareholders --- (investors) are the owners of a

Voters and Government Officials --- use information to
corporation. They use accounting reports to decide
evaluate government performance.
whether to buy, hold, or sell stock.

Work Sheet --- a document that is used internally by

Source documents --- identify and describe transactions
companies to help with adjusting and closing accounts
and events entering the accounting system. They can be
and with preparing financial statements. It is an internal
in hard copy or electronic form. Examples are sales
accounting aid and is not a substitute for journals,
receipts, checks, purchase orders, bills from suppliers,
ledgers, or financial statements. A work sheet:
payroll records, and bank statements.
 Helps in preparing financial statements.
Reduces the risk of errors when working with
Suppliers --- use information to analyze a customer many accounts and adjustments.
before extending credit.  Links accounts and adjustments to financial
statements.
 Shows the effects of proposed or “what-if”
Supplies --- are assets until they are used. When they transactions.
are used up, their costs are reported as expenses.
Unused supplies are recorded in a Supplies asset
account.

T-account --- represents a ledger account and is used to

show the effects of transactions.

Time Period Assumption --- presumes that an

organization’s activities can be divided into specific time
periods such as a month, a three-month quarter, a
sixmonth interval, or a year.