Accounting example #77052

Accounting is the process of recording, analyzing, interpreting and communicating the financial activity of an individual or organization. The purpose of accounting is to allow interested users to make informed judgements based on accurately recorded information.

Net worth = Assets - Liabilities. If all assets are cashed out to pay off outstanding liabilities the remaining cash will represent net worth.

Assets are what you own and liabilities are what you owe.

Revenues are increases in net worth caused by providing goods or services. In your personal life, one way revenue is earned is by working and earning a salary. Expenses are a decrease in net worth from the costs of day-to-day activities. In your personal life, expenses can include items such as rent or food.

The balance sheet is a permanent document that is used to record what you own (assets) and what you owe (liabilities) on a specific date. The balance sheet provides a snapshot of your financial position. The difference between the value of what you own and what you owe represents your net work.

The income statement is primarily used as a temporary record of transactions relating to revenue and expenses. The purpose of this statement is to determine the change in net worth over a specific period of time.

The advantages include tracking regular monthly living expenses (eg rent, cell phone) frequently assessing realistic expectations, and controlling errors.

Assets = Liabilities + Net worth

Closing Net Worth = Opening Net Worth + Surplus (or) deficit

Surplus (or Deficit) is the amount by which revenues exceed expenses (or expenses exceed revenues) for the period. The amount is taken from the personal income statement. A surplus increases net worth and a deficit decreases net worth.

Used to record accounting for individual terms. This form allows you to record the double entries for each transaction on opposite sides (increase or decrease) of each account.

Revenue (which causes an increase in net worth) and expenses (which causes a decrease in net worth) should be recognized in the time period in which they occur, regardless of when the cash payment is received or made.

Under the cash-based method of accounting, revenue and expenses are recorded only when the cash is received or paid.

The matching principle requires expenses to be reported in the same period as the revenues to which they are related. The matching principle is closely linked to accrual accounting.

Depreciation takes a portion of the asset's cost and records it as an expense for each period you use the asset in order to account for the deterioration in the asset's value. This is in line with the matching principle and reports the depreciation expense in the same period as the revenue to which it is related.

1) Pay as the expense occurs (cash) 2) Pay before the event and recognize the expense when the even occurs (prepaid expense) 3) Pay after the event has occurred (unpaid account)

Applying the concept of materiality means that we can record an asset as an expense if it does not make a big difference to the balance sheet and income statement.

Capital is an increase in net worth other than revenue (such as winning the lottery or receiving a gift)

Net Worth = Owners Equity

The assets of a business are listed in sequence according to their level of liquidity. Liquidity is the ease with which the asset can be converted to cash.

The liabilities that are payable within the shortest amount of time are listed first and the liabilities that are due more than one year in the future are listed last.

Owners Equity = Assets - Liabilities. If the owner sell all the assets of the business for the values reflected in the balance sheet and uses the cash receivable to pay all the debts, the remaining cash would represent owner's equity.

Ending Owner's Equity = Beginning Owner's Equity + Owners Contributions + Net income (loss) - Owner's Withdrawls

A sole proprietorship is a business that is owned and generally operated by a single owner.

Unlimited Liability means that the owner(s) are personally liable for the activities of the business. If the business is unable to pay it's debts, creditors of the business can force the owner to sell his or her personal assets to off the debt of the business.

A partnership is a business owned by two or more persons called partners

1) General Partnership - is a partnership in which all partners are subject to unlimited liability. In this situation, all partners are considered to be general partners. 2) Limited Partnership - includes at lease on general partner who accepts unlimited liability and one or more limited partners with liability to the amount they invested. 3) Limited Liability Partnership

A c00perative is an enterprise or organization that is organized, owned and democratically controlled by the people who use it's products and services, and whose earning are distributed on the basis of use rather than an investment.

A corporation is a business that is registered with the provincial or federal government and is a separate legal entity from it's owners, the shareholders. As a separate legal entity, the corporation has all the rights of a person and is responsible for it's own activities. It is responsible for it's own debts.

Not-For-Profit Organization is an organization whose "profits" are paid out (redistributed) to the community by providing services.

1) Religious Organizations 2) Community Care Centers 3) Charitable Organizations & Hospitals

Internal Stakeholder - May own and/or work in the business (eg Shareholders and employees) External Stakeholders - An External Stakeholder is an individual or organization that is outside the business but still interacts with the business, such as suppliers, banks and external accounts.

1) Service 2) Merchandising (buys goods and resells to customers) 3) Manufacturing - Car maker

Cash flow is the record of the amount of cash the business is expected to collect and to pay out.

Financial accounting is concerned with the record keeping of the business and preparing the financial statements for external users.

Managerial accounting serves the internal users of the business by preparing specialized reports to assist in the management decisions making.

Generally.Accepted.Accounting.Principals (GAAP) Is a set of standards and acceptable ways of reporting accounting activities. The Canadian Institute of Chartered Accountants (CICA) is responsible for the development and communication of GAAP.

1) Relevant 2) Reliable 3) Understandable 4) Comparable

Relevant means that all information useful for decision making is present in the financial statements. In other words, if a piece of relevant information is omitted or misstated, the user's interpretation of the statement would change.

Information is timely if there is no delay in the reporting of crucial information. Timeless is a component of relevance.

Reliability means that information is free from material error and bias. In other words, different independent people looking at the evidence will arrive at the same values.

Information is verifiable if it is based on objective evidence. (ie there are documents to back up the reported information). Verifiability is a component of reliability.

Understandability means that the financial information can be reasonably understood by it's users if the users have a reasonable knowledge of the business and a basic knowledge of accounting.

Comparability means the financial statements of a company must be prepared in a similar way year after year. This allows for a comparison of this year's performance to past years.

A trade-off is an exchange of part of one characteristic for part of another.

One commonly known trade-off is the one between reliability and relevance.

The business entity principle states that accounting for a business must be kept separate from the personal affairs of it's owner or any other business.

The going concern principle assumes that a business will continue to operate into the foreseeable future.

The monetary unit principle requires that the accounting records are expressed in terms of money. Accounting reports should all be prepared using a single currency.

The objectivity principal states that transactions will be recorded on the basis of objective evidence. It means that different people looking at the evidence will arrive at the same values for the transaction (Similar to Reliability Characteristic.)

The cost principle states that the accounting for purchases must be at their cost price.

The conservatism principle states that whenever an accountant needs to exercise judgement in applying an accounting standard and has several options, the least optimistic option should be selected. This means choosing the option that would result in a lower balance of assets lower net income or a higher balance of debt.

The time period principle requires that accounting takes place over specific time periods known as fiscal periods (of equal length)

The revenue recognition principle requires that revenue must be recorded at the time the duties are performed, regardless of when the cash is received.

The matching principle states that an expense must be recorded in the same accounting period in which it was used to produce revenue.

The consistency principle prevents people from changing accounting methods for the sole purpose of manipulating figures on the financial statements. The consistency principle requires accountants to apply the same methods and procedures from period to period.

The materiality principle requires accountants to use GAAP except when doing so would be more expensive or complicated relative to the value of the transactions.

The full disclosure principle states that any and all information that affects the full understanding of a company's financial statements must be included with the financial statements.

International Financial Reporting Standards (IFRS) is a new, uniform set of international accounting standards for reporting a company's financial position and performance. The purpose of IFRS is to establish a universal accounting standard that can be applied by all accountants no matter where in the world they practice.

IFRS is based on the same four characteristics of information as stated in GAAP (relevance, reliability, understanding, and comparability) Also, the basic principles and assumptions of GAAP are aligned with those of IFRS.

The disadvantages of IFRS include that IFRS can be costly to implement in the short term if a company must switch from GAAP to IFRS. Countries also lose control over domestic accounting standards.

Controls are procedures and methods used to protect assets, monitor cash payments, ensure transactions are authorized and generally make sure the accounting records are accurate.

The purpose of internal controls is to provide reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reports and compliance with applicable laws and regulations.

1) Practitioners shall act with trustworthiness, integrity and objectivity 2) Practitioners shall adhere to acknowledged principles and standard of professional practice.

Revenue is earnings of a business generated by selling products or providing services over a period of time.

Recognizing revenue simply means to record the revenue in the accounting records (ie. on the income statement)

1) Customer Pays cash when service or product is delivered 2) Customer pays after service or product is delivered 3) Customer pays before service or product is delivered

Increase cash (asset, balance sheet) and increase revenue (income statement)

1) Pay cash when the expense is incurred 2) Pay cash after the expense has been incurred 3) Pay cash before the expense has been incurred

An expense is incurred by a company if the activity to the expense have been used or consumed

An accounting period is the period of time covered by the financial statements.

Adjustments ensure that the assets and liabilities of a company are properly reported and they update the revenue and expense accounts to their correct balance.

Accrual accounting states that revenue and expenses should be recognized in the accounting period when they occur, regardless of when the cash payment is received or made.

Examples of adjustments include recognition of unearned revenue, recognition of prepaid, expenses, accrual of interest expense and depreciation.

Expenses incurred in one accounting period but not paid until a later accounting period are called accrued expenses.

The net book value is $6000 ($9000-$3000)

A contra account is linked to another account and records decreases in the value of the account without changing the original value shown.

The residual value of an asset is the value the asset can be sold for at the end of it's useful life.

Journal - General Ledger - Trial Balance - Income Statement - Balance Sheet - Post Closing Trial Balance