ACC 342 Lecture Notes - Lecture 7: Retained Earnings, Accounts Payable, Accrual

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20 May 2018
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Basic Accounting Equation
assets= liabilities + stockholders' equity
Assets
-own
-debit
-economic resources presently controlled by the company that have measurable value and are expected
to benefit the company by producing cash inflows or reducing cash outflows in the future (cash,
supplies, furniture, equipment)
Liabilities
-owe
-credit
-measurable amounts that the company owes to credits (notes payable -loans, accounts payable)
Stockholders' equity
-investments and retained earnings
-credit
owners' claim to the business resources (common stock and retained earning)
Net Income
Revenues-expenses =net income
Revenues
-earned
-credit
-sales of goods or services to customers. they are measured at the amount the business charges the
customer
Expenses
-incurred
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-debit
-The costs of doing business necessary to earn revenues, including wages to employees, advertising,
insurance, utilities and supplies used in the office
Dividends
distributions of a company's earning to its stockholders as a return on their investment (common stock
and retained earnings: rev-expenses)
The income statement
The unit of measure assumption states that results of business activities should be reported in an
appropriate monetary unit ( rev-exp.)
The statement of retained earning
Reports the way that net income and the distribution of dividends affected the financial position of the
company during the period. Add net income, subtract dividends
The balance sheet
Reports at a point in time: assets, liabilities, stockholders' equity. Assets= liabilities +stockholders' equity
The statement of cash flows
summarizes how a business's operating, investing, and financing activities caused its cash balance to
change over a particular period of time
accrual basis accounting
records revenues when they are earned and expenses in the same period as the revenues to which they
relate, regardless of the timing of cash receipts or payments
revenue recognition principle (accruing)
revenues are recognized when they are earned
timing of reporting expenses (accruing)
record expenses in the same period as the revenues with which they can be reasonably associated
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Expanded accounting equation
Why adjustments are needed
designed to record most recurring daily transactions, particularly any involving cash. cash is not always
received or paid in the period in which the company earns the related revenue or incurs the related
expenses
Solution to adjustments
adjustments are made to the accounting records at the end of the period to state assets liabilities
revenues and expenses at appropriate amounts
income statement adjustments
revenues are recorded when earned. expenses are recorded in the same period as the revenues to
which they relate
balance sheet adjustments
assets are reported at amounts representing the economic benefits that remain at the end of the
period. liabilities are reported at amounts owed at the end of the period
deferral adjustments
an expense or revenue has been deferred if we have postponed reporting it on the income statement
until a later period. used to decrease balance sheet accounts and increase corresponding income
statement accounts. one asset and one expense or one liability and one rev
accrual adjustments
needed when a company has earned revenue or incurred an expense in the current period but has not
yet recorded it because the related cash will not be received or paid until a later period. used to record
revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding
balance sheet accounts. involves one asset and one revenue account, or one liability and one expense
account.
note 1
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Document Summary

Basic accounting equation assets= liabilities + stockholders" equity. Economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (cash, supplies, furniture, equipment) Measurable amounts that the company owes to credits (notes payable -loans, accounts payable) Credit owners" claim to the business resources (common stock and retained earning) Sales of goods or services to customers. they are measured at the amount the business charges the customer. The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities and supplies used in the office. Dividends distributions of a company"s earning to its stockholders as a return on their investment (common stock and retained earnings: rev-expenses) The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit ( rev-exp. )

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