Accounting Final Exam Review PDF

ACCOUNTING FINAL EXAM Accounting- is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are impart at least of a financial character and interpreting the results Thereof TYPES OF BUSINESS 1. Trading or Merchandising - i...

ACCOUNTING FINAL EXAM Accounting- is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are impart at least of a financial character and interpreting the results Thereof TYPES OF BUSINESS 1. Trading or Merchandising - involves the buying of goods or merchandise which will be sold at a price higher than the purchase cost Keyword: Buying products> Adding price> Selling 2. Manufacturing - involves the conversion of raw material into finished product, which will be sold at a price higher than the cost of production Keyword: Buying products> Converting into new product> Selling 3.Servicing- This involves the rendering of service for a certain fee which is higher than the cost of the service rendered. FORMS OF BUSINESS 1. Sole proprietorship - A business owned and operated by only one person. Advantage: Own profit, Control your business Disadvantage: Minimum Capitalism, theres no one can help you in your Business 2. Partnership - this is a business owned by two or more persons Advantage: Bigger Capitalization Disadvantage: Share in the profit 3. Corporation - this is a business whose capital is divided into share of stocks owned by several people called shareholders or stockholders ----Atleast 25% should be bought and atleast 25% should be sold----- 4. Cooperative - This is a business whose capital is owned by several people ( generally poor people) called Members. CHARACTERISTICS OF THE DIFFERENT FORMS OF BUSINESS ORGANIZATION 1. Sole Proprietorship - One owner called proprietor - unlimited liability - owner manages the business 2. Partnership - Two or more partners called owners - unlimited liability - there is a managing partner 3. Corporation -Unlimited owners called shareholders -limited liability - Management is vested in the board of directors 4. Cooperative -Unlimited members called owners -Limited liability-Management is vested in the board of directors ___________________________________________________________________ OTHER DEFINITIONS Capital Partnership - Offered money or financial resources Industrial Partnership- Offered Services through their skills and expertise General Partner- They have unlimited personal liability for the debts meaning they are responsible for any financial losses or (pagkalugi) Limited Partner (LTD)- They contribute Capital for a business but they have limited liability meaning there personal assets are protected kahit na malugi and hindi rin sila pwede habulin for any losses connected to the their Business partnership Generally Accepted Accounting principles (GAAP) - are principles (including concepts and assumptions), which have gained international acceptance in the business world and the accountancy profession 1. Business entity concept - The business is separate and have distinct identity from the owners 2. Going Concern Concept - Assumed that the business will continue operations indefinitely unless there is an evidence to the contrary 3. Accrual basis of Accounting - this simply means that expenses of the business are recognize or recorded when incurred whether it was paid or not and revenue is recognized wheter collected or not. 4. Objectivity - this simply means that the transaction recorded or amount recorded can be verified through supporting document. Information are free from bias. 5. Cost Principles- this simply means that properties or assets acquired must be recorded at the actual acquisition cost and not an estimated cost. 6. Matching costs against Revenue - this simply means that all cost and expenses incurred during the period in generating the revenue must be matched (subtracted) against the revenue for the same period. ( R-E) 7. Consistency - This simply means that for the financial statements to be comparative, the application of the accounting methods, procedures, or principles must be consistent with the previous period. 8. Accounting Period - Considering that the business is assumed to be a going concern, its life is divided into periods (usually one year) at the end of which financial statements are prepared. In this manner, interested users or readers will know the status of the business on a period-to-period basis. 9. Full Disclosure - This simply means that the financial statements should reflect all significant events or facts, which might influence the decisions to be made by any interested party. This can be done by using footnotes, parenthetical notations, or if warranted, a separate document called "Notes to the financial statements" can be attached to the financial statements. Books of Accounts are the formal accounting books where the business transactions are recorded. They consist of two books as follows: Book of Original Entry - the accounting book where the business transactions are first recorded hence the term "original entry". The book of original entry is called the JOURNAL. The process of recording in the journal is called JOURNALIZING. There are several kinds of journals but in this chapter only the general journal will be illustrated (see exhibit 1 below). The other special journals will be discussed in chapter 7 of this book. Book of Final Entry the accounting book where the business transactions are finally recorded hence the term "final entry". The book of final entry is called the LEDGER. The process of recording in the ledger is called POSTING. There are two kinds of ledger, the general ledger and the subsidiary ledger. Only the general ledger will be illustrated in this chapter (see exhibit 2 below). The subsidiary ledger will be discussed in chapter 7 of this book. A list of account titles to be used in the recording is called Chart of Accounts At the end of an accounting period (usually one year) accounting reports called "financial statements" are prepared. These are the end-products of financial accounting. The complete financial statements are as follows: Income Statement this is a statement which shows the results of operations of a business enterprise. It shows whether the business makes a profit or incurs a loss. Balance Sheet this is a statement which shows the financial condition of a business, Statement of Changes in Owner's Equity - this is a statement supplementing the balance sheet. It shows the increases or decreases in the equity of the owner/s. Cash Flow Statement - this is a statement which shows the sources (inflows) and uses Calendar Year: A 12 Month period which ends December 31 Fiscal Year: Any 12 Month period which does not end on December 31 Natural Business Year: A 12 Month period which ends in the month of business Activities BASIC ACCOUNTING ELEMENTS OR VALUES 1. Assets Are properties or economic resources owned by the business. The most common properties or assets of a business are: Cash, receivables, furniture and fixtures (such as tables, cabinets, chairs, etc.), office equipment (such as calculators, computers, copying machines, fax machine, etc.), machineries, delivery truck, land, building, etc. 2. Liabilities These are amounts owed by the business. In simple terms, they are debts or legal obligations of the business to individuals or other businesses. Examples are payables to suppliers, loan with a bank, mortgage payable, taxes payable, and other unpaid (accrued) expenses, etc. (Internal claim) 3. Capital (Also called Owner's Equity) - This is the owner's interest or claim in the assets of the business after subtracting the interest of the creditors. It is the difference between the amount of assets and amount of liabilities. 4. Drawing (Sometimes called Personal) - is the withdrawal made by the owner or partners which is not considered as a reduction of capital but rather an advanced distribution of profits. 5. Revenues (Also called Income) -inflows of assets resulting from the sale of goods or services. Revenues increase the owner's equity. Example In a repair shop, the amount charged to the customer for repair service is the revenue or income. 6. Expenses outflows of assets resulting from cash spent or liability incurred in order to generate the revenue. Expenses decrease the owner's equity. Salaries of the employees, office supplies used, rent of the office space are examples of expenses. FUNCTIONS OF ACCOUNTING Recording this involves putting into writing all the business transactions including significant events which might occur and which will affect the business. This is more popularly known as Bookkeeping. Classifying this involves grouping together similar items or accounts for purposes of systematic recording and preparation of reports. Summarizing this involves the preparation of the formal accounting reports or financial statements at the end of an accounting period.  Interpreting this involves the analysis of the financial statements by developing financial ratios and explaining their significance to make the statements more meaningful. In a computerized system of accounting, this is the only function the computer cannot perform hence accountants are still useful. ROLES OF ACCOUNTING IN BUSINESS The role of accounting in business may be summarized as follows: 1. It helps the owner/s or managers make plans and decisions. 2. It reports and analyzes business transactions thru the financial statements. 3. It communicates financial information to all interested parties T ACCOUNT? It is an accounting device that is used to summarize the changes in the accounting elements. It is called T account because of its T shape. This will be a convenient tool to analyze and record the effect of a transaction on the different accounting elements. Debit the value received by the business or what the business paid for; and Credit the value parted with or given up by the business or the source of the value received by the business Accounting Equation: ASSETS = LIABILITY + OWNERS EQUITY A Trial Balance is a listing of all the balances of the different accounts (assets, liabilities, capital, drawing, revenues and expenses), as of a given time. This is usually prepared at the end of each month. The total of all the accounts with debit balances must equal with the total of all the accounts with credit balances.Purposes of the Trial Balance: A trial balance is prepared for the following purposes: 1. To check the accuracy of posting (recording in the general ledger) by testing the equality of the debit and credit amounts. 2. It aids in locating errors in posting. 3. It serves as a basis in the preparation of the financial statements. Kinds of Trial Balance The following are the different kinds of trial balance: 1. Preliminary Trial Balance (the trial balance before adjustments) a. Trial balance of balances b. Trial balance of totals 2. Adjusted Trial Balance (The trial balance after adjustments) 3. Post-closing Trial Balance (the trial balance after the closing entries ADJUSTING ENTRIES The adjustments to be recorded in the general journal are called adjusting entries. The purposes of the adjusting entries include the following: 1. To conform to the principle of "Matching Costs Against Revenue" which will result in a more accurate measurement of the net income 2. To arrive at the correct valuation of assets and liabilities. 3. To arrive at the correct determination of the owner's equity. Adjusting entries are made at the end of an accounting period to ensure that financial statements accurately reflect a company's financial position by recording revenues and expenses that have occurred but haven't been recorded yet. The usual Adjustments made in the end of the Accounting Period: Unused Supplies (sometimes called Supplies Inventory) - These are supplies which remain unused at the end of the accounting period. Prepaid Expenses - (sometimes called Deferred Expenses) -These are expenses not yet incurred but already paid. Examples of these expenses which are usually paid in advance are Rent Expense, Insurance Expense, Advertising Expense, etc. Accrued Expenses - These are expenses already incurred but not yet paid. Considering that the item of expense is not yet paid, hence is not yet  recorded, there is a need to recognize the expense and the liability in the books Unearned Income (sometimes called Deferred Income) This is an income not yet earned but already collected. A good example is Rental Income. Rentals are usually paid in advance by the tenants. Accrued Income This is an income already earned but not yet collected Bad Debts (now called Impairment Loss) This refers to the estimated receivables which may not be collected. Depreciation refers to the decrease in the value of a non-current asset (fixed asset) due to the ordinary wear and tear or passage of time. Examples of assets which depreciate in value are furniture, equipment, machinery, building, etc ACCOUNTING FOR MERCHANDISING BUSINESS ACCOUNTING FOR PURCHASES OF MERCHANDISE When merchandise is purchased, the following are the usual terms: 1. Cash or COD (Cash on Delivery) - it means that the purchase of merchandise is payable in cash. 2. On Credit or On Account it means that the purchase of merchandise is payable at some future time 3. Credit Term or Credit Period - is the time within which the payment should be made EXAMPLES OF CREDIT TERM n/30 - payable within 30 days from the date of the invoice n/EOM - payable at the end of the month when the purchase is made 10 EOM - payable up-to 10 days after the end of the month of the purchase 4. Trade Discount is a special discount given to the buyer for buying in large quantity. The discount is an outright deduction from the list price hence the amount to be recorded is the net amount. 5. Purchase Discount is a discount given to the buyer for paying within a specified period of time which is usually earlier than the credit period. This is offered to encourage the buyer to pay promptly. 6. Discount Period is the period of time within which to pay to be entitled to a discount. COST OF DELIVERING OR TRANSPORTING GOODS Freight In - the costs incurred by the buyer for transporting the goods from the seller's place to the buyer's place. FOB Shipping Point - this means Free on Board up to the shipping point. Freight charges will be shouldered by the seller up to the shipping point before loading to a common carrier. Once the goods are loaded, the buyer will pay for the freight charges and other incidental costs. FOB Destination this means Free on Board up to the point of destination. The seller will pay all the freight charges and incidental costs up to the buyer's place. Freight Collect - this means that the buyer will pay for the freight charges upon receipt of the goods. However, if the term is FOB Destination, the buyer can deduct the freight charges when paying for the invoice price Freight Prepaid this means that the seller has paid the freight charges at the time of shipment. However, if the term is FOB Shipping Point, the seller can add the freight charges to the invoice price. ACCOUNTING FOR SALES OF MERCHANDISE Whenever a sale of merchandise is made, new purchase must be initiated to replenish the items sold lest stockout occurs Sale of merchandise is considered a revenue and credited to Sales account. The terms of the sale are practically similar if not the same as the terms of the purchase Sales Invoice - is a document that the seller gives to the buyer listing the items ordered or sold together with the quantity, price, description, value added tax, terms of the sale, and the total price of all the items sold. Delivery Receipt is a document issued by the seller and signed by the customer evidencing receipt of the goods ordered or sold as per the sales invoice. In some companies, the sales invoice serves as the delivery receipt. Credit Memo is a business form used by the seller to notify the buyer that his account is credited (i.e., the balance is reduced) for returns made or allowance granted for defective merchandise. Sales Returns & Allowances These are deductions from sales as a result of merchandise returned or allowance granted for damaged or defective merchandise. This is supported by the credit memo issued by the seller. Sales Discount is the discount given to customers for paying earlier than the credit term. Trade Discount this is a special discount given to customers for buying in large quantity. The discount is automatically deducted from the invoice price and as such is not recorded. Freight Out this is the expense incurred by the seller to transport the goods to the buyer's place when the term stipulates that the seller will shoulder the freight. RECORDING THE PURCHASE OF MERCHANDISE There are two methods for recording purchases of merchandise. 1 Periodic Inventory Method - Under this method, every time a purchase of merchandise is made, an account PURCHASES is debited When a sale is made, a revenue account SALES is credited At the end of the accounting period, a physical count of the goods unsold (called MERCHANDISE INVENTORY) will be made. 2 Perpetual Inventory Method - Under this method, an asset account Merchandise (instead of Purchases) is debited to record the purchase When a sale is made, two entries are required, first is to recognize the revenue account called Sales and the second to debit the Cost of Goods Sold with a corresponding credit to Merchandise