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Summary Accounting Principle
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, RAPID REVIEWChapter Content
ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6)
Ownership
Basic Assets = Liabilities + Owner’s Equity
Equation
Ownership of goods on
Expanded Owner’s Owner’s Freight Terms public carrier resides with: Who pays freight costs:
Assets = Liabilities + Capital – Drawing + Revenues – Expenses
Equation
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. FOB shipping point Buyer Buyer
Debit / Credit + – – + – + + – – + + –
Effects
FOB destination Seller Seller
ADJUSTING ENTRIES (Chapter 3) Perpetual vs. Periodic Journal Entries
Type Adjusting Entry Event Perpetual Periodic*
Deferrals 1. Prepaid expenses Dr. Expenses Cr. Assets Purchase of goods Inventory Purchases
2. Unearned revenues Dr. Liabilities Cr. Revenues Cash (A/P) Cash (A/P)
Accruals 1. Accrued revenues Dr. Assets Cr. Revenues Freight (shipping point) Inventory Freight-In
2. Accrued expenses Dr. Expenses Cr. Liabilities Cash Cash
Note: Each adjusting entry will affect one or more income statement accounts and one or Return of goods Cash (or A/P) Cash (or A/P)
more balance sheet accounts. Inventory Purchase Returns and Allowances
Sale of goods Cash (or A/R) Cash (or A/R)
Interest Computation
Sales Sales
Cost of Goods Sold No entry
Interest = Face value of note ⫻ Annual interest rate ⫻ Time in terms of one year
Inventory
CLOSING ENTRIES (Chapter 4) End of period No entry Closing or adjusting entry required
Purpose: (1) Update the Owner’s Capital account in the ledger by transferring net Cost Flow Methods
income (loss) and Owner’s Drawing to Owner’s Capital. (2) Prepare the temporary
accounts (revenue, expense, Owner’s Drawing) for the next period’s postings by • Specific identification • Weighted average
reducing their balances to zero. • First-in, first-out (FIFO) • Last-in, first-out (LIFO)
Process FRAUD, INTERNAL CONTROL, AND CASH (Chapter 8)
The Fraud Triangle Principles of Internal Control Activities
1. Debit each revenue account for its balance (assuming normal balances), and
credit Income Summary for total revenues. Opportunity • Establishment of responsibility
2. Debit Income Summary for total expenses, and credit each expense account for
• Segregation of duties
its balance (assuming normal balances). Finanical
• Documentation procedures
pressure Rationalization
STOP AND CHECK: Does the balance in your Income Summary Account equal • Physical controls
the net income (loss) reported in the income statement? • Independent internal verification
• Human resource controls
3. Debit (credit) Income Summary, and credit (debit) Owner’s Capital for the Bank Reconciliation
amount of net income (loss).
4. Debit Owner’s Capital for the balance in the Owner’s Drawing account and Bank Books
credit Owner’s Drawing for the same amount.
Balance per bank statement Balance per books
STOP AND CHECK: Does the balance in your Owner’s Capital account equal Add: Deposit in transit Add: Unrecorded credit memoranda from bank
the ending balance reported in the balance sheet and the owner’s equity statement
statement? Are all of your temporary account balances zero? Deduct: Outstanding checks Deduct: Unrecorded debit memoranda from
bank statement
ACCOUNTING CYCLE (Chapter 4) Adjusted cash balance Adjusted cash balance
Note: 1. Errors should be offset (added or deducted) on the side that made the error.
1 2. Adjusting journal entries should only be made on the books.
Analyze business
transactions STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the
reconciled balance?
9 2
Prepare a post-closing Journalize the
RECEIVABLES (Chapter 9)
trial balance transactions
Methods to Account for Uncollectible Accounts
8 3
Direct write-off method Record bad debts expense when the company
Journalize and Post to determines a particular account to be uncollectible.
post closing entries ledger accounts
Allowance methods: At the end of each period estimate the amount of
7 4
Percentage-of-sales credit sales uncollectible. Debit Bad Debts Expense
and credit Allowance for Doubtful Accounts for this
Prepare financial Prepare a
statements: trial balance amount. As specific accounts become uncollectible,
Income statement debit Allowance for Doubtful Accounts and credit
Owner’s equity statement
Balance sheet Accounts Receivable.
5
Journalize and post Percentage-of-receivables At the end of each period estimate the amount of
6 adjusting entries:
Deferrals/Accruals uncollectible receivables. Debit Bad Debts Expense and
Prepare an adjusted
trial balance credit Allowance for Doubtful Accounts in an amount
that results in a balance in the allowance account equal
to the estimate of uncollectibles. As specific accounts
become uncollectible, debit Allowance for Doubtful
Optional steps: If a worksheet is prepared, steps 4, 5, and 6 are incorporated in the worksheet.
If reversing entries are prepared, they occur between steps 9 and 1 as discussed below. Accounts and credit Accounts Receivable.
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, RAPID REVIEW
Chapter Content
PLANT ASSETS (Chapter 10) INVESTMENTS (Chapter 16)
Presentation Comparison of Long-Term Bond Investment and Liability Journal Entries
Tangible Assets Intangible Assets Event Investor Investee
Property, plant, and equipment Intangible assets (Patents, copyrights, Purchase / issue of bonds Debt Investments Cash
trademarks, franchises, goodwill) Cash Bonds Payable
Natural resources Interest receipt / payment Cash Interest Expense
Interest Revenue Cash
Computation of Annual Depreciation Expense
Comparison of Cost and Equity Methods of Accounting for Long-Term Stock Investments
Cost ⫺ Salvage value
Straight-line ᎏᎏᎏ
Useful life (in years) Event Cost Equity
Depreciable cost Acquisition Stock Investments Stock Investments
Units-of-activity ᎏᎏᎏ ⫻ Units of activity during year
Useful life (in units) Cash Cash
Declining-balance Book value at beginning of year ⫻ Declining balance rate* Investee reports No entry Stock Investments
*Declining-balance rate ⫽ 1 ⫼ Useful life (in years) earnings Investment Revenue
Note: If depreciation is calculated for partial periods, the straight-line and declining- Investee pays Cash Cash
balance methods must be adjusted for the relevant proportion of the year. dividends Dividend Revenue Stock Investments
Multiply the annual depreciation expense by the number of months expired in
the year divided by 12 months.
Trading and Available-for-Sale Securities
SHAREHOLDERS’ EQUITY (Chapter 13)
Trading Report at fair value with changes reported in net income.
Comparison of Equity Accounts
Available-for- Report at fair value with changes reported in the stockholders’
sale equity section.
Proprietorship Partnership Corporation
Owner’s equity Partner’s equity Stockholders’ equity STATEMENT OF CASH FLOWS (Chapter 17)
Name, Capital Name, Capital Common stock
Name, Capital Retained earnings Cash flows from operating activities (indirect method)
Net income
No-Par Value vs. Par Value Stock Journal Entries Add: Losses on disposals of assets $X
Amortization and depreciation X
Decreases in current assets X
No-Par Value Par Value Increases in current liabilities X
Deduct: Gains on disposals of assets (X)
Cash Cash
Increases in current assets (X)
Common Stock Common Stock (par value)
Decreases in current liabilities (X)
Paid-in Capital in Excess of Par Value
Net cash provided (used) by operating activities $X
DIVIDENDS (Chapter 14) Cash flows from operating activities (direct method)
Cash receipts
Comparison of Dividend Effects (Examples: from sales of goods and services to customers, from receipts
of interest and dividends on loans and investments) $X
Cash payments
Cash Common Stock Retained Earnings (Examples: to suppliers, for operating expenses, for interest, for taxes) (X)
Cash dividend ↓ No effect ↓ Cash provided (used) by operating activities $X
Stock dividend No effect ↑ ↓ PRESENTATION OF NON-TYPICAL ITEMS (Chapter 18)
Stock split No effect No effect No effect
Prior period adjustments Statement of retained earnings (adjustment of
(Chapter 14) beginning retained earnings)
BONDS (Chapter 15)
Discontinued operations Income statement (presented separately after
“Income from continuing operations”)
Premium Market interest rate ⬍ Contractual interest rate
Extraordinary items Income statement (presented separately after
Face Value Market interest rate ⫽ Contractual interest rate “Income before extraordinary items”)
Discount Market interest rate ⬎ Contractual interest rate Changes in accounting principle In most instances, use the new method in current
period and restate previous years results using
new method. For changes in depreciation and
amortization methods, use the new method in the
current period, but do not restate previous periods.
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Chapter Content
MANAGERIAL ACCOUNTING (Chapter 19) COST-VOLUME-PROFIT (Chapter 22)
Characteristics of Managerial Accounting Types of Costs
Primary Users Internal users Variable costs Vary in total directly and proportionately with changes in
activity level
Reports Internal reports issued as needed
Fixed costs Remain the same in total regardless of change in activity level
Purpose Special purpose for a particular user
Mixed costs Contain both a fixed and a variable element
Content Pertains to subunits, may be detailed, use of relevant data
Verification No independent audits CVP Income Statement Format
Total Per Unit
Types of Manufacturing Costs
Sales $xx $xx
Variable costs xx xx
Direct materials Raw materials directly associated with finished product
Contribution margin xx $xx
Direct labor Work of employees directly associated with turning Fixed costs xx
raw materials into finished product
Net income $xx
Manufacturing Costs indirectly associated with manufacture of finished
overhead product
Contribution Margin per Unit
Contribution Unit Unit
JOB ORDER AND PROCESS COSTING (Chapters 20 and 21)
margin ⫽ selling ⫺ variable
per unit price costs
Types of Accounting Systems
Job order Costs are assigned to each unit or each batch of goods Breakeven Point
Breakeven Fixed Contribution
Process cost Costs are applied to similar products that are ⫽ ⫼
point in units costs margin per unit
mass-produced in a continuous fashion
Target Net Income
Job Order and Process Cost Flow
Required sales Contribution
⫽ (Fixed costs ⫹ Target net income) ⫼
in units margin per unit
Job Order Cost Flow Process Cost Flow
Direct Materials Direct Materials
BUDGETS (Chapter 23)
Direct Labor Direct Labor
Manufacturing Manufacturing
Overhead Overhead Components of the Master Budget
.
Sales Budget
Work in Process s Co
Haye get
Inventory Bud
Work in
Job No. 101 Process Kitchen-
Job No. 102 Production mate
Job No. 103 Budget
Direct Direct Manufacturing
Materials Labor Overhead Operating Budgets
Finished Goods Finished Goods Budget Budget Budget
Inventory Inventory
Selling and
Administrative
Expense Budget
Cost of Goods Cost of Goods
Sold Sold
Budgeted
Income
Statement
Capital Budgeted
Expenditure Cash Budget Balance Financial Budgets
Budget Sheet
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