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Accounting Exam

Accounting Exam

I recently did an Accounting Exam and made some notes. Maybe you will find them useful. The references in brackets is to the book: Introduction to College Accounting (4th Edition) by George W. Bischoff.

Accounts Lesson One

Accounting is the "language" of business

3 Types of accounting fields:

- public accounting- auditing - independent analysis of financial records
- private accounting - oil, gas, steel manufacturers textile, etc
- nonprofit accounting - government, public hospitals, universities

CPA = certified public accountant
GAAP - generally accepted accounting principles


Entity - books kept on any business
Entity concept - business is seperate from owner

Economic event - business transaction - resources MOVE through an organization

Balance sheet (prepare 1-10) - historic book value of entity / summarizes each individual account under broad class of accounts / firm position at certain date / prepared at end of accounting period (quarter, month, annually, etc)

fiscal year - 12 month period
interim statement - less than one fiscal year

Income statement - revenue + expenses / creditors look at this for loans

Assets - entity owns / land, cash, equipment, money owed to entity (accounts receivable), prepaid anything such as rent or insurance / historical cost (actual cost)

Liabilities - also known as "debts" entity owes creditor / recorded as the amount to be paid in the future / anything payable: accounts payable, notes payable

Equity - also known as "Capital" - difference or net worth / Owner's claim AFTER creditor's claim on assets of business


Three forms of business:

Sole Proprietorship - business with one owner / if sued can claim against personal stuff / owner's equity here is: capital and draw accounts

Partnerships - two or more individuals

Corporation - legally seperate from owners - ownerships is divided into shares of stock


Three forms of business operations:

Service - law, accounting, consulting, medical practioners, and so forth offering services not goods

Merchandising - resaleable goods: grocery, hardware, department stores

Manufacturing - capital intensive (purchases expensive equipment), working with raw materials.


FUNDAMENTAL ACCOUNTING EQUATION (1-5)

ALOE: Assets = Liabilities + Owner's Equity / these are called, "Broad Classes of Accounts"

or

Owner's Equity = Assets - Liabilities

Left side must always equal right side

ALOERE: Assets = Liabilities + Owner's Equity + Revenue - Expenses

Double entry or compound entry - 2 or more accounts are used

T Accounts (prepare 2-4) - debits enter first then credits
Footing - total of T Accounts - written in pencil / do not use footing if only one amount in t account
Writing transactions in ink / mistakes cross out and write above.

Debit left side (Dr.) - increase assets and expenses
Credit right side (Cr.) - decrease assets and expenses

Contra accounts - contrary to balances (example: drawing account)
Drawing account - increases when owner withdraws money for personal use

_____Dr________Cr_____
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|
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Rules of entry for T accounts:
Assets and expenses: + T -
Others are always: - T +


Trial Balance (prepare 2-9) - makes sure that debits equal credits / if equals then on to financial statements

Financial Statement (prepare 2-9)

Includes:
1. Income statement (measures firm performance for certain time)
2. Statement of owner's equity
3. Balance sheet (generated in that order)


Income Statement (prepare 2-9 and 2-10, 2-12)

Includes two types: net income / net loss - accounts it contains (prepare from worksheet 5-5) - simply transfers balances from worksheet

Statement of Owner's Equity (prepare 2-13)

Prepared to show changes in owner's capital during a certain period - if all liabilities were paid (prepare from worksheet 5-6)

Balance Sheet (prepare 1-10 or 2-14)

It is a statement of financial position for a period of time (preparation from worksheet 5-7 and 5-8)



Chart of accounts (see 3-2) - listing of all accounts the firm uses / Numbers are assigned: 1 - assets, 2 - liabilities, 3 - owner's equity, 4 - revenues, 5 - expenses

General Journal (prepare 3-3) - where transactions are FIRST recorded (journalizing) / chronological order

General Ledger (prepare 3-7) - after journal comes this / contains ALL accounts of business listed in numerical order / contains Post Ref. Column

Posting - transferring info from General Journal ro General Ledger

Correcting errors (3-12) double the amounts to correct "reversal of the original entry" when entered in wrong columns of Dr / Cr

Transposition error - transpose numbers "54" "45" always divisible by "9".

Slide error (3-13) - deciminal in wrong place

Proper account not used

Exam Accounting

LESSON 2

Adjusting entry (various types 4-3 and 4-4) - bill for previous date must be entered in previous period / two types: "deferrals" (postpone recognition of revenue / expense) and "accruals" (recognize revenue / expense not recorded)

Journalizing adjusting entries (5-9)

Worksheet (4-7) - after making adjusting entries use worksheet to generate financial statements
Consists of: trial balance, adjustments, adjusted trial balance, income statement, and balance sheet
Adjusted entries are NOT journalized until worksheet is complete

Matching Concept - proper matching of expenses / revenues for period

Accural Basis - recorded even if money not paid or received yet / general ledger accounts must be brought to balance - process known as "calculating adjustments" or "adjusting entries"

Cash Basis - recorded only when money is received and money paid

Accounting cycle - (see 4-2) - first part creates financial statements for a period, second part prepares general ledger and trial balance for next period

Depreciation - salvage value (4-5)

Straight-line method (4-5) - same amount of depreciation every accounting cycle

Accumulated depreciation - what firm expensed during purchase of assset

Book value - what item is worth on books may not be what it can be sold for

Fixed material asset - can be felt or touched (tangible)

Statements order: income statement, statement of owner's equity, and balance sheet

Statement of cash flows - analyzes how cash is spent and received

Nominal or Temporary Accounts: Draw (must be set to zero for a period) - other accounts are carried over (real or permanent) / Income Summary closes nominal accounts
Draw, Revenues, Expenses are ALL nominal accounts

Closing entries: (prepare 6-4) 1. Set nominal accounts to zero and 2. Bring owner's capital account balance up to date.
Order: 1. Close revenues to income summary, 2. Close expenses to income summary, 3. Close income summary to capital, 4. Close drawing to capital

Journalizing closing entries (6-10)

Income Summary (6-7, 6-8) - zero balance before and after / used to close accounts - should have three entries recorded

Post closing trial balance (prepare 6-14) - assures that all nominal accounts are closed, total debits = total credits, all account balances are normal

Accounting Exam UFO & Writing Art Education Sciences

LESSON 3

Merchandise Inventory Goods bought to resell in original form without modification

How to journalize a sales ticket (7-2) - terms "Accounts Receivable" and "Sales" must be written

Special journal - groups together similar transactions (7-3) posting (7-5)

Credit terms - 2/10, n30 means if bill paid within 10 days you get 2% discount else total amount due in 30 days - EOM means end of month

Recording Sales Tax Payable (7-6)

Accounts Receivable Subsidiary Ledger - shows all the amounts owed by a customer - posting (7-7)

Control Account - Accounts receivable in general ledger

Sales returns and allowances - return is physical return of goods by customer, allowance is given by seller to customer for defective goods

Credit memorandum - credit given to customer for return or defective goods - posting (7-12)

Internatl Control / Purchases - procedures for purchases (8-2)

Posing Accounts Payable (8-7)

FOB Shipping - customer pays cost of shipping and account Freight In is debited (FOC - Free On Board)
FOB Destination - seller pays cost of shipping

Purchases Returns and Allowances (8-11)

Debit Memorandum -

COGS - Cost of goods sold

Cash Receipts Journal (9-2)

Crossfooting - verifying debit / credit column (9-6)

Cash payments journal (9-9)

Exam Accounting

LESSON 4

Major accounting duty is to apply controls to cash.

Checking account best for controlling cash because only a few can use the checks - must reconcile with general ledger

Petty cash account is not used in general journal entry

Cash Short or Over account us used to adjust differences from cash register total - the amount over or under is misc. Expense / misc. Income depending

Endorsing checks can be either blank (just sign only) or restrictive (sign wih note of "for deposit only", etc)

Deposits in transit are still added to the bank balance even though they do not show on bank statement (10-8)

Asjusted cash balance and Reconciliation (10-9)

Petty Cash is an asset account - when established for fixed account called, "imprest system"

Change fund - the amount used by cashiers before they start transactions as change for customers

Periodic method - count the actual amount of merchandise in inventory - and the total is the 'ending balance'

Deferral adjustments when:
1. Expenses paid to apply to future accounting periods
2. Revenues have been received to apply to future accounting periods

Unearned sales revenue (11-4) - cash received in advance (ex. Presale on tickets for a show)

Accrual adjustments when:
1. Expenses incurred but not recorded
2. Revenues are earned but unrecorded

Journalizing and posting adjustments (11-14)

Profit margin - net income divide by net sales

Detailed income statement - each unique part is stated separately

Gross profit on sales - COGS - Net Sales on income statement

Operating Expenses - cost of expenses to operate business

Income from operations - total operating expenses - gross profit on sales

(12-5) - VERY IMPORTANT - shows how to make all the calculations

Other revenue - like interest on account

Net Income - Add other revenue to income from operations

Classified balance sheet (12-7)

Current Assets - most liquid into cash like office supplies and prepaid expenses

Investments - long term assets

Intangible Assets - such as rights to have a business - nothing physical like copyrights

Other Assets

Current liabilities - obligations less than a year

Long-term liabilities - more than a year

Working capital (12-9) - current assets - current liabilities = working capital

Current ratio - current assets divided by current liabilities

Profit margin - net income divided by net sales

Post-closing trial balance (12-13)

Reversing entries - (12-14)

Exam Accounting

LESSON 5

Payroll accounting.

Gross pay - amount to pay employee before deductions

Net pay - amount after deductions

Gross pay - net pay = employer's liability to tax

Wages - paid hourly

Salary - paid monthly / annually

US Tax Laws / Acts (13-2)