Financial Accounting Overview

Financial Accounting Zusammenfassung 1. Semster

I. Begriffe

Balance sheet (Bilanz): Describes where the enterprise stands at a specific date."Snapshot" of the business.

Looking like:

Income statement: Depicts the revenues and expenses for a designated period of time.

Looking like:

It is used to summarize the operating results of a business by matching the revenue earned during a given period of time with the expenses incurred in generating that revenue.

Statement of cash flows: Depicts the ways cash has changed during a designated period of time.

Looking like:

Assets: Economic resources that are owed by the business and are expected to provide positive future cash flow.

Liabilities: Debts that represent negative future cash flow for the enterprise.

OWNERSÐ'Ò' INVESTMENTS ARE LIABILITIES

ASSETS = LIABILITIES + OWNERSÐ'Ò' EQUITY

Dividends: They represent a decision of by a corporation to ditribute a portion its income to stockholders. Thus, the amount of the dividens is not included in the computation of income. A lliability account, Dividens Payable, comes into existence, when the dividend is declared and is discharged when the dividend is paid.

Journal: In an actual accounting system, transactions are initially recorded in the journal and is later transferred to the general ledger. It is a day-by-day record of business transactions.

Looking like:

Net income: Difference between revenue and expenses. Increase in ownersÐ'Ò'equity profits of the business

Retained earnings: the rest of the net income which is left for companyÐ'Ò's usage. It belongs to the owner (shareholders). It is the portion of ownersÐ'Ò'equity created by earning net income and retaining (=behalten, bewahren) the related resources in the business. The resources are not limited on cash! Increases result from earning net income, decreases from net losses or from the declaration of dividens.

Revenues: Transactions of the company that already have resulted in positive cash flow or are expected to do so in the near future. They are increases in companyÐ'Ò's assets

Revenues

Debit for decrease Credit for increase

Expenses: Decreases in the companyÐ'Ò's assets from profit-directed activities. They result in negative cash flow.

Expenses

Debit for increase Credit for decrease

Owners` equity: Represents the owners`claims on the assets of a business. It increases by investment of cash or assets and from earnings of profitable operations in the business. It decreases due to payments of cash or transfers of other assets to the owners and due to losses from unprofiterable operations.

Equities

Debit for increase Credit for decrease

Adjusting entries: Needed whenever transactions affect the revenue or expenses for more than one accounting period. They assign revenues to the period in which they are earned and expenses to the period in which related goods or services are used. Every adjusting entry involves a change in either a revenue or expense and an asset or liability.

Depreciation: The systematic allocation of the cost of a depreciable asset. Straight line method:

Depreciable assets are physical objects that retin their size and shape but lose their economic usefulness over time (e.g. truck)

Accounting principles:

Cost principle: Assets should be presented at their original costs

Going-Concern Assumption: The assumption that the company is a continuing enterprise

Objectivity principle: Valuation of assets that are factual and can be verified by independent experts

Stable dollar assumption: Implying that the dollar is a stable unit of measurement

Realization principle: Revenue should be recognized at the time goods are sold and services are rendered

Matching principle: Expenses should be recorded in the period in which they are used up

II. Types of adjusting entries

Converting Assets to Expenses

In a prior period cash was paid in advance for an asset, which is used up over a longer period. In the Balance sheet you will see the cost of the asset in total. At the end of each period benefitting from the asset, an adjusting entry is made to transfer an appropriate portion of the cost from an asset account to an expense account. It reflects that part of the asset has been used up (became an expense)

Debit an expense account

Credit an asset account

Prepaid expensens are assets and just become expenses when the good or service is used up.

Concept of depretiation adjusting entry in the income statement looks like

in the balance sheet after eleven months

Converting Liabilities to Revenue

Customers may pay in advance for services to be rendered in future periods (e.g. ticket sale). Revenues that benefit more than one accounting period are recorded as liabilities because the amount has not been earned yet. It is recorded by debiting the cash account (cash increases) and crediting an unearned revenue account (liability -> account increases).

For the adjusting entry

Debit a liability account (unearned revenue)

Credit a revenue account (revenue earned)

in