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Accounting by Mind Map: Accounting

1. 1:Role of Accounting in Society

1.1. Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

1.1.1. Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making “accounting is the language of business. Measures the financial performance of an organization using standard conventions to prepare and distribute financial reports. Financial accounting is used to generate information for stakeholders outside of an organization, such as owners, stockholders, lenders, and governmental entities such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS). As a basis for making decisions within an organization with the purpose,to make a particular decision and how to analyze and communicate this information.

1.2. Identify Users of Accounting Information and How They Apply Information

1.2.1. Financial accounting information is valuable as it measures whether or not the company was financially successful.

1.2.2. Accounting information are generally divided into two categories: Internal External Internal users are those within an organization who use financial information to make day-to-day decisions. Include managers and other employees who use financial information to confirm past results External users are those outside of the organization who use the financial information to make decisions or to evaluate an entity’s performance. For example, investors, financial analysts, loan officers, governmental auditors, such as IRS agents, and an assortment of other stakeholders are classified as external users, while still having an interest in an organization’s financial information.

1.2.3. Allows managers to compare the organization’s performance to previous periods, to expectations, and to other organizations or industry standards.

1.2.4. Characteristics, Users, and Sources of Financial Accounting Information Financial accounting information is mostly historical in nature, although companies and other entities also incorporate estimates into their accounting processes. Organizations measure financial performance in monetary terms.

1.2.5. Characteristics, Users, and Sources of Managerial Accounting Information These accounting standards are referred to as generally accepted accounting principles The previously mentioned Financial Accounting Standards Board (FASB), an independent, nonprofit organization that sets financial accounting and reporting standards for both public and private. (GAAP) and are the common set of rules, standards, and procedures that publicly traded companies must follow when composing their financial statements.

1.3. Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities

1.3.1. We can classify organizations into three categories: for profit, governmental, and not for profit. For-Profit Businesses As the name implies, the primary purpose or mission of a for-profit business is to earn a profit by selling In for-profit businesses, accounting information is used to measure the financial performance of the organization and to help ensure that resources are being used efficiently. For-profit businesses can be further categorized by the types of products or services the business provides. Let’s examine three types of for-profit businesses: Governmental Entities A governmental entity provides services to the general public (taxpayers). Governmental agencies exist at the federal, state, and local levels. These entities are funded through the issuance of taxes and other fees Government accounting standards are governed by the Governmental Accounting Standards Board (GASB). Not-for-Profit Entities To be fair, the name “not-for-profit” can be somewhat confusing. As with “for-profit” entities, the name refers to the primary purpose or mission of the organization. The profits, then, can be used to sustain and improve the business through

2. 3:Analyzing and Recording Transactions

2.1. Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

2.1.1. If you want to start your own business, you need to maintain detailed and accurate records of business performance in order for you, your investors, and your lenders, to make informed decisions about the future of your company Revenue Recognition Principle Therevenue recognition principledirects a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. There also does not have to be a correlation between when cash is collected and when revenue is recognized. A customer may not pay for the service on the day it was provided. Expense Recognition (Matching) Principle Theexpense recognition principle(also referred to as thematching principle) states that we must match expenses with associated revenues in the period in which the revenues were earned. There would be no reliability in statements if expenses were recorded separately from the revenues generated. Cost Principle Thecost principle, also known as thehistorical cost principle, states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor. There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance. Full Disclosure Principle and Separate Entity Concept Thefull disclosure principlestates that a business must report any business activities that could affect what is reported on the financial statements. Theseparate entity conceptprescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally The Accounting Equation Introduction to Financial Statementsbriefly discussed the accounting equation, which is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources. Theaccounting equationis expressed as follows: Debits and Credits Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as aT-account.

2.2. Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions

2.2.1. Chart of Accounts Recall that the basic components of even the simplest accounting system are accounts and a general ledger. Accounts shows all the changes made to assets, liabilities, and equity—the three main categories in the accounting equation. Each of these categories, in turn, includes many individual accounts, all of which a company maintains in its general ledger.

2.2.2. Breaking Down the Expanded Accounting Equation and Assets and the Expanded Accounting Equation We begin with the left side of the equation, the assets, and work toward the right side of the equation to liabilities and equity. On the left side of the equation are assets.Assetsare resources a company owns that have an economic value. Assets are represented on the balance sheet financial statement. Some common examples of assets are cash, accounts receivable, inventory, supplies, prepaid expenses, notes receivable, equipment, buildings, machinery, and land.

2.2.3. Liabilities and the Expanded Accounting Equation The accounting equation emphasizes a basic idea in business; that is, businesses need assets in order to operate. There are two ways a business can finance the purchase of assets. Liabilitiesare obligations to pay an amount owed to a lender (creditor) based on a past transaction. Liabilities are reported on the balance sheet Unearned revenue represents a customer’s advanced payment for a product or service that has yet to be provided by the company

2.2.4. Equity and the Expanded Accounting Equation Stockholder’s equityrefers to the owner’s (stockholders) investments in the business and earnings. These two components are contributed capital and retained earnings. The owner’s investments in the business typically come in the form of common stock and are called contributed capital. There is a hybrid owner’s investment labeled as preferred stock that is a combination of debt and equity (a concept covered in more advanced accounting courses).

2.3. Define and Describe the Initial Steps in the Accounting Cycle

2.3.1. The Accounting Cycle 1-Identifying and analyzing transactions 2-Recording transactions to a journal. 3-Posting journal information to a ledger 4-Prepare an unadjusted trial balance 5- Adjusting entries

2.4. Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements

2.4.1. Both the basic and the expanded accounting equations are useful in analyzing how any transaction affects a company’s financial statements.

2.5. Use Journal Entries to Record Transactions and Post to T-Accounts

2.5.1. Journals are the first place where information is entered into the accounting system, which is why they are often referred to as books of original entry. Journalizing transactions transfers information from accounting equation analysis to a record of each transaction. There are several formatting rules for journalizing transactions that include where to put debits and credits, which account titles come first, the need for a date and inclusion of a brief description. Step 3 in the accounting cycle posts journal information to the general ledger (T-accounts). Final balances in each account must be calculated before transfer to the trial balance occurs.

2.6. Prepare a Trial Balance

2.6.1. The trial balance contains a listing of all accounts in the general ledger with nonzero balances. Information is transferred from the T-accounts to the trial balance.

3. 4:The Adjustment Process

3.1. Explain the Concepts and Guidelines Affecting Adjusting Entries

3.1.1. The next three steps in the accounting cycle are adjusting entries (journalizing and posting), preparing an adjusted trial balance, and preparing the financial statements. These steps consider end-of-period transactions and their impact on financial statements. Accrual basis accounting is used by US GAAP or IFRS-governed companies, and it requires revenues and expenses to be recorded in the accounting period in which they occur, not necessarily where an associated cash event happened. A calendar year considers financial information for a company for the time period of January 1 to December 31 on a specific year. A fiscal year is any twelve-month reporting cycle not beginning onJanuary 1 and ending on December 31.

3.2. Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries

3.2.1. Incorrect balances: Incorrect balances on the unadjusted trial balance occur because not every transaction produces an original source document that will alert the bookkeeper it is time to make an entry.

3.2.2. Need for adjustments: Some account adjustments are needed to update records that may not have original source documents or those that do not reflect change on a daily basis.

3.2.3. Prepaid expenses: Prepaid expenses are assets paid for before their use. When they are used, this asset’s value is reduced and an expense is recognized. Some examples include supplies, insurance, and depreciation.

3.2.4. Unearned revenues: These are customer advanced payments for product or services yet to be provided. When the company provides the product or service, revenue is then recognized.

3.2.5. Accrued revenues: Accrued revenues are revenues earned in a period but have yet to be recorded and no money has been collected

3.2.6. Accrued expenses: Accrued expenses are incurred in a period but have yet to be recorded and no money has been paid.

3.3. Record and Post the Common Types of Adjusting Entries

3.3.1. Rules for adjusting entries: The rules for recording adjusting entries are as follows: every adjusting entry will have one income statement account and one balance sheet account, cash will never be in an adjusting entry, and the adjusting entry records the change in amount that occurred during the period. Posting adjusting entries: Posting adjusting entries is the same process as posting general journal entries. The additional adjustments may add accounts to the end of the period or may change account balances from the earlier journal entry step in the accounting cycle.

3.4. Use the Ledger Balances to Prepare an Adjusted Trial Balance

3.4.1. The adjusted trial balance lists all accounts in the general ledger, including adjusting entries, which have nonzero balances. This trial balance is an important step in the accounting process because it helps identify any computational errors throughout the first five steps in the cycle.

3.5. Prepare Financial Statements Using the Adjusted Trial Balance

3.5.1. Income Statement: The income statement shows the net income or loss as a result of revenue and expense activities occurring in a period. Statement of Retained Earnings: The statement of retained earnings shows the effects of net income (loss) and dividends on the earnings the company maintains. Balance Sheet: The balance sheet visually represents the accounting equation, showing that assets balance with liabilities and equity. 0-column worksheet: The 10-column worksheet organizes data from the trial balance all the way through the financial statements.

4. 2:Introduction to Financial Statements

4.1. Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate

4.1.1. Financial statements provide financial information to stakeholders to help them in making decisions.

4.1.2. There are four financial statements: income statement, statement of owner’s equity, balance sheet, and statement of cash flows

4.1.3. The income statement measures the financialperformanceof the organization for a period of time. The income statement lists revenues, expenses, gains, and losses, which make up net income (or net loss).

4.1.4. The statement of owner’s equity shows how the net worth of the organization changes for a period of time. In addition to showing net income or net loss, the statement of owner’s equity shows the investments by and distributions to owners

4.1.5. The balance sheet shows the organization’s financialpositionon a given date. The balance sheet lists assets, liabilities, and owners’ equity. .

4.1.6. The statement of cash flows shows the organization’s cash inflows and cash outflows for a given period of time. The statement of cash flows is necessary because financial statements are usually prepared using accrualaccounting, which records transactions when they occur rather than waiting until cash is exchanged

4.2. Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses

4.2.1. Assets and liabilities are categorized into current and noncurrent, based on when the item will be settled. Assets and liabilities that will be settled in one year or less are classified as current; otherwise, the items are classified as noncurrent.

4.2.2. Assets are also categorized based on whether or not the asset has physical substance. Assets with physical substance are considered tangible assets, while intangible assets lack physical substance

4.2.3. The distinction between current and noncurrent assets and liabilities is important because it helps financial statement users assess the timing of the transactions.

4.2.4. Three broad categories of legal business structures are sole proprietorship, partnership, and corporation, with each structure having advantages and disadvantages.

4.2.5. The accounting equation is Assets = Liabilities + Owner’s Equity. It is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources.

4.2.6. Owners’ equity can also be thought of as the net worth or value of the business. There are many factors that influence equity, including net income or net loss, investments by and distributions to owners, revenues, gains, losses, expenses, and comprehensive income.

4.3. Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet

4.3.1. There are ten financial statement elements: revenues, expenses, gains, losses, assets, liabilities, equity, investments by owners, distributions to owners, and comprehensive income.

4.3.2. There are standard conventions for the order of preparing financial statements (income statement, statement of owner’s equity, balance sheet, and statement of cash flows) and for the format (three-line heading and columnar structure).

4.3.3. Financial ratios, which are calculated using financial statement information, are often beneficial to aid in financial decision-making. Ratios allow for comparisons between businesses and determining trends between periods within the same business.

4.3.4. Liquidity ratios assess the firm’s ability to convert assets into cash. Working Capital (Current Assets – Current Liabilities) is a liquidity ratio that measures a firm’s ability to meet current obligations. The Current Ratio (Current Assets/Current Liabilities) is similar to Working Capital but allows for comparisons between firms by determining the proportion of current assets to current liabilities.