Assumptions and Principles
Going Concern – An assumption which states that the entity will continue operations for enough time to use its assets for their intended purpose and to fulfill its obligations. Monetary Unit – An assumption which states that only transaction data that can be expressed in terms of money may be included in the accounting records. Economic Entity – An assumption that economic events can be identified with a particular unit of accountability. Time Period – An assumption that the economic life of a business can be divided into artificial time periods: normally a month, quarter, or year. Cost – An accounting principle which states that assets should be recorded at their original historical cost. Revenue Recognition – The principle that revenue should be recognized in the accounting period in which it is earned. Matching – The principle that efforts (expenses) should be matched with accomplishments (revenues).
Temporary ( Revenue, Expense, Drawings
Permanent ( Asset, Liability, Capital
DR. REVENUE CR. CAPITAL
DR. CAPITAL CR. EXPENSES
DR. CAPITAL CR. DRAWINGS
* Write closing entry/adjusting entry in ledger explanation.
Owner’s Capital Balance should equal ending balance on both balance sheet and statement of OE.
To evaluate a company’s LIQUIDITY:
Current Assets – Current Liabilities = Working Capital
Current Assets / Current Liabilities = Current Ratio
Tangible Assets (Physical Substance): Ex. Land, Land Improvements, Buildings, Equipment, Standing Timber, Underground Deposits of oil, gas, and minerals.
Intangible Assets (No Physical Substance): Ex. Patents, copyrights, trademarks, goodwill, franchises/licenses, research and development costs
Basket Purchase: Fair Market Value/Sum of Fair Market Values x Total Cost
Net Book Value = Cost – Accumulated Amortization
Straight Line Method
Cost – Residual Value = Amortizable Cost / Useful Life = Annual...