Chapter 4 - Minimum Take-Aways 1. Chapter 4 continues to add to your vocabulary. As always, know the Key Terms listed in the chapter in your textbook. The following items are just highlights. I am going to continue to use slightly different wording at times in the classroom to better prepare you for the variety of terms used in accounting in the business world. 2. Because we use a 12 month accounting period for the income statement, the accounting cycle describes the yearly process of capturing the economic activity for a period no longer than 12 months. Companies may use a fiscal year end that is different from December. Many companies use a 52-53 week year. This means that they have 13 four week periods during the year and the end of year balance sheet date will not always be the last day of a month. For example, a 52-53 week year end with a December year end may show an accounting period ending date of January 2nd. 3. The Income Statement is an accumulation of revenue and expense activity for a period of time ending on a specific date. The maximum period of time shown on the income statement is 12 months. As noted in the Chapter 1 Take-Aways, this statement may be called Statement of Activities or similar terminology in published financial statements. 4. The Balance Sheet show the balances in the asset, liability, and equity accounts at a specific date in time. As noted in the Chapter 1 Take-Aways, this statement may be called Statement of Financial Position or similar terminology in published financial statements. 5. The retained earnings account is reduced when the company pays dividends to shareholders. 6. Closing entries are made as part of the closing process. The closing process is necessary since the income statement includes revenue and expenses for a finite period of time. At the end of twelve months the income statement accounts are zeroed out and the balances in the revenue and expense accounts formally become a part of the beginning balance in the retained earnings account for the next year. 7. The revenue and expense accounts may be referred to as temporary or nominal accounts. The balance sheet accounts continue forward year after year and may be referred to as real or permanent accounts. 8. A 12 month period of time is used to separate current assets and liabilities from long-term assets and liabilities.
Balance Sheet as of a specific date (permanent accounts) Assets - (Debit) Cash Accounts Receivable Less Allow. Doubtful Accts. Inventory Accrued Revenue Prepaid Expenses Note Receivable Fixed (tangible) Assets Less Accum. Depreciation Intangible Assets Less Accum. Amortization Indefinite Lived Intangibles Goodwill Total Assets Basic Financial Statements The Accounting Equation in Picture Form Snap shot in time. Accumulation of profit for a period of time. Liabilities - (Credit) Accounts Payable Accrued Expenses Unearned Revenue Interest Payable Sales Tax Payable Notes Payable Bond Payable Total Liabilities Equity - (Credit) Common Stock Retained Earnings (Net Income less Dividends)