Week 2 Lecture paper

School: Colorado State University, Fort Collins - Course: BUS 614 - Subject: Accounting

Video 1 This video is about concepts and steps in the accounting cycle.It is important to understand the concepts and steps in accounting.The basic concepts are understanding the general ledger (this summarizes every transaction in every account), accrual accounting (revenue is going to recognized whenever it is earned and expenses are recorded when incurred), and cash basis accounting (whenever cash is collected it is recorded and expenses are recorded when paid). Cash basis accounting is more for smaller businesses and accrual is used by most other companies.It makes it easier to read everyone's financial statements if they are using the same accounting method.Cash basis accounting can distort the financial statements as sometimes cash is not always received or paid in the period that the expense is incurred, or revenue is earned.Accrual accounting matches the revenue with the expense.This makes the information more comparable and consistent. There are four main steps in the accounting cycle: record transactions, adjust accounts, prepare statements, and close temporary accounts.It is important to adjust accounts to account for transactions that have not been recorded yet, record revenue that has been earned in the period, record expenses that have been incurred in the period, and then to correctly state the assets and liabilities on the balance sheet. Deferral accounting is an expense or revenue after cash has been exchanged as opposed to accrual accounting where the expense or revenue is recorded before cash is received.There are three rules for adjusting transactions: always hits a balance sheet account, always hits an income statement account, and never hist the cash account. We close the temporary accounts: revenue, expenses, and dividends into the retained earnings account and they set back to 0. Video 2 Financing transactions deal with debt and equity.If a client provides services but have yet to receive the cash, it goes into the accounts receivable account in assets.When any cash is collected from accounts receivable, it is an asset exchange transaction and also reports on statement of cash flows.This is where we want to see cash coming in, is the business getting assets that are turning into cash?Paid means cash and will always impact the statement of cash flows.If a company pays an operating expense, the expense goes up, cash goes down, and statement of cash flows is impacted as well.There is no transaction when you sign a contract because you haven't earned the cash yet.If a company records accrued employee salary expenses that they will pay in the next year, this would be an adjusting entry since it hits the balance sheet and income statement but does not hit the statement of cash flows.If this was not recorded the balance sheet and income statement would be wrong and companies wouldn't be able to understand what happened in that period.The closing process is to get us ready for the next season and to clear temporary accounts to 0.In the second accounting period, we are settling the expenses that were incurred but not yet paid in the previous period. This is the completion of the adjusting entry that was done.The expense was recognized before cash traded hands.We are using our assets to pay off our claims. If a company purchases on account, that is accounts payable.This is an asset source transaction.If that company at the end of the year, has unused supplies that are on hand, that

is an adjusting entry.Assets goes down and expenses go up.This hits the balance sheet and income statement but not the statement of cash flows.If a company prepays a lease or any other accounts that will carry over into the new period, a new asset account is created for prepaid rent or similar.That will have to be adjusted at the end of the period based on how many months are left.For example, a company signs a lease for one year beginning March 1 for $24,000, at the end of the period they have only used 9 months of the prepaid rent ($18,000) and the rest is deferred into the next period.At the end of the year there will be -$18,000 in prepaid rent as well as in retained earnings and expenses on income statement.The company deferred recognizing the expense for the remainder of the prepaid rent of $6,000.If a company receives cash in advance, cash goes up and liabilities goes up, it is unearned revenue.This will also hit the statement of cash flows.