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Title: Financial Accounting
Description: Learn everything you need to know about accounting! In these notes, it will show you how accounting is used, when it's used and what all you can do with it. It will go over debits and credits as well as many other cool things about accounting.
Description: Learn everything you need to know about accounting! In these notes, it will show you how accounting is used, when it's used and what all you can do with it. It will go over debits and credits as well as many other cool things about accounting.
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Financial Accounting Notes - Unit One
Chapter 1
1-9-19
• Accounting is a system of identifying information, recording the information and
communicating the information
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▪ Want to reduce all the paper stuff into debits and credits,
deciphering it, putting it into a debit and credit format
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▪ Manipulate the information
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o Communicate the information by balance sheets and financial
statements
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o Internal users like managers, sales staff and controllers, people that
decide and operate the company
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o Third step: make the ethical decision
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o Rationalization and pressure end up being related
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o Paul Sarbanes & Michael Oxley created this
• Dodd - Frank Wall Street Reform
o To promote accountability
o End “too-big to fail” like banks and automotive companies
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o “too-big to fail” is like government pay out, where did they get their
money? The taxpayers, the government extorted the taxpayers
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1-14-19
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Generally accepted accounting principles (US GAAP)
o The accounting rule book of how and why we do things
o Reliable, relevant and comparable information
o Why is this important?
▪ We don’t want to give our client’s wrong information
o Doing the same thing/process every time
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Principles and assumption of accounting
o Principles - measurement, full disclosure, revenue recognition, expense
recognition
▪ Measurement - cost is considered objective, what did it cost Sinclair
to have the desk in the classroom
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▪ Revenue recognition - buy something, and somebody owes
something 30 days from now
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The seller will recognize the cash today
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When earned
▪ Expenses recognition - when a company has an obligation to pay
them, buyer’s case
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o Assumptions - going concern, monetary unit, time period, business entity
▪ The Business going concern - if the business is a going concern,
the profit check is going in place
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▪ Monetary unit - the accounting record can be denominated into
currency
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▪ Time period - financial activity can be broken into months, quarters
and years
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▪ Cost benefit - is x worth the y
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• Does the disclosure cost more than the benefit?
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You have a $1 and you buy water, it cost $1 to buy that
water but a could have bought candy
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Business organization
o Proprietorship - single owner, sole owner, not business taxed
o Partnership - two or more partners, no longer a sole owner, not business
taxed
o Corporation - three or more, when capital is needed, inviting public to buy
shares in corporation, owners may hire people to be part of the day to day
stuff, limited liability
o LLCs provide higher liability protection than corporations
▪ Assets are protected
Accounting equation
o Assets = liabilities = equity
Asset - resources a company owns that have a value
Liability - things that are owed by a company, a claim by creditors against a
business
o Claims on assets by others that don’t own the company
Equity - claims on the assets by the people that own the company
Contributed capital - equity that is contributed by the owners, common stock
Retained earnings - dividends, revenues and expenses
Net income - revenues and expenses
Accounting Equation:
o
1-16-19
• Income statements- revenues - expenses
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Statement of cash flows - looking at when and how much cash moved in and out
of the entity over the period of the time
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Headings
o Company name
o Name of the statement
o Date in proper format
Balance sheet - only a specific date
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•
Account is a record of the increases and decreases in a specific/individual
account
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• Ledgers are inside of accounts
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• Journal - where to post journal entries
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• Assets - anything a company owns that is worth something or that can help them
make money
• Liabilities- something we’re going to have to give up, an outside party has a claim
against us
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1-23-19
• Debits and credits
o Dead clerk
• Debits
o D - debits increase the following: the following are normal
o E - expenses
o A - assets
o D - dividends
• Credits
o C - increase the following the following are normal
o L - liabilities
o R - revenues accounts
o C - capital accounts / equity / common stock or retained earnings
• T account
o Left side -debits
o Right side - credits
• Whatever side is normal, is the side of the account that is increasing
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• Journalizing and posting transactions
o 4 steps
Take source documents, running it through the accounting equation,
recording the journal entry, and posting it to ledger
• PR - postal reference - posting reference
1-28-19
• Summarize into a trial balance
• Balance of all debits and credits
o When adding the columns down, it should equal - if not, there’s a problem
o Summary of ending balanced in general ledger accounts created from the
journal entries
• For a statement, must have
THE COMPANY NAME
o Tell them what it is, name of the report
o Date for what the report is for
• Search for mistakes
o Make sure you add and subtract correctly
o Make sure the ledger is right
...
Use each account
once and only once
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o Balance sheet - where we show all the assets, liabilities and equity
accounts, common stock
o (Cash flows)
• Equation: Beginning balance +- activity = ending balance
o Particularly in the retained earnings
• Income statement
o revenues, expenses = net income
o Revenues - expenses = net income
• Statement of retained earnings
o You put the net income at the beginning and add retained earnings and
subtract the dividends
o You get a new retained earnings number
• For the balance sheet
o Assets, liabilities, contributed capital
▪ Put new retained earnings in equity
o Looks like the accounting equation
...
• Dollar signs are not un ledgers and journals
• First and last in the column as are going to have signs
Chapter 3
• Accounting equation - chapter 1
• Debits and credits - chapter 2
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Adjusting balance - chapter 3
Accrual
o Revenues are recognized when we have the right to get paid
o Expenses are shown when we get the benefit from what it is
Cash
o Not GAAP
▪ Generally accepted accounting principles
2-4-19
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There are four types of balance sheet accounts
o Prepaid expense
o Unearned revenue
o Accrued expense
o Accrued revenues
▪ All from the balance sheet
Principles, assumptions and constraints → where everything is linking back to,
therefore we do things
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Prepaid is an asset and gets debited
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Supplies is a prepaid
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o Recognize expenses in the period they give us benefit
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o Short term is anything less than a year
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Depreciation equation
o Asset cost - salvage value / life span
Salvage value - scrap value
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o Is often not the same value
o It’s an estimated value
Accumulated depreciation
o Contra account
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Unearned deferred revenues
We recognize revenue when we earn it/ have the right to it
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o Unrecorded receivable
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• Our right to get money in the future - receivable
o It’s an asset
o It’s increasing because we debit it
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• Paid cash before hand
o Prepaid insurance/expense
▪ At the end of each period, how much of the asset now become an
expense
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o Unearned revenues
▪ Got a customer deposit
• How much of that money have earned? how much do we
have the right to?
o Decrease liability, increase revenues
• Paid for cash after expense
▪ Accrued - cash has not changed hands, but you have the right to
the money
o Accrued expenses
▪ Uses payroll
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o Reid
• Permanent accounts
o Assets, liabilities, common stock and retained earnings
• Steps to closing
o Close credit and debit balances
• Chapters 2 - 1 thru 4
• Created journal entries
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Posted into ledgers
• From the ledgers, we got the unadjusted trial balance
• Chapter 3, looking at liabilities and asset accounts and looking for adjustments
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Takes us to adjusting process
Then we have an adjusted trial balance and we then get financial statements
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o Buying something you can hold
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• Perpetual systems
o Updates the accounting record after every purchase or sale
• Periodic
o Only updates the end of the accounting cycle
• Credit period is typically a 30-day window
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o Allow the buyer to pay less than the invoice
o If you pay the invoice in the time of the discount
• Buyer for discount- purchase discount
o Seller - sales discount
The numbers will be the same
Purchase discounts:
• 2/10, n/30
o How are credit terms are displayed?
o from the invoice date, you have 10 days to pay 2%, but the net is due in
30 days
• 1/15, n/45
o 15 days the 1% discount is available and 45 is the end of the credit period
• ⅗, n/15
o 3% discount in 5 days and the whole thing is due in 15 days
• On account - credit transaction
• Credit terms - am I the buyer or the seller
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• Purchase returns - want your money back
o Reduce accounts payable
• Allowances: inducement by seller for the buyer to keep the product
• Fob - free on board
o When does title of the property pass?
o When does the piece of property stop being the seller’s property and
becomes the buyer’s property?
o Depends on the shipping terms
o Need to know the shipping point, the seller's loading dock and the buyers
loading dock
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• Title is so important because it’s the buyer’s risk
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• Depending if you’re a buyer or a seller, the journal entries will be different
• Gross profit - net sales minus cost of goods sold
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• Revenues transaction and cost transaction for the seller
• Seller has sales discounts
• Buyer has purchase discount
• Sales discount - contra revenue account
o Contra account - the opposite of what it’s containing to
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• Sales returns and allowance
o Merchandise got returned to the seller
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o Allowance
▪ Reduce the selling price
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▪ Sell must record the net effect
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For a merchandiser
• Things that might not match up
o Theft (shrink)
o Damaged and you might not document it
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• Sales is a revenue account
• Take all credit balance accounts and debit to zero amounts in the income
summary
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• Balance sheet and income statement is what adjusting entries must impact
o What is the balance and what should it be?
o Is it increasing or decreasing?
o Find the other account and do the opposite
• Liquidity - current assets and how quickly can we make stuff into cash
o What can we sell to make cash?
o Can you convert it to cash?
o What are the liabilities we’re going to pay first?
• Notes payable are long term debts and less liquid
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• Goods on consignment
o You retain merchandise but somebody else is selling it for you
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• We’re looking at the matching principle
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o Matching costs with sales
• Management needs to decide
o What inventory are we going to use on a basis?
▪ Anything necessary to get the item ready to be sold
o Choose a costing methodology
o Do a periodic or perpetual inventory
o Use of market values or other estimates
• Most companies use fifi, recognizing their oldest cost first
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o You cannot switch methodologies
o You better have a reason why you’re changing
• Accounting information had to be arc, reliability, relevant and comparable
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• If we have a rising cost curve, we’re probably going to keep it historical, not going
to do a write up to cost
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• Lower cost or market can be applied for three ways
o Each item
o Major categories
o Whole inventory
• Why are we doing this?
o If I had to replace the units today what would the market be today?
• We use lock based on the conservatism principle, not going to overstate the
value of our assets
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• Another concept to come up with cost
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Inventory turnover=
o Costs of goods sold/ average inventory
o Get average by (beg inventory add ending inventory) /2
▪ Number of times per year we turn over our inventory
o Wants the turnover number to be High because it means you’re moving
inventory quickly
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Chapter 6
• Chapters 6 -11 are All about balance sheet accounts
o How do I make individual adjusting entries to determine the correct
balance?
• Internal control system
test question!
o Policies managers use to protect assets, ensure reliability accounting,
uphold policies and promote efficient operations
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o Puts restrictions on publicly traded company
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o Private - privately held by a group of people
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o This was to protect consumers that were buying stock, beef up internal
controls process, protect the investors
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o Who does what?
o Maintaining records
▪ RCRA
▪ Reliable, comparable, relevant
o Insure assets & bond key employees
▪ Bandings - protecting assets from employees stealing
o Separate record keeping from custody of assets
o Divide responsibility for related transactions
o Applying technological controls
o Perform regular and independent reviews
▪ 3rd person
Technology pros
• Technology should be able to reduce errors
• Increase ecommerce
• Testing of the records
• Allows for separation of duties
Technology downsides
• Not paper intensive, lost paper trail
Limitations of internal control
• Human error
o non - intentional
• Human fraud
o Intent
o You must have intent
o Usually, there’s a necessity for malicious intent
• Human fraud, triple threat
o Pressure, opportunity, rationalization
Control of cash
• The person handling cash needs to be separate from whose accounting it
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• Cash over short - typically an expense account, debit balance
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Plug account that is used to force cash and sales to balance
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o Also track, who is on the register and see a trend
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o Cashier deposits the money in a bank
▪ Needs to go to the bank asap
o The recordkeeper record the amounts received in the accounting records
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o Create the account petty cash
▪ Take money out of cash
• Two accounts used - petty cash and cash
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▪ Imp rest - fixed dollar amount, balance
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Setting it up or increasing and decreasing is the only time you make a
petty cash journal entry
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Bank reconciliation:
• Two account balance
o Bank side and general ledger
o Two numbers are normally not the same
o Looking at bank statement to see what activity is not on the general ledger
number
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• Balance from bank statement and book balance
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• Post to individual sub ledgers and to controlling account
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• Advantage to seller - they get their cash right away
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• Installment sale - circumstance where you pay overtime and there’s an
interest charge over time
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o Reduce account receivable account
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o Recovering bad debts - we do two journal entries
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• Allowance method
o Does a better job to matching them up?
o What are we going to collect?
o At the end of each period, we estimate total bad debt expense for
that period’s sales
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o Bad debt account used once
o Credit allowance for doubtful accounts
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▪ Uncollectible accounts
o Write it off to allowance
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Matching vs materiality
• Matching principle
o Expenses be recorded in the same accounting period as the sales they
helped produced
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o Target number does not amount of adjustment
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• Aging of receivables method
o Classify each receivable by how long it’s past due
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Like unearned revenue
o Current and long term
▪ Current - anything due within a year
▪ long term- anything due after a year
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• Required to recognize expenses when incurred
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Uncertainty of liabilities
o Who to pay?
o When to pay
o How much to pay
• Current known liabilities
o Accounts payable, sales tax payable, unearned revenue, short-term
note payable, payroll liabilities, multi-period known liabilities
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o Date of the note
o End of period
o Maturity date
• Computing employee payroll
• State unemployment tax- insurance program
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Wrongfully terminated, you have the right to file for unemployment
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• Warranty plans are hard because we have estimate those by experience on
those warranty coverages
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• Contingent liabilities
o Before this occurs, something else must happen
o Not liable for it until court says you are
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• Disclosure to public and/if probable, can I quantify the dollar amount
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• Contingent expense, an amt I’m going to have to pay in
the future
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you’re also going to have to know how to close
the note out, close the payable and expense account out as well
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Method (THIS WILL NOT BE ON THE TEST)
o Aging
o Percent of sales
▪ Income statement focused account driven by matching
principle
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• Disposal
o Depreciation, selling asset, calculate the remaining depreciation
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”
o Cost account when done disposing - 0 amount
o Accumulated depreciation amount -0 amount
o Cost less ad for net book value
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▪ Proceeds less than net book value - loss
▪ Same amount - broke even
Chapter 9
• Know the knuckles, know how many days are in each month
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o
Unit Four - Financial Accounting
Chapter 10
• Long term notes payable
o There can be a payment at the end or there can be payments from the note
date to the note maturity date
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And then pay principle at the end
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• The value tables allow you to compute how much interest there is
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More of the loan goes to
principal
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• Mortgage
o Includes other assets at stake, borrowing
o They’re collateralized
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Give the lender security
that they’re going to get something in return
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• Convertible - converting to stock
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Term - pay it all at the end
Serial - payments over the course of the time
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o Separate from owner
o Has rights and privileges
▪ To engage in contracts, all the rights to an individual
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o Has the right to free speech
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• Article of corporation - the max number of shares a company could issue
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• Outstanding - how many shares are held by shareholders
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If they’re the
same, there’s no treasury stock
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• Bonds, record stock at par or stated value
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o Meant as a mathematical place holder to give us a dollar amount
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• Par and stated at interchangeable
• Common stock transaction journal entry
o you get cash, - what do you get? Most likely a debit
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o Common stock will be a credit
o Common and preferred - the exam will have more
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o Paid - in capital
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o Contained - running net income
• Retained earnings
o Net income, running total
Title: Financial Accounting
Description: Learn everything you need to know about accounting! In these notes, it will show you how accounting is used, when it's used and what all you can do with it. It will go over debits and credits as well as many other cool things about accounting.
Description: Learn everything you need to know about accounting! In these notes, it will show you how accounting is used, when it's used and what all you can do with it. It will go over debits and credits as well as many other cool things about accounting.