AC210 - Chapter 2 - Reporting Investing and Financing Results on the Balance Sheet

What are current liabilities?

debts and other obligations that will be paid or fulfilled within 12 months of the balance sheet date.

duality of effects

every transaction has at least two effects on the basic accounting equation

What do companies list Assets by?

in order of Liquidity, How soon they will be used or turned into cash.

What do companies list Liabilities by?

in order of Maturity, How soon they will be paid in cash or fulfilled by providing a service,

What are Long term Liabilities?

include debt that will be paid in more than one year of the balance sheet date.

What are Long Term Assets?

include resources that will be used or turned into cash more than 12 months after the balance sheet date.

What is a T-account?

simplified form of an account, shows debits and credits of a time period.

what is the Normal Balance?

the balance that appears on the increase side of an account

what is a Journal Entry?

these record a company's economic transactions (using debits & credits). a. Date, At least 1 debit & 1 credit (must equal!), amounts, description/notes b. Debits appear first; credits are written below the debits and are indented to the right (words and amounts).

What are current assets?

things that will be used up or converted into cash within the next 12 months.

What are the subcategories of a Classified Balance Sheet?

Current Assets, Current Liabilities, Long Term Assets, Long Term Liabilities.

What is the formula for Current Ratio?

Current assets/Current Liabilities. Current Assets(divided by) Current Liabilities.

What does Current Ratio do?

a. It is used to evaluate liquidity, which is the ability to pay liabilities as they come due in the short run. b. A higher current ratio generally means a better ability to pay.

What is on the Right side of a T account?

(CREL) Credit, Revenue, Equity, Liabilities. For these 4 aspects the RIGHT is the normal balance.

What is on the Left side of a T account?

(DEAD) Debit, Expenses, Assets, Dividends. For these 4 aspects the LEFT is the NORMAL balance.

Review: A transaction is a business activity that affects the basic accounting equation. A company always...

1. Document its activities 2. Get and Give - Name what's exchanged (account names) 3. Determine a dollar amount for each exchange (analyze the financial affects increase and/or decrease)

Review: Transactions include 2 types of events...

1. External exchanges -- Between the company and someone else. 2. Internal events -- Occur within the company itself. C. Exchange of only promises is not an accounting transaction. D. Cost Principle - record assets at historical cost on date of transaction

What is a classified balance sheet?

1. The balance sheet is prepared by taking the ending balances for each account and grouping them as assets, liabilities, and stockholders' equity in balance sheet format. 2. A classified balance sheet contains subcategories for assets and liabilities labeled current and long-term

What is a trial balance?

1. Trial Balance checks that the accounting records are in balance by determining whether debits = credits. 2. The TB lists the ending balance in every T-account and then computes total debits and total credits

What is a ledger?

A collection of records that summarizes, for each account, the effects of transactions entered in the journal.

What is a Journal?

A record of each day's transactions.

What is accounting?

A systematic accounting process is used to capture and report the financial effects of a company's transactions.

Assets on a T Account will...

Have a normal balance (increase) on the LEFT (DEAD)

Expenses on a T account will...

Have a normal balance (increase) on the LEFT (DEAD)

Liabilities on a T account will...

Have a normal balance (increase) on the RIGHT (CREL)

Revenue on a T account will...

Have a normal balance (increase) on the RIGHT (CREL)

Stockholders Equity on a T account will...

Have a normal balance (increase) on the RIGHT (CREL)