Accounting I Chapter 2 Key terms

List three basic questions that must be answered when analyzing the effects of a business transaction on the accounting equation.

1) What happened? 2) Which accounts are affected? 3) How is the accounting equation affected?

Name and define the six major elements of the accounting equation.

Assets—items owned by a business and will provide future benefits. Liabilities—represent something owed to another business entity. Owner's Equity—the amount by which the business assets exceed the business liabilities. Revenues—represent the amount a business charges customers for products sold or services performed. Expenses—represent the decrease in assets (or increases in liabilities) as a result of a company's efforts to produce revenues. Withdrawals (Drawing)—reduce owner's equity as a result of the owner taking cash or other assets out of the business for personal use.

What is the function of a balance sheet?

Reports assets, liabilities, and owner's equity on a specific date.

What is the function of a statement of owner's equity?

Reports beginning capital plus net income less withdrawals to compute ending capital.

What is the function of an income statement?

Reports the profitability of business operations for a specific period of time.

What are the three basic phases of the accounting process?

These are input, processing, and output.

Why is it necessary to distinguish between business assets and liabilities and non-business assets and liabilities of a single proprietor?

These distinctions are important because they allow the owner to make decisions based on the financial conditions and results of the business apart from the non-business activities.