Chapter 2

liability

something owed to another business entity

revenues

the amount a business charges customers for products sold or services performed

business entity concept

the concept that nonbusiness assets and liabilities are not included in the business entity's accounting records

expenses

the decrease in assets (or increase in liabilities) as a result of efforts to produce revenues

drawing

withdrawals that reduce owner's equity as a result of the owner taking cash or other assets out of the business for personal use

business transaction

an economic event that has a direct impact on the business

profit and loss statement

another name for the income statement, which reports the profitability of business operations for a specific period of time.

capital

another term for owner's equity, the amount b y which the business assets exceed the business liabilities.

statement of financial position

Another name for the balance sheet, which reports assets, liabilities, and owner's equity on a specific date.

accounting equation

Consists of the three basic accounting elements: Assets = Liabilities + Owner's Equity

When total revenues exceed total expenses, the difference is called net loss. T/F

False (net income)

When an asset increases, a liability must also increase. T/F

False (other changes could occur: capital could increase, revenue could increase, etc.)

Accounts payable is an example of an asset account. T/F

False (Accounts payable is a liability)

withdrawals

Reduce owner's equity as a result of the owner taking cash or other assets out of the business for personal use.

statement of owner's equity

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

According to the business entity concept, nonbusiness assets and liabilities are not included in the business's accounting records. T/F

True

Assets are items that are owned by the business and are expected to provide future benefits. T/F

True

Expenses represent outflows of assets or increases in liabilities as a result of efforts two produce revenues. T/F

True

The accounting equation (assets = liabilities + owner's equity) must always be in balance. T/F

True

notes payable

a formal written promise to pay a supplier or lender a specified sum of money at a definite future time

liquidity

a measure of the ease with which an asset will be concerted to cash.

account

a separate record used to summarize changes in each asset, liability, and owner's equity of a business.

accounts receivable

an amount owed to a business by its customers as a result of the sale of goods or services

business entity

an individual, association, or organization that engages in economic activities and controls specific economic resources

asset

an item that is owned by a business and will provide future benefits

accounts payable

an unwritten promise to pay a supplier for assets purchased or services received.

statement of financial condition

another name for the balance sheet, which reports assets, liabilities, and owner's equity on a specific date

operating statement

another name for the income statement, which reports the profitability of business operations for a specific period of time

net worth

another term for owner's equity, the amount by which the business assets exceed the business liabilities

fiscal year

any accounting period of 12 months' duration

input

business transactions provide the necessary input for the accounting information system.

account title

provides a description of the particular type of asset, liability, owner's equity, revenue, or expense

processing

recognizing the effect of transactions on the assets, liabilities, owner's equity, revenues, and expenses of a business

balance sheet

reports assets, liabilities, and owner's equity on a specific date. It confirms that the accounting equation is in balance

income statement

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

owner's equity

the amount by which the business assets exceed the business liabilities.

accounting period concept

the concept that income determination can be made on a period basis

net loss

the excess of total expenses over total revenues for the period

net income

the excess of total revenues over total expenses for the period

output

the financial statements are the output of the accounting information system.

When delivery revenue is earned in cash, which accounts increase or decrease? (a) Cash increases; Revenue increases (b) Cash decreases; Revenue increases (c) Cash decreases; Revenue decreases (d) Cash does not change; owner's equity increases

(a) Cash increases; Revenue increases

When delivery revenue is earned on account, which accounts increase or decrease? (a) Cash increase; Revenues increases (b) Accounts Receivable increases; Revenue increases (c) Accounts Receivable increases; Revenue decreases (d) Accounts Receivable decreases; Revenue decreases

(b) Accounts Receivable increases; Revenue increases

An increase to which of these accounts will increase owner's equity? (a) Accounts Payable (b) Drawing (c) Client Fees (d) Rent Expense

(c) Client Fees

Which of the following accounts does not appear on the income statement? (a) Delivery Fees (b) Wages Expense (c) Drawing (d) Rent Expense

(c) Drawing

When payment is made on an existing debt, which accounts increase or decrease? (a) Cash increases; Accounts Receivable increases (b) Cash decreases; Accounts Payable increases (c) Cash increases; Accounts Payable increases (d) Cash decreases; Accounts Payable decreases

(d) Cash decreases; Accounts Payable decreases