Accounting 211

Debit and Credit rules

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Numbering system for chart of accounts

1. Assets, 2. Liabilities, 3. Stockholders' equity, 4. Revenues, 5. Expenses

types of accounts requiring adjusting

1. Prepaid expenses 2. Unearned revenues 3. Accrued revenues 4. Accrued expenses

Ledger

A group of accounts for a business entity.

Chart of accounts

A list of accounts in the ledger. The list of accounts are normally listed in the order they appear in which they appear in the financial statements. The balance sheet accounts are listed first, in the order of assets, liabilities and stockholders' equity. The income statements accounts are then listed in the order of revenues and expenses.

Balance sheet

A list of the assets, liabilities, and stockholders equity as of a specific date, usually at the close of the last day or a month or a year. The data presented in this sheet is for a specific date.

Statement of cash flows

A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. The data presented in this sheet is for a period of time.

Retained earnings

A summary of the changes in retained earnings that have occurred during a specific period of time, such as a month or a year. The data presented in this sheet is for a period of time.

Income statement

A summary of the revenue and expenses for a specific period of time, such as a month or a year. The data presented in this sheet is for a period of time.

Trial balance

A way to detect any errors made during the process of posting credits and debits from the journal to the ledger.

Financial statements

Accounting reports providing information about recorded and summarized transactions. These reports are prepared for users.

Account

Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record.

Dividends account

An account representing the distribution of earnings to stockholders.

T account

An account used to show the increases and decreases in various elements of the accounting equation. The left side of the account is the debit side and the right side is the credit side.

Journal entry

An entry in the journal.

Expenses

Assets used in the process of earning revenue. Reduce assets and stockholders' equity.

Liabilities

Debts owed to outsiders (creditors). Liabilities are often identified on the balance sheet by titles that include "payable." Examples of liabilities are accounts payable, notes payable, and wages payable. Cash received before services are delivered creates a liability to perform services. The future service commitments are called "unearned revenue." Examples of unearned revenue include magazine subscriptions, tuition, etc.

Dividends

Distribution of earnings to stockholders. The payment of dividends decreases cash and stockholders' equity.

Normal balance of an account

Either a debit or a credit depending on whether increases in the account are recorded as debits or credits. For example, since asset accounts are increased with debits, asset accounts have a normal debit balance. Liability accounts have normal credit balances. Stockholders' equity accounts have normal credit balances. Revenue accounts have normal credit balances. Expenses have normal debit balances. Dividends have normal debit balances.

Account receivable

Fees earned on account. Instead of receiving cash at the time services are provided or merchandise is sold, a business accepts payment at a later date. (AN ASSET). The revenue is earned and recorded as if cash had been received. When customers pay their account, cash increases and accounts receivable decreases.

ALL Financial statements:

Identified by the name of the business, the title of the statement and the date or period of time.

Revenues

Increases in stockholders' equity as a result of selling services or products to customers. Examples of revenue include fees earned, fares earned, commissions revenue and rent revenue.

Assets

Resources owned by the business entity. These can be physical or intangible items. Physical items include cash and supplies, while intangibles include patent rights, copyrights and trademarks. Assets also include accounts receivable, buildings, equipment, prepaid expenses (insurance), and land.

Expenses

Result from using up assets or consuming services in the process of generating revenues. Examples of expenses include wages expense, rent expense, utilities expense, supplies expense, and miscellaneous expense.

Interest revenue

Revenue earned from interest.

Fees earned

Revenue earned from providing services.

Rent revenue

Revenue earned from rent.

Sales

Revenue earned from the sale of merchandise.

Capital stock

Shares of ownership distributed to investors of a cooperation. It represents the portion of stockholders' equity contributed by investors.

Prepaid expenses

The advance payment of future expenses. Recorded as assets when they are paid. Becomes an expense overtime. Supplies, prepaid advertising and prepaid interest are all examples of prepaid expenses.

The adjusting process

The analysis and updating of accounts at the end of the period before the financial statements are prepared.

Adjusting entries

The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries. All adjusting entries affect at least one income statement account and one balance sheet account. Thus, an adjusting entry will always involve a revenue or an expense account and an asset or a liability account.

Journalizing

The process of recording a transaction in the journal.

Stockholders' equity

The rights of the owners. Classified as capital stock and retained earnings.

Retained earnings

The stockholders' equity created from business operations through revenue and expense transactions. Dividends reduce retained earnings since it is the distribution of earnings to stockholders.

Stockholders' equity / owner's equity

The stockholders' right to the assets of the business. Stockholders' equity is represented by the balance of the capital stock and retained earnings accounts.

Double-entry accounting system

This system is based on the accounting equation and requires: 1. Every business transaction to be recorded in at least two accounts. 2. The total debits recorded for each transaction to be equal to the total credits recorded.