Accounting Final
steps to analyze the effect of a business transaction
1. Describe the financial event. Identify the property. Identify who owns the property. Determine the amount of increase or decrease. 2. Make sure the equation is in balance.
credit memorandum
A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved.
sales allowance
A reduction in the price originally charged to customers for goods or services.
Accounting Cycle
A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.
stock
A share of ownership in a corporation. Issued in the form of stock certificates
Income summary account
A special owner's equity account that is used only in the closing process to summarize the results of operations.
post-closing trial balance
A statement that is prepared to prove the equality of total debits and credits after the closing process is completed
Accounts receivable ledger
A subsidiary ledger containing only accounts for charge customers
open account credit
A system that allows the sale of services or goods with the understanding that payment will be made at a later date.
permanent accounts
Account kept open from one period to the next
temporary accounts
Account whose balance is transferred to another at the end of a period
What are the 4 accounts associated with the trial balance?
Accumulated depreciation, supplies expense, rent expense, depreciation exp equiptment
If the trial balance section has a credit balance and the entry in the adjustment section is a credit then:
Add the amounts
If the trial balance section has a debit balance and the entry in the adjustment section is a debit then:
Add the amounts
straight line depreciation
Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life.
Depreciation
Allocation of the cost of a long term asset to operations during its expected useful life
Control account
An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger.
contra account
An account with a balance that is opposite, or "contra," to that of its related accounts.
contra revenue account
An account with a debit balance, which is contrary to the normal balance for a revenue account.
contra asset account
An asset account with a credit balance, which is contrary to the normal balance of an asset account.
List price
An established retail price.
salvage value
An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life
periodic inventory system
An inventory system in which the merchandise inventory balance is only updated when a physical inventory is taken.
Drawing account
An owners equity account set up to record withdrawals
Fundamental Accounting Equation
Assets = Liabilities + Owner's Equity
What are the only accounts on the post closing trial balance?
Assets, liabilities, owners equity.
Difference in gross/net payroll earnings
Gross pay: amount before taxes Net: after all deductions
Charge-Account Sales
Sales made through the use of open-account credit or one of various types of credit cards.
Liability Accounts
Shows the debt of the business
Owners equity
Shows the owners financial interest in a business
If the trial balance section has a debit balance and the entry in the adjustment section is a credit then:
Subtract the credit
If the trial balance section has a credit balance and the entry in the adjustment section is a debit then:
Subtract the debit
Book Value
That portion of an asset's original cost that has not yet been depreciated.
If an account only shows one amount then...
The amount is the balance
If the total on the left side is larger then...
The balance is recorded on the left
If the total on the right side is larger than the total on the left side then:
The balance is recorded on the right side
net sales
The difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account.
perpetual inventory system
an inventory system that tracks the inventories on hand at all times
Business transaction
any financial event that changes the resources of a firm
What type of account is accounts receivable?
asset/sales
Asset Accounts
cash, supplies, equipment
Right side of T account
credit
Liabilities
debts or obligations of a business
Account balance
the difference between the amounts on the two sides of the account.
Owner's Equity
The financial interest of the owner of a business; also called proprietorship or net worth.
net price
The list price less all trade discounts.
Accounting
The process of planning, recording, analyzing, and interpreting financial information.
discount on credit card sales
a fee charged by the credit card companies for processing sales made with credit cards
special journal
a journal used to record only one kind of transaction
Chart of accounts
a list of accounts used by a business
trade discount
a reduction in the list price
Sales journal
a special journal used to record only sales of merchandise on account
prepaid expenses
Expense items acquired, recorded, and paid for in advance of their use.
public corporation
a corporation whose stock anyone may buy, sell, or trade
What are the 4 steps in the closing process?
1. Transfer the balance of the revenue account to the Income Summary account. Debit each revenue account and credit income summary. 2. Transfer the expense account balances to the Income Summary account. Debit Income Summary and credit each expense account. 3. Transfer the balance of the Income Summary account to the owner's capital account. If you have net income, debit income summary and credit capital. If you have net loss, debit capital and credit incomne summary. 4. Transfer the balance of the drawing account to the owners capital account. Debit capital and credit drawing.
What are the steps in the accounting cycle?
1. analyze transactions 2. Journalize the data about transactions 3. Post the data about transactions 4. Prep a worksheet 5. Prep financial statements 6. Journalize and post adjusting entries 7. Journalize and post closing entries 8. Prepare a postclosing trial balance 9. Interpret the financial information
Account Form Balance Sheet
A balance sheet that lists assets on the left and liabilities and owner's equity on the right.
Report Form Balance Sheet
A balance sheet that lists the asset accounts first, followed by liabilities and owner's equity.
Corporation
A business entity that is separate from its owners and has a legal right to own property and do business in its own name
Sole Proprietorship
A business owned by one person, unlimited liability
wholesale business
A business that manufactures or distributes goods to retail businesses or large consumers such as hotels and hospitals.
retail business
A business that sells directly to individual consumers.
manufacturing business
A business that sells goods that it has produced.
service business
A business that sells services
Sales Returns and Allowances
A contra revenue account where sales returns and sales allowances are recorded; sales returns and allowances are subtracted from sales to determine net sales.
invoice
A customer billing for merchandise bought on credit.
sales return
A firm's acceptance of a return of goods from a customer.
Worksheet
A form used to gather all data needed at the end of an accounting period to prepare financial statements.
Balance sheet
A formal report of a business financial condition on a certain date; reports the assets, liabilities and owners equity of the business.
Income Statement
A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses.
Statement of Owner's Equity
A formal report of changes that occurred in the owner's financial interest during a reporting period.
subsidiary ledger
A ledger dedicated to accounts of a single type and showing details to support a general ledger account.
schedule of accounts receivable
A listing of all balances of the accounts in the accounts receivable subsidiary ledger.
What type of contra account is accumulated depreciation?
Contra asset - accumulated depreciation
What type of contra account is sales returns and allowances?
Contra revenue account
Left side of T account
Debit
Expense T-Account
Debit + Credit -
Liabilities T-Account
Debit: decrease / credit: increase
Owner's Equity T Account
Debit: decrease / credit: increase
Revenue T-Account
Debit: decrease / credit: increase
Asset T-Account
Debit: increase / credit: decrease
Owners drawing account T
Debit: increase / credit: decrease
What is debited and credited during a sales return
Debit: sales returns and allowances Debit: sales tax payable Credit: Accounts receivable Posted in general journal
Components of Owner's Equity
Investments by the owner Withdrawals by the owner for personal use Revenue Expenses
Classification
Is a means of identifying each account as an asset, Liability, or owners equity
capital account
Is an owners equity account
Adjusting entries
Journal entries made to update accounts for items that were not recorded during the accounting period
Closing entries
Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero.
How does depreciation get recorded?
Not recorded as expense at time of purchase - recorded as an asset and charged to expense over time asset is used for business
4 types of credit
Open account credit - personal Business credit cards - large dept stores(retail) Bank credit cards - Mastercard/visa(retail) Cards issued by credit card companies - issued by firms or subsidiaries (hotels/restaurants)
Auditing
The review of financial statements to assess their fairness and adherence to generally accepted accounting principles.
GAAP (Generally Accepted Accounting Principles)
The standards and rules that accountants follow while recording and reporting financial activities.
Merchandise Inventory
The stock of goods a merchandising business keeps on hand.
If the account contains entries on only one side then...
The total of those entries is the balance
Interpret
To understand and explain the meaning and importance of somethjng
What two things do closing entries accomplish?
Transfer results of operations to owners equity Reduce revenue, expense, and drawing accounts to zero
All financial statements must include a heading containing
Who - name of business What - the name of the financial statement When - the specific period or date
Partnership
a business owned by two or more people who share its risks and rewards
Assets
property or items of value owned by a business
Asset Accounts
show the property a business owns