Acct2051 Exam 1

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The dual effects concept can be best described as follows:

When one records a transaction in the accounting system, at least 2 effects on the basic accounting equation will result

Journal Entry

Debits must = Credits

PP&E

Non-current Asset

Accounts Payable

Liability

Taxes Payable

Liability

Wages Payable

Liability

Expense

to decrease shareholder's equity immediately

Accounts Receivable

Asset

Cash

Asset

Intangible assets (acquired externally)

Asset

Inventory

Asset

Long-Term Investments

Asset

Prepaid Expenses

Asset

Short term-investment

Asset

Accounting Equation

Assets = Liabilities + Owner's Equity

Accrued Expenses

Cash is paid or received after expenses or revenues are recognized

Accrued Revenues

Cash is paid or received after expenses or revenues are recognized

Prepaid Expense

Cash is paid or received before expenses or revenues are recognized

Unearned Revenues

Cash is paid or received before expenses or revenues are recognized

Revenues are recognized if they are both

Earned, Realized

Which of the following describes how assets are listed on the balance sheet?

From most liquid to least liquid

Debits

Left

If a publicly traded company is trying to maximize its perceived value to decision makers external to the corporation, the company is most likely to understate which of the following on the balance sheet?

Liabilities

Matching Principle

Recognizes expenses when incurred; recording of expenses in the same time period as the related revenues are recognized

Accrual basis of accounting

Revenue is recognized when earned. Costs should be recognized as expenses in the period in which the related revenues are recognized.

Credits

Right

Contributed Capital

Shareholder's equity

Retained Earnings

Shareholder's equity

Cash basis of accounting

Transactions are recorded (recognized) when cash is received or disbursed. The comparison of cash inflows and outflows during a period rests on the chronology rather than causality

All income statement accounts

begin the next period with zero balances

Assets with a long life span...

can have their cost spread out over the life of the asset

Balance sheet accounts

carry over from period to period and are called permanent accounts

Cost Recovery

concept by which some purchases of goods or services are recorded as assets (capitalized) and expired/consumed later, because the costs are expected to be recovered in future periods

capitalize

purchases of goods or services are recorded as assets and "expired" later because the goods or services are expected to provide benefits in future periods

Deferrals

receipts of assets or payments of cash in advance of revenue or expense recognition

Revenue Recognition Principle

recognizes revenues when earned

Capitalization

recording the purchase as a long-term asset and then delay the recognition of the expense

The closing process

refers to the 'zeroing out' of revenue and expense accounts by transferring their ending balances to retained earnings

Accruals

revenues earned or expenses incurred that have not been previously recorded


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