ACG Chapter 3

liabilities

1. accounts payable 2. unearned revenue 3. salaries payable

the company's accounting information system analyzes each transaction to

1. identify which accounts are affected 2. how much each account is affected 3. whether the amount increases the account's balance or decreases it

A company started the year with $95,000 in its common stock account and a credit balance in retained earnings of $55,000. During the year, the company earned net income of $30,000 and declared and paid $8,000 of dividends. In addition, the company sold additional common stock amounting to $37,000. As a result, the amount of its retained earnings at the end of the year would be

77000 Ending retained earnings = Beginning Retained Earnings + Net Income - Dividends Ending retained earnings = 55,000 + 30,000 - 8,000 = $77,000

C.L.I.C.

Credit: Liability, Income, capital

credits increase

creation accounts

payment of dividend

decreases cash and decreases retained earnings

debit means

left

dividends

stock dividends

In its first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a

$2,600 debit balance. Solution: When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

example of transactions

- buying inventory from a supplier -selling inventory to a customer - paying employee's their wages - borrowing money from a bank

The following errors do not cause a trial balance to be out of balance

1. a transaction was not journalized in the journal 2. a journal entry was not posted to the ledger 3. a transaction was journalized more than once or posted more than once 4. incorrect accounts were used to journalize or post the transaction 5. offsetting errors are made in recording two or more transactions

four important rules for recording transactions

1. accounting equation must remain in balance (assets= liabilities+equity) 2. debits equal credits 3. debits increase assets 4. revenues increase equity; expenses and dividends decrease equity

the trial balance lists accounts in the order they appear on the ledger

1. assets 2. liabilities, stockholders equity 3. dividends 4. revenues 5. expenses

asset accounts

1. cash 2. accounts receivable 3. inventory 4. prepaid insurance 5. equipment 6. buildings 7. patents 8. trademarks

equities

1. common stock 2. retained earnings

equity can be split into two components

1. common stock 2. retained earnings

expenses

1. cost of goods sold 2. salaries expense 3. rent expense 4. insurance expense 5. tax expense

transactions that are not recorded in a journal or a ledger

1. hiring an employee 2. discussing new products with potential customers

income includes what accounts

1. revenue accounts 2. gain accounts

retained earnings is sometimes expanded by partioning it into components that affect it such as

1. revenues increase retained earnings 2. expenses and dividends decrease it.

revenues

1. sales revenue 2. service revenue 3. interest revenue

At the start of the month, a corporation reported retained earnings of $154,000. During the month, it incurred expenses of $20,000, earned revenues of $35,000, received $25,000 of cash from stockholders in exchange for additional common stock, and paid dividends of $3,000. What is the balance in retained earnings at the end of the month?

166000 Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $154,000 + $35,000 - 20,000 − 3,000 = $166,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: selling (i.e., issuing) additional common stock to shareholders in exchange for cash increases stockholders' equity and assets; it does not affect net income or retained earnings.

At the start of the current year, a corporation's retained earnings account had a credit balance of $282,000. During the year, the corporation earned revenues of $40,000, incurred expenses of $24,000. At the end of the year, it purchased equipment for $10,000 in exchange for a $10,000 note and it paid dividends of $4,000. What is the balance in retained earnings at the end of the year?

294000 Ending retained earnings = Beginning retained earnings + Revenues - Expenses - DividendsEnding retained earnings = $282,000 + 40,000 - 24,000 - 4,000 = $294,000Retained earnings is an equity account; it normally has a credit balance.Certain transactions do not affect retained earnings, such as borrowing money by issuing a note and purchasing equipment.

A company's financial records report the following accounts and balances at the end of the year: Accounts payable$ 4,300 Accounts receivable 5,000 Cash 14,400 Common stock 5,900 Dividends 2,500 Interest expense 18,800 Notes payable 5,500 Prepaid insurance 3,000 Retained earnings 2,700 Service revenue 25,300 What would the company show as its total credits on its trial balance?

43700 Solution:Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $43,700 (i.e., 5,000 + 14,400 + 2,500 + 3,000 + 18,800 = 43,700).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $43,700 (i.e., 4,300 + 5,900 + 5,500 + 2,700 + 25,300 = 43,700).Note: total debits equal total credits.

what are steps 5 through 9

5. Journalize and post the adjusting entries 6. prepare and adjust trial balance. this is the second trial balance 7. prepare the financial statements 8. journalize and post the closing entries 9. prepare a post-closing trial balance. this is the third trial balance

Prior to recording its closing entries, a company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $22,000 Common stock, Not given Dividends, $4,000 Expenses, $17,000 Notes payable, $3,000 Prepaid insurance, $5,000 Revenues, $28,000What is the balance of its retained earnings at the start of its second year?

7000 solution: A company starts with a retained earnings balance of zero. Retained earnings accumulates a company's net income minus its dividends for the current year and all prior years. After a company's first year, retained earnings will accumulate the company's first year's revenues minus its first year's expenses and dividends. By the start of the second year, the company will have transferred the its first year's revenue, expenses, and dividends to retained earnings. Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Ending retained earnings = $0 + 28,000 - 17,000 - 4,000 = $7,000 By the way, the company repeats this process annually transferring each year's revenues, expenses, and dividends to retained earnings.

double entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

An account is a part of a company's financial information system and is described by all except which one of the following?

An account is a source document.

A trial balance would only help in detecting which one of the following errors?

An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly.

D.E.A.D.

Debit: expense, asset, & dividends

Which of the following two accounts are both increased with debits?

Dividends and Accounts Receivable

Which of these steps occurs earliest in the accounting cycle?

Journalize the transaction

credits increase

Liabilities, Equity, Revenue

debits decrease

Liabilities, Equity, Revenue

accounting cycles

The series of accounting activities included in recording financial information for a fiscal period

A company performed services for for $1,400 of cash from a customer. The journal entry to record this transaction on the company's books will include

a credit to Service Revenue of $1,400.

which of the following events is not recorded in a company's accounting records

a decision to offer a company's services in a new geographic area

trial balance

a list of accounts and their balances at a given time

chart of accounts

a list of the accounts a given company maintains

journal

a record of each transaction in chronological order. Like a diary

if a company receives cash from a customer before performing services for the customer, then

assets increase and liabilities increase

credits decrease

assets, expenses, dividends

debit increases

assets, expenses, dividends

A company purchases office equipment in exchange for cash. This transaction will immediately affect the

balance sheet and cash flows statement only

a certain company records wages only when it pays them. Recording the payment of wages

decreases assets and decreases stockholders equity

debits increase

destination accounts

D.E.A.L.E.R.

dividends, expenses, assets, liabilities, equity, revenue

The effects of a purchase of equipment for cash on the basic accounting equation are to

increase assets and decrease assets by equal amounts

accounts being credited in a journal are

indented and under debits

transactions are recorded in what two books

journal and ledger

ledger

record of each account tracked or maintained by a company that tracks each account's dollar balance and changes in their dollar balances as a caused by transactions. more like chapters in a book

A journal is least useful for

reporting the balances of each account affected by the journal entry.

credit means

right

in the ledger what is summarized

the balance in each account

If a trial balance's two columns equal one another, it indicates

the mathematical equality of debits and credits.

posting

the procedure of transferring journal entries to the ledger accounts

the account cycle

the series of steps used by accounting information system

if a transaction affected accounts and total equity increased by 4000 then

total assets must have increased by 4000 or total liabilities must have decreased by 4000