Chapter 1 Accounting In Action
statement of cash flows
A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time. includes total revenues, total expenses, total of investing activities (purchase of equipment and supplies) and the difference between the investments made by owner and drawings; will also include the cash amount at the beginning of the period; final result is total cash at the end of the period
examples of liabilities
Accounts Payable, Unearned Service Revenue, Notes Payable, Salaries Payable
examples of assets
Cash, Supplies, Land, Equipment, Accounts Receivable
trial balance
a list of accounts and their balances at a given time to prove the equity of the ledger
compound entry
affects 3 or more accounts
steps of the recording process
analyze each transaction for its affects on the account, enter the transaction information in the journal and transfer the journal information to the appropriate accounts ledger
accounting equation
assets= liabilities + owner's equity (liabilities is first because these must be paid first if the business was to fail)
recording process
begins with the transaction, business documents such as sales slips, a check, a bill or a cash register tape
Owner's capital statement
consists of investments and net income minus owners drawings, you will use the final amount from the income statement to calculate this; A financial statement that summarizes the changes in owner's equity for a specific period of time
the ledger
contains the entire group of accounts maintained by a company with name and balance of account
credits
decrease assets, increase liabilities
journalizing
entering transactions in the journal
three steps of accounting
identifying, recording and communicating
debits
increase assets; decrease liabilities
simple entry
involves two accounts, one debit one credit
account
is an individual accounting record of increases and decrease in a specific asset, liability or owner equity item; consists of three parts title, left or debit side, and right or credit side
chart of accounts
lists the accounts and the accounts number that identify their location in the ledger. Accounts are usually numbered starting with the balance sheet accounts followed by income statement accounts.
asset accounts
normally show a debit balances; debits to a specific asset account should exceed credits to that account
liability accounts
normally show credit balance; credits to a liability account should exceed debits to that account
liabilities
obligations of a company
Withdrawal
owner taking assets from the business for personal use
investment
owner transferring personal assets to the business
owner's equity
owner's claim to the assets
assets
resources owned by the company that will benefit beyond the current period
balance sheet
shows all assets, liabilities, and Owner' equity. on the top will be all assets including cash, accounts receivable, supplies, and equipment which will give total assets. liabilities is any liability of the company and includes accounts payable and the final amount is owner's capital. (used the amount from owner's capital statement) the top and bottom amounts should be equal; A financial statement that reports the assets, liabilities, and owner's equity at a specific date.
income statement
shows the net income for the month, total revenue minus total expenses equals total income. consists of service revenue, salaries and wages expenses, rent expense, advertising expense, utilities expense; A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
identifies
the economic events relevant to the business
records
the events in order to provide a history of its financial activities.
journal
the journal is referred to as the book or original entry; general journal has spaces for dates, account titles, and explanation references and two amount columns
posting
transferring journal entries to the ledger accounts; this phase of the recording process accumulates the effects of journalized transactions into individual accounts
four components of owners equity
withdrawals, Investments, Revenue and Expenses (WIRE)
Expenses
costs incurred to generate revenues
Revenue
generated by performing services or selling goods
normal balance
is on the side of an account where an increase in the account is recorded