Chapter 2 Terms

Balance Sheet Accounts (real accounts/permanent accounts)

assets, liabilities, and SE They are not subclassifications or subdivisions of any other account. Permanent accounts do not have their balances transferred to any other account at the end of the accounting period.

Accrual Basis of Accounting

Revenues are recognized when the company makes a sale or performs a service, regardless of when the company receives the cash. Expenses are recognized when they are incurred, whether or not the company has paid out cash.

Vertical Analysis

Shows the percentage that each item in a financial statement is of some significant total such as total assets or sales.

Income Statement Accounts (nominal or temporary accounts)

Subclassifications of stockholders' equity accounts. Expenses, Revenues, Dividend accounts

Account

Used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense.

Normal Balances

Assets, Expenses, and Dividend accounts generally have a debit balance. Liability, Capital Stock, Retained Earnings, and Revenue accounts normally have credit balances.

Accounting Cycle

1. Analyze Source Documents 2. Journalize Transactions 3. Ledger 4. Trial Balance 5. Financial Statements 6. Journal Adjusting Entries 7. Journal Closing Entries 8. Post-Closing Trial Balance

Steps in Recording and Posting the Effects of Business Transactions

1. Business Transaction 2. Source Document 3. Journal Entry 4. Ledger

Chart of Accounts

A complete listing of the titles and numbers of all the accounts in the ledger.

Trial Balance

A listing of the ledger accounts and their debit or credit balances to determine that debits equal credits in the recording process. Accounts appear in this order: A, L, SE, Div, Rev, Exp

Double-Entry Procedure

Accounting requirement that requires each transaction be recorded by an entry that has equal debits and credits.

Other Expenses

Advertising, Gas & Oil, Salaries, Utilities expenses incurred in the current period (E)

Service Revenue

Amounts earned by performing training services for customers (R)

Accounts Payable

Amounts owed to creditors for items purchased from them. (L)

Accounts Receivable

Amounts owed to the company by customers (A)

Unearned Service Fees

Amounts received from customers before the training services have been performed for them. (L)

Note

An unconditional written promise to pay to another party the amount owed either when demanded or at a specific date, usually with interest at a specified rate.

Cash

Bank deposits and cash on hand. (A)

Journal

Chronological record of business transactions

Recording Changes in Revenues and Expenses in T-Acounts

Credit increases in revenues; debit increases in expenses. This is because revenues increase retained earnings (in SE) and expenses decrease retained earnings (in SE)

Recording Changes in Dividends

Debit increases in dividends; this is because they decrease SE

T-Account

Debits on the left hand side, credits on the right hand side.

Prepaid Insurance

Insurance policy premiums paid in advance of the periods for which the insurance coverage applies. (A)

Supplies on Hand

Items and other materials used in performing training services for customers or in doing administrative and clerical office work. (A)

Compound Journal Entries

Journal entries for transactions involving more than one debit and or/credit

Simple Journal Entries

Journal entries involving one debit and one credit

Journal Entry

Recording that shows all of the effects of a business transaction as expressed in debit(s) and credit(s)

Prepaid Rent

Rent paid in advance of the periods for which the rent payment applies (A)

Horizontal Analysis

The calculation of dollar and/or percentage changes from one year to the next in an item on financial statements. Meaningful because we can see changes that have occurred over time for a company's statements

General Ledger

The complete collection of all the accounts of a company.

Retained Earnings

The earnings retained in the business. (SE)

Debit

The left side of any account; when used as a verb, to enter a dollar amount on the left side of an account. Debits increase asset, expense, and dividend accounts, and decrease liability, stockholder's equity, and revenue accounts.

Credit

The right side of any account; when used as a verb, to enter a dollar amount on the right side of an account. Credits increase liability, stockholders' equity, and revenue accounts and decrease asset, expense, and Dividends accounts.

Capital Stock

The stockholder's investment in a business (SE)

Debit Balance

The sum of debits exceeds the sum of the credits in any T-Account

Credit Balance

The sum of the credits exceed the sum of the debits in any T-Account

Debiting an Asset (ex. Prepaid Rent) vs. Debiting an Expense (Rent Expense)

Whenever a company will not fully use up an item such as insurance, rent, or supplies in the period when purchased, it usually debits an asset.