Accounting CH2

3. Identify each of the following as either an asset, a liability, or equity: a) prepaid rent, b) unearned fees, c) building, d) wages, e) office supplies

3. Assets= ace; Liabilities= bd; Equity=

8. What types of transactions increase equity and which decrease it

8. Equity is increased by revenues and by owner investments. Equity is decreased by expenses and owner withdrawals

Calendar year companies

Businesses whose accounting year begins Jan 1 and ends Dec 31

Double-entry accounting

Demands the accounting equation must remain in balance

Asset account

Includes asset, cash, accounts receivable, notes receivable, prepaid accounts, supplies accounts, equipment accounts, building accounts, and land

1. Identify examples of accounting source documents

1. Examples of source documents are sales tickets, checks, purchase orders, charges to customers, bills from suppliers, employee earnings records, and bank statements

10. For each transaction, double-entry accounting requires which of the following? a) debits to asset accounts must create credits to liability or equity accounts, b) a debit to a liability account must create a credit to an asset account, or c) total debits must equal total credits

10. C

12. Explain what a compound journal entry is

12. A compound journal entry affects three or more accounts

13. Why are posting reference numbers entered in the journal when entries are posted to ledger accounts

13. Posting reference numbers are entered in the journal when posting to the ledger as a cross-reference that allows the record-keeper or auditor to trace debits and credits from one record to another

14. Where are dollar signs typically entered in financial statements

14. At a minimum, dollar signs are placed beside the first and last numbers in a column. It is also common to place dollar signs beside any amount that appears after a ruled line to indicate that an addition or subtraction has occurred

15. If a $4,000 debit to Equipment in a journal entry is incorrectly posted to the ledger as a $4,000 credit, and the ledger account has a resulting debit balance of $20,000, what is the effect of this error on the Trial Balance column totals

15. The equipment account balance is incorrectly reported at 20k- it should be 28k. The effect of this error understates the trial balance's debit column total by 8k. This results in an 8k difference between the column totals

16. Describe the link between the income statement and the statement of owner's equity

16. An income statement reports a company's revenues and expenses along with the resulting net income or loss. A statement of owner's equity reports changes in equity, including that from net income or loss. Both statements report transactions occurring over a period of time

17. Explain the link between the balance sheet and statement of owner's equity

17. The balance sheet describes a company's financial position (assets, liability, and equity) at a point in time. The capital amount in the balance sheet is obtained from the statement of owner's equity.

18. Define and describe revenues and expenses

18. Revenues are inflows of assets in exchange for products or services provided to customers as part of the main operations of a business. Expenses are outflows or the using up of assets that result from providing products or services to customers

19. Define and describe assets, liabilities, and equity

19. Assets are the resources a business owns or controls that carry expected future benefits. Liabilities are obligations of a business, representing the claims of others against the assets of a business. Equity reflects the owner's claims on the assets of the business after deducting liabilities

2. Explain the importance of source documents

2. Source documents serve many purposes, including record-keeping and internal control. Source documents, especially if obtained from outside the organization, provide objective and reliable evidence about transactions and their amounts

4. What is an account? What is a ledger

4. An account is a record in an accounting system that records and stores the increases and decreases in a specific asset, liability, equity, revenue, or expense. The ledger is collection of all the accounts of a company

5. What determines the number and types of accounts a company uses

5. A company's size and diversity affect the number of accounts in its accounting system. the types of accounts depend on information the company needs to both effectively operate and report its activities in financial statements

6. Does debit always mean increase and credit always mean decrease

6. No. Debit and credit both can mean increase or decrease. The particular meaning in a circumstance depends on the type of account. For example, a debit increases the balance of an asset, wzhitdrawals, and expense accounts, but it decreases the balance of liability, capital, and revenue accounts

7. Describe a chart of accounts

7. A chart of accounts is a list of all of a company's accounts and their identification numbers

9. Why are accounting systems double-entry

9. The name double-entry is used because all transactions affect at least two accounts. There must be at least one debit in one account and at least on credit in another accounts

Trial balance

A [ ] is a list of accounts from the ledger showing their debits or credit balances in separate columns. The trial balance is a summary of the ledger's contents and is useful in preparing financial statements and is revealing record-keeping errors.

Financial leverage

A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage

Unearned revenue

A liability that is settled in the future when a company delivers its products or services

A2 Compute the debt ratio and describe its use in analyzing financial condition

A2 A company's debt ratio is computed as total liabilities divided by total assets. It reveals how much of the assets are financed by creditor (non-owner) financing. The higher this ratio, the more risk a company faces because liabilities must be repaid at specific dates

Balance column account (p 58)

Actual accounting systems need more structure. Has a column with the balance of the account after each entry is recorded. The heading of the balance column does not show whether it is a debit or a credit balance. Instead, an account is assumed to have a normal balance.

Accused liabilities

Are amounts owed that are not yet paid Examples include wages payable, taxes payable, and interest payable

Creditors (p 52)

Are individuals and organizations that have rights to receive payments from a company. If a company fails to pay its obligations, the law gives creditors a right to force the sale of that company's assets to obtain the money to meet creditor's claims. Any remaining money goes to the owners of the company. A loan is less risky if the borrower's liabilities are smaller in comparison to assets because this means there are more resources than claims on resources

C1 Explain the steps in processing transactions and the role of source documents

C1 The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and prepares information useful in making decisions. Transactions and events are the starting points in the accounting process. Source documents identify and describe transactions and events. Examples are sales tickets, checks, purchasing orders, bills, and bank statements. Source documents provide objective and reliable evidence, making information more useful. The effects of transactions and events are recorded in journals. Posting along with a trial balance helps summarize and classify these effects

C2 Describe an account and its use in recording transactions

C2 An account is a detailed record of increases and decreases in a specific asset, liability, equity, revenue, or expense. Information from accounts is analyzed, summarized, and presented in reports and financial statements for decision makers

C3 Describe a ledger and a chart of accounts

C3 The ledger or general ledger is a record containing all accounts used by a company and their balances. It is referred to as the books. The chart of accounts is a list of all accounts and usually includes an identification number assigned to each account

C4 Define debits and credits and explain double-entry accounting

C4 Debit refers to left, and credit refers to right. Debits increase assets, expenses, and withdrawals who credits decrease them. Credits increase liabilities, owner capital, and revenues; debits decrease them. Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows the accounting equation. The left side of the account is the normal balance for assets, withdrawals, and expenses, and the right side is the normal balance for liabilities, capital, and revenues

Correcting entry

Corrects an error by removing an amount from the wrong account and recording it in the correct

Equity accounts

Equity is affected by owner's capital, owner's withdrawals, revenues, and expenses

Journal

Gives a complete record of each transaction in one place.

Accounting process

Identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements

Source documents

Identify and describe transactions and events entering the accounting process.

General journal (p 56)

Includes date of transaction, title of affected accounts, $ amount of each debit and credit, and an explanation of the transaction

Chart of accounts

Is a list of all ledger accounts and includes an identification number assigned to each account

General ledger

Is a record containing all accounts used by a company

Debit balance

Is when the sum of debit exceeds the sum of credits

Liability accounts

Liabilities, creditors, accounts payable, and notes payable

Trial balance

List of accounts and their balances at a point in time

Fiscal accounting year

One-year reporting period

P1 Record transactions in a journal and post entries to a ledger

P1 Transactions are recorded in a journal. Each entry in a journal is posted to the accounts in the ledger. This provides information that is used to produce financial statements. Balance column accounts are widely used and include column for debits, credits, and the account balance

Abnormal balance

Refers to balance on the side where decreases are recorded. Identified by circling it or by entering it in red or some other unusual color

Financial statements

Report on financial performance and condition of an organization

Statement of owner's equity

Reports information about how equity changes over the reporting period. Dollar signs are not used in journals and ledgers. Visual practice is to put dollar signs below only the first and last numbers in a column

T-accounts

Represents a ledger account and is a tool used to understand the effects of one or more transactions.

Normal balance

Side for assets is the left side Side for liabilities and equity is the right side. Equity increases from revenues and owner investments and it decreases from expenses and other withdrawals

P3 Prepare financial statements from business transactions

The balance sheet, the statement of owner's equity, the income statement, and the statement of cash flows use data from the trial balance and other financial statements for their preparation

Account balance (p 55)

The difference between total debits and credits for an account, including any beginning balance

Journalizing (p 56)

The process of recording transactions in a journal

Posting

The process of transferring journal entry information to the ledger

Debt ratio

Total liabilities divided by total assets

A1 Analyze the impact of transactions on accounts and financial statements

We analyze transactions using concepts of double-entry accounting. This analysis is performed by determining a transaction's effects on accounts. Theses effects are recorded in journals to ledgers

Credit balance

When the sum of credits exceeds the sum of debits

Zero balance

When the sum of debits equals the sum of credits. For an account is usually shown by writing zeros or a dash in the balance column to avoid confusion between a zero balance and one omitted in error

Unadjusted statement

Will need further adjustments. Balance sheet is the financial position at a point in time. The income statement is the financial position in a period of time

Account

record of increases and decreases in a specific asset, liability, equity, revenue, or expense item