Ch 2

Net income ______ retained earnings.

increases

account payable "on account"

indicates that the company does not pay cash immediately but promises to pay cash in the future.

External transactions

Transactions the firm conducts with a separate economic entity.

receivable

"to be received in the future." Thus, the Accounts Receivable account is a record of specific people and companies from whom we expect to receive cash in the future.

Expanded Accounting Equation

Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends

Six Steps in Measuring External Transactions

1. Use source documents to identify accounts affected by an external transaction 2. Analyze the impact of the transaction on the accounting equation 3. Assess whether the transaction results in a debit or credit to account balances 4. Record the transaction in a journal using debits and credits 5. Post the transaction to the general ledger 6. Prepare a trial balance

three steps for analyzing the effect of transactions in the correct order.

1. determine 1 account in the accounting eq that in increase or decrease 2. Determine a 2nd acount in the acct eq that will inc or dec 3. confirm assets are equal to liabilities plus stockholders equity

Journal:

A chronological record of all transactions affecting a firm.

General Ledger

A collection of each account with its individual transactions and resulting account balance.

Chart of accounts

A list of all account names used to record transactions of a company.

Trial balance:

A list of all accounts and their balances at a particular date, showing that total debits equal total credits.

Account

A record of the business activities related to a particular item

liability accounts

Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable.

Accounts receivable are assets which represent

Amounts owed by customers

t-account

An simplified version that is used informally for analysis instead of drawing a formal general ledger account is referred to as a:

Basic Accounting Equation

Assets (resources) = Liabilities (creditors claims)+ Stockholders' Equity (owners claims) *must always remain in balance: The left side (assets) equals the right side (liabilities plus stockholders' equity).

prepaid rent

Because the rent paid is for occupying space in the future, we record it as an asset representing a resource of the company

Stockholders' equity accounts

Common Stock and Retained Earnings

stockholder equity accounts

Common stock Retained earnings

Effects of Debit and Credit on Each Account Type

DEALOR -In accounting terminology, debit means left, and credit means right. Let's split DEALOR into its left and right side. The three accounts on the left, or debit, side of DEALOR—Dividends, Expenses, and Assets—increase with a debit and decrease with a credit. In contrast, the three accounts on the right, or credit, side—Liabilities, Owners' (stockholders') equity, and Revenues—increase with a credit and decrease with a debit.

Pluto Inc. borrows $3,000 from Second National Bank by signing a promissory note. Recording this transaction will include which of the following?

Debit cash Credit note payable

Carnival Company issues common stock to investors for $50,000. Which of the following is used to record this transaction?

Debit cash; credit common stock.

Resnick purchases supplies on account. Which of the following is used to record this transaction?

Debit supplies; credit accounts payable.

What is the effect of dividends on retained earnings

Decrease

Which type of account is increased with a debit?

Expense

subtract expenses and dividends to calculate retained earnings

Expenses reduce net income, and dividends represent a distribution of net income to stockholders. Both expenses and dividends reduce stockholders' claims to the company's resources. Therefore, an increase in expenses or dividends has the effect of decreasing stockholders' equity in the basic accounting equation.

Debit and Credit Effects on Accounts in the Basic Accounting Equation

For the basic accounting equation (Assets = Liabilities + Stockholders' Equity), assets (left side) increase with debits. Liabilities and stockholders' equity (right side) increase with credits. The opposite is true to decrease any of these accounts.

Accounting cycle

Full set of procedures used to accomplish the measurement/communication process of financial accounting.

Price Company provides cleaning services to customers for $10,000 cash. What are the effects of this transaction on the accounting equation? (Select all that apply.) Multiple select question.

Increase assets Increase retained earnings

LMN Enterprises performs accounting services for a client for $3,000 cash. What is the effect on the accounting equation?

Increase assets and increase retained earnings

What effect does revenue have on retained earnings?

Increases

What is the effect of net income on retained earnings

Increases retained earnings

Debit

Left side of an account. Indicates an increase to asset, expense, or dividend accounts, and a decrease to liability, stockholders' equity, or revenue accounts.

Revenue recognition principle:

Record revenue in the period in which we provide goods and services to customers for the amount the company is entitled to receive.

three components of retained earnings

Revenues, expenses, and dividends

Credit:

Right side of an account. Indicates a decrease to asset, expense, or dividend accounts, and an increase to liability, stockholders' equity, or revenue accounts.

add revenues to calculate retained earnings

That's because revenues increase net income, and net income increases stockholders' claims to resources. Therefore, an increase in revenues has the effect of increasing stockholders' equity in the basic accounting equation.

Journal entry

The format used for recording business transactions. -The important point is that for each journal entry, total debits must equal total credits. -For the account credited, be sure to indent both the account name and the amount.

accounts receivable

When a customer does not immediately pay for services with cash, we traditionally say the services are performed "on account,"

Trial Balance

a list of accounts and their balances at a given time

If a transaction decreases cash by $100, the balance sheet will balance if which of the following occurs?

another asset in increased, a liability is decreased

Tabor Company issues $20,000 of common stock to investors. Recording this transaction will include a credit to

common stock.

Dividends paid to stockholders will cause retained earnings to

decrease

Expenses will cause retained earnings to

decrease

Credits increase revenues, whereas debits increase

expenses and dividends.

asset accounts

include Cash, Supplies, and Equipment.

Stockholders' equity is increased by revenues because revenues increase

net income.

deferred revenue

receiving cash in advance from customers creates an obligation for the company to perform services in the future. This future obligation is a liability (or debt)

Notes Payable

represent amounts owed to creditors

An increase in revenues increases net income, which results in an increase to

retained earnings

Which type of account is increased with a credit?

revenue

components of calculating net income

revenues, expenses

The type of information included in an account includes

the account title. columns for debits and credits.

Posting

the procedure of transferring journal entry amounts to the ledger accounts

compound transactions

transactions that affect more than two accounts