Chapter 2

Business transaction

A financial event that changes the resources of a firm

Balance Sheet

A formal report of a business's financial condition on a certain date; reports the assets, liabilities, and owner's equity of the business

Income statement

A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses

Statement of owner's equity

A formal report of changes that occurred in the owner's financial interest during a reporting period

Break Even

A point at which revenue equals expenses

What are examples of liabilities?

Accounts Payable

Accounts Payable

Amounts a business must pay in the future

On account

An arrangement to allow payment at a later date; also called a charge account or open-account credit

revenue

An inflow of money or other assets that results from the sales of goods or services or from the use of money or property; also called income

expense

An outflow of cash, use of other assets, or incurring of a liability

equity

An owner's financial interest in a business

If an owner gives personal tools to the business, how is the transaction recorded?

As an additional investment by the owner recorded on the basis of fair market value.

What information does the balance sheet contain?

Assets Liabilities Owner's equity

What is the difference between buying for cash and buying on account?

Buying for cash results in an immediate decrease in cash; buying on account results in a liability recorded as accounts payable.

What are examples of assets?

Cash, AR, Supplies, Equipment, Prepaid Rent.

Accounts Receivable

Claims for future collection from customers

liabilities

Debts or obligations of a business

capital

Financial investment in a business; equity

withdrawals

Funds taken from the business by the owner for personal use.

A new business is starting out operating at a loss. What recommendations would you make?

Make a projection of income and expenses to determine how much new business will be needed to earn an income. Make sure they have an organized financial record keeping procedure.

Assets

Property owned by a business

What effect does revenue and expenses have on owner's equity?

Revenue increases owner's equity. Expenses decrease owner's equity.

What information is shown in the heading of a financial statement?

The business name The type of financial statement The period of time

Fair market value

The current worth of an asset or the price the asset would bring if sold on the open market

Owner's equity

The financial interest of the owner of a business; also called proprietorship or net worth

In what order are the financial statements prepared and why?

The income statement is prepared first because the net income or loss is needed to complete the statement of owner's equity. The statement of owner's equity is prepared next to update the change in owner's equity. The balance sheet is prepared last and the number from the change in owner's equity is incorporated.

Fundamental accounting equation

The relationship between assets and liabilities plus owner's equity

Net loss

The result of an excess of expenses over revenue

Net income

The result of an excess of revenue over expenses

True or False: The total amount of liabilities doesn't include inventory.

True

True or false: Services or goods sold on account is reflected as revenue.

True

Is the rent paid for future months an asset or expense?

asset