Accounting Exam 1 (Ch 1,2,3)

Asset Accounts

Assets are resources owned or controlled by a company and that have expected future benefits. Most accounting systems include (at a minimum) separate accounts for the assets described, such as cash, accounts receivable, note receivable, and prepaid accounts.

Equity Accounts

The owner's claim on a company's assets is called equity or stockholders' equity, or shareholders' equity. Equity is the owner's residual interest in the assets of a business after deducting liabilities.

The Matching Principle

aims to record expenses in the same accounting period as the revenues that are recognized as a result of those expenses. This matching of expenses with the revenue benefits is a major part of the adjusting process.

Debt Ratio

Debt Ratio= Total Liabiliies/ Total Assets Evaluates the level of debt risk A higher ratio indicates that there is a greater probability that a company will not be able to pay it's debt in the future

Equity Accounts

Common stock Dividends Revenues Expenses

Common Standards in formatting in accounting

Dollar signs are not used in journals and ledgers Dollar signs appear in financial statements and other reports such as trail balances. The usual practice is to put dollar signs in the first and last numbers in the column When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. Commas are always used in financial statements. Companies commonly round amounts in reports to the nearest dollar, or even to a higher level.

Examples of Prepaid Expenses

Examples: Prepaid rent, Prepaid insurance

4 steps in posting journal entry

Identify debit account in Ledger: enter date, journal page, amount, and balance Enter the debit account number from the Ledger in the PR column of the journal. Identify the credit account in Ledger: enter date, journal page, amount, and balance Enter the credit account number from the Ledger in the PR column of the journal. Journalize it then post in the general ledger

Transactions to financial systems

Identify each transaction and event from source documents. Analyze each transaction and event using the accounting equation. Record relevant transactions and events in a journal. Post journal information to ledger accounts. Prepare and analyze the trial balance and financial statements.

4 income statements

Income Statement: Reports revenues less expenses along with resulting net income or loss over period of time due to earnings activities Statement of Retained Earnings: reports how equity changes over the reporting period from net income (or loss) and from any dividends over a period of time. Balance sheet: 1.reports the financial position (types and amounts of assets, liabilities, and equity) at a point in time.

T Accounts

Left side of t account-> Debit Right Side of T account-> Credit

Liability Accounts

Liability accounts - Liabilities are claims (by creditors) against assets, which means they are obligations to transfer assets or provide products or services to other entities. Creditors often use a balance sheet to help decide whether to loan money to a company. A loan is less risky if the borrower's liabilities are small in comparison to assets because this means there are more resources than claims on resources.

Three steps in preparing a trial balance

List each account title and its amount (from ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely) Compute the total of debit balances and the total of credit balances Verify (prove) total debit balances equal total credit balances.

Annual Financial Statements

Reports covering a one-year period

Journalizing and Posting transactions

Step 1: Identify transactions and source documents Step 2: Analyze transactions using the accounting equation Step 3: Record a journal entry Step 4: Post entry to ledger

Searching for Errors

Step 1: Verify that the trial balance columns are correctly added Step 2: Verify that account balance are accurately entered from the ledger Step 3: See whether a debit (or credit) balance is mistakenly listed in the trial balance as credit or debit Re compute each account balance in the ledger Verify that each journal entry is properly posted Verify that the original journal entry has equal debits and credits

The Accounting Period

To provide timely information, accounting systems prepare reports at regular intervals

(What is an) Account

a record of increases and decreases in a specific asset, liability, equity, revenue, or expense. The general ledger is a record of all accounts used by the company.

Prepaid Accounts

also called prepaid expenses, are assets that represent prepayments of future expenses (expenses expected to be incurred in one or more future accounting periods). When the expenses are later incurred, the amounts in prepaid accounts are transferred to expense accounts. Examples include prepaid insurance, prepaid rent, and prepaid services.

Accural Basis Accounting

applies adjustments so that revenues are recognized when services and products are delivered, and expenses are recognized when incurred (matched with revenues).

Accounts Receivable

are held by a seller and refer to promises of payment from customers to sellers. These transactions are often called credit sales or sales on account (or on credit).

Prepaid Expenses

assets paid for in advance of receiving their benefits

Basic Accounting Equation

basic accounting equation - Assets are equal to Liabilities plus Equity. The equity section is composed of the owner's capital account and the owner's withdrawal account as well as revenues and expenses.

Liabilities

claims by creditors against assets, which means they are obligations to transfer assets or provide products or services to others.

Leder

collection of all accounts and their balances for an accounting system. A company's size and diversity of operations affect the number of accounts needed.

Interim Financial Statements

covering one, three, or six months of activity.

Source Documents

identify and describe transactions and events entering the accounting system. They can be in either hard copy or electronic form. Examples are sales tickets, checks, purchase orders, bills from suppliers, employee earnings records, and bank statements. Source documents, especially if obtained from outside the organization, provide objective and reliable evidence about transactions and events and their amounts.

Creditors

individuals and organizations that have rights to receive payments from a company.

Adjusting Entries

made at the end of an accounting period to reflect a transaction or event adjusting entry affects one or more income statement accounts and one or more balance sheet accounts (but never cash accounts)

Cash Basis Accounting

recognizes revenues when cash is received and records expenses when cash is paid. This means that cash basis income is the difference between cash receipts and cash payments.

Cash

reflects a company's cash balances. It includes money and any funds that a bank accepts for deposit (coins, checks, money orders, and checking account balances).

Revenue Recognition Principle

requires that revenue be recorded when goods or services are provided to customers and at an amount expected to be received from customers.