Chapter 1 Accounting In Action

statement of cash flows

A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time. includes total revenues, total expenses, total of investing activities (purchase of equipment and supplies) and the difference between the investments made by owner and drawings; will also include the cash amount at the beginning of the period; final result is total cash at the end of the period

examples of liabilities

Accounts Payable, Unearned Service Revenue, Notes Payable, Salaries Payable

examples of assets

Cash, Supplies, Land, Equipment, Accounts Receivable

trial balance

a list of accounts and their balances at a given time to prove the equity of the ledger

compound entry

affects 3 or more accounts

steps of the recording process

analyze each transaction for its affects on the account, enter the transaction information in the journal and transfer the journal information to the appropriate accounts ledger

accounting equation

assets= liabilities + owner's equity (liabilities is first because these must be paid first if the business was to fail)

recording process

begins with the transaction, business documents such as sales slips, a check, a bill or a cash register tape

Owner's capital statement

consists of investments and net income minus owners drawings, you will use the final amount from the income statement to calculate this; A financial statement that summarizes the changes in owner's equity for a specific period of time

the ledger

contains the entire group of accounts maintained by a company with name and balance of account

credits

decrease assets, increase liabilities

journalizing

entering transactions in the journal

three steps of accounting

identifying, recording and communicating

debits

increase assets; decrease liabilities

simple entry

involves two accounts, one debit one credit

account

is an individual accounting record of increases and decrease in a specific asset, liability or owner equity item; consists of three parts title, left or debit side, and right or credit side

chart of accounts

lists the accounts and the accounts number that identify their location in the ledger. Accounts are usually numbered starting with the balance sheet accounts followed by income statement accounts.

asset accounts

normally show a debit balances; debits to a specific asset account should exceed credits to that account

liability accounts

normally show credit balance; credits to a liability account should exceed debits to that account

liabilities

obligations of a company

Withdrawal

owner taking assets from the business for personal use

investment

owner transferring personal assets to the business

owner's equity

owner's claim to the assets

assets

resources owned by the company that will benefit beyond the current period

balance sheet

shows all assets, liabilities, and Owner' equity. on the top will be all assets including cash, accounts receivable, supplies, and equipment which will give total assets. liabilities is any liability of the company and includes accounts payable and the final amount is owner's capital. (used the amount from owner's capital statement) the top and bottom amounts should be equal; A financial statement that reports the assets, liabilities, and owner's equity at a specific date.

income statement

shows the net income for the month, total revenue minus total expenses equals total income. consists of service revenue, salaries and wages expenses, rent expense, advertising expense, utilities expense; A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.

identifies

the economic events relevant to the business

records

the events in order to provide a history of its financial activities.

journal

the journal is referred to as the book or original entry; general journal has spaces for dates, account titles, and explanation references and two amount columns

posting

transferring journal entries to the ledger accounts; this phase of the recording process accumulates the effects of journalized transactions into individual accounts

four components of owners equity

withdrawals, Investments, Revenue and Expenses (WIRE)

Expenses

costs incurred to generate revenues

Revenue

generated by performing services or selling goods

normal balance

is on the side of an account where an increase in the account is recorded