Accounting - chapter 2

The last step for analyzing the effect of transactions?

"Do assets equal liabilities plus stockholders' equity"

The first step for analyzing the effect of transactions is:

"What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?"

What accounts are affected by the issuance of common stock for x amount per share?

- Common stock - Cash

Price Company provides cleaning services to customers for $10,000 cash. What are the effects of this transaction on the accounting equation?

- Increase retained earnings - Increase assets An increase in Service Revenue increases stockholders' equity by increasing the retained earnings account. Therefore, the basic accounting equation remains in balance.

A(n) ______ is maintained for each financial statement item, whereas a(n) ______ contains all of the accounts of the company.

- account - general ledger

Information included in an account -

- columns for debits and credits - account title

when is company required to record revenue in the current period?

- when the company performs services on account m - When the company performs services for cash

Two functions of financial accounting:

1) Measure business activities 2) Communicate those measurements to external parties for decision-making purposes

Which of the following are stockholder equity accounts? A) Retained Earnings B) Common Stock C) Notes Payable D) Accounts receivable E) Inventory

A) Retained Earnings B) Common Stock

Which of the following contains a list of transactions affecting each account and the account's balance? A) General ledger B) General journal C) Account

General Ledger

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 An increase in Service revenue increases stockholders' equity by increasing the Retained Earnings account. Therefore, the basic accounting equation remains in balance.

How does net income affect retained earnings?

Increases, Revenues increase net income , and net income increases stockholders' claims to resources.

A chronological record of all economic events affecting a firm are recorded in a:

Journal

Computerized systems

Journal entries are instantly posted to the general ledger

what are two components for calculating net income?

Net Income = Revenues - Expenses

Shriver Corp. borrows $25,000 from a bank and signs a two-year promissory note. What accounts will be affected by this transaction and what is the effect?

Notes payable increases cash Increases

Jonathan Company's journal shows a debit to supplies and a credit to accounts payable. This means that Jonathan:

Purchased supplies on account

three components of retained earnings

Revenues, Expenses, and Dividends

External Transactions

Selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank.

The accounting equation must always remain in balance

True

Rawlings Corp. borrows $3,000 on a note payable from Third National Bank. Which of the following is used to record this transaction?

Debit cash $3000; credit note payable $3000

Expenses will cause retained earnings to..

Decrease

What is the effect of dividends on retained earnings?

Decrease

what effect does revenue have on retained earnings?

We add revenues to calculate retained earnings. Revenues increase net income, and net income increases stockholders' claims to resources. An increase in revenues has the effect of increasing stockholders' equity in the basic accounting equation.

When should revenue be recorded?

When the services are being performed.

Revenues cause retained earnings to

increase

Debit

means left, some accounts you debit to increase

credit

means right, other accounts you credit to increase

Stockholders' equity is increased by revenues because revenues increase

net income

Ursula Company's bookkeeper records revenue relating to a customer transaction. This indicates that the company

provided goods or services to a customer

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

t-account

A list of all accounts and their balances at a particular date showing that debits equal credits is referred to as a(n)

trial balance

Accounting Equation

Assets = Liabilities + Stockholders' Equity - Must always be in balance

Two components of stockholders equity are

Common stock and retained earnings

Revenue recognition principle

Companies recognize revenue at the time they provide goods and services to customers.

Retained earnings

credit account, we increase revenues with a credit

London Corp. issues 1,000 shares of stock for $20 per share. What are the effects of this transaction?

- Common stock is increased - Cash is increased Cash is a resource of the company, making it an asset. The company receives cash from investors, so cash and total assets increase. Common Stock is a stockholders' equity account. Issuing common stock to investors in exchange for cash increases the amount of common stock owned by the company's stockholders, so common stock and total srtockholders' equity increase.

Farmer, Inc. purchases a tractor for $80,000 cash. Recording this transaction will require which of the following?

- Credit cash - Debit equipment

Resnick purchases supplies on account. Which of the following is used to record this transaction? Debit cash; credit supplies. Debit supplies; credit cash. Debit supplies; credit accounts payable. Debit accounts receivable; credit supplies.

- Debit supplies; credit accounts payable.

Geo Corporation issues stock to investors for $100,000. Recording this transaction will include which of the following?

- Debit to cash - Credit to common stock

The type of information included in an account includes

- columns for debits and credits. - columns for debits and credits. the account title

Pluto Inc. borrows $3,000 from Second National Bank by signing a promissory note. Recording this transaction will include which of the following? - Debit notes receivable - Credit note payable - Credit revenue - Debit cash

- credit notes payable - debit cash

Lassiter Industries purchased equipment for $140,000. Lassiter expects to use the equipment over the next 10 years. Recording this transaction would include a

- debit to equipment $140,000.

Indigo Company's journal reveals that equipment was debited and notes payable was credited, both for $10,000. Indigo Company must have

- purchased equipment and signed a note for the purchase price

A(n) ___a___ is maintained for each financial statement item, whereas a(n) ___b___ contains all of the accounts of the company.

A) Account B) Journal

Dividends paid to stockholders will cause retained earnings to :

Decrease - An increase in expenses or dividends has the effect of decreasing stockholders' equity in the basic accounting equation. Assets = Liabilities + Stockholders' equity

manual system

Journal entries are posted periodically to the general ledger

An increase in ______ ______, which increases retained earnings, which increases stockholders' equity .

Net Income

What is the effect of expenses on retained earnings?

We SUBTRACT expenses and dividends to calculate retained earnings. Expenses reduce net income. 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.

Dividends represent:

a distribution of net income to stockholder

promissory note

a written contract with a promise to pay a supplier a specific sum of money at a definite time

Decreases in assets

as credits

Increase in assets (left-hand side accounts)

as debits

accounts receivable are

assets

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

common stock

Sinclair purchased equipment for $100,000 cash. Recording this transaction would include a

debit to equipment is $100k

True or false: A balance sheet is a list of all accounts and their balances showing that debits equals

false