Accounting Final

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steps to analyze the effect of a business transaction

1. Describe the financial event. Identify the property. Identify who owns the property. Determine the amount of increase or decrease. 2. Make sure the equation is in balance.

credit memorandum

A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved.

sales allowance

A reduction in the price originally charged to customers for goods or services.

Accounting Cycle

A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.

stock

A share of ownership in a corporation. Issued in the form of stock certificates

Income summary account

A special owner's equity account that is used only in the closing process to summarize the results of operations.

post-closing trial balance

A statement that is prepared to prove the equality of total debits and credits after the closing process is completed

Accounts receivable ledger

A subsidiary ledger containing only accounts for charge customers

open account credit

A system that allows the sale of services or goods with the understanding that payment will be made at a later date.

permanent accounts

Account kept open from one period to the next

temporary accounts

Account whose balance is transferred to another at the end of a period

What are the 4 accounts associated with the trial balance?

Accumulated depreciation, supplies expense, rent expense, depreciation exp equiptment

If the trial balance section has a credit balance and the entry in the adjustment section is a credit then:

Add the amounts

If the trial balance section has a debit balance and the entry in the adjustment section is a debit then:

Add the amounts

straight line depreciation

Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life.

Depreciation

Allocation of the cost of a long term asset to operations during its expected useful life

Control account

An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger.

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts.

contra revenue account

An account with a debit balance, which is contrary to the normal balance for a revenue account.

contra asset account

An asset account with a credit balance, which is contrary to the normal balance of an asset account.

List price

An established retail price.

salvage value

An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life

periodic inventory system

An inventory system in which the merchandise inventory balance is only updated when a physical inventory is taken.

Drawing account

An owners equity account set up to record withdrawals

Fundamental Accounting Equation

Assets = Liabilities + Owner's Equity

What are the only accounts on the post closing trial balance?

Assets, liabilities, owners equity.

Difference in gross/net payroll earnings

Gross pay: amount before taxes Net: after all deductions

Charge-Account Sales

Sales made through the use of open-account credit or one of various types of credit cards.

Liability Accounts

Shows the debt of the business

Owners equity

Shows the owners financial interest in a business

If the trial balance section has a debit balance and the entry in the adjustment section is a credit then:

Subtract the credit

If the trial balance section has a credit balance and the entry in the adjustment section is a debit then:

Subtract the debit

Book Value

That portion of an asset's original cost that has not yet been depreciated.

If an account only shows one amount then...

The amount is the balance

If the total on the left side is larger then...

The balance is recorded on the left

If the total on the right side is larger than the total on the left side then:

The balance is recorded on the right side

net sales

The difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account.

perpetual inventory system

an inventory system that tracks the inventories on hand at all times

Business transaction

any financial event that changes the resources of a firm

What type of account is accounts receivable?

asset/sales

Asset Accounts

cash, supplies, equipment

Right side of T account

credit

Liabilities

debts or obligations of a business

Account balance

the difference between the amounts on the two sides of the account.

Owner's Equity

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

net price

The list price less all trade discounts.

Accounting

The process of planning, recording, analyzing, and interpreting financial information.

discount on credit card sales

a fee charged by the credit card companies for processing sales made with credit cards

special journal

a journal used to record only one kind of transaction

Chart of accounts

a list of accounts used by a business

trade discount

a reduction in the list price

Sales journal

a special journal used to record only sales of merchandise on account

prepaid expenses

Expense items acquired, recorded, and paid for in advance of their use.

public corporation

a corporation whose stock anyone may buy, sell, or trade

What are the 4 steps in the closing process?

1. Transfer the balance of the revenue account to the Income Summary account. Debit each revenue account and credit income summary. 2. Transfer the expense account balances to the Income Summary account. Debit Income Summary and credit each expense account. 3. Transfer the balance of the Income Summary account to the owner's capital account. If you have net income, debit income summary and credit capital. If you have net loss, debit capital and credit incomne summary. 4. Transfer the balance of the drawing account to the owners capital account. Debit capital and credit drawing.

What are the steps in the accounting cycle?

1. analyze transactions 2. Journalize the data about transactions 3. Post the data about transactions 4. Prep a worksheet 5. Prep financial statements 6. Journalize and post adjusting entries 7. Journalize and post closing entries 8. Prepare a postclosing trial balance 9. Interpret the financial information

Account Form Balance Sheet

A balance sheet that lists assets on the left and liabilities and owner's equity on the right.

Report Form Balance Sheet

A balance sheet that lists the asset accounts first, followed by liabilities and owner's equity.

Corporation

A business entity that is separate from its owners and has a legal right to own property and do business in its own name

Sole Proprietorship

A business owned by one person, unlimited liability

wholesale business

A business that manufactures or distributes goods to retail businesses or large consumers such as hotels and hospitals.

retail business

A business that sells directly to individual consumers.

manufacturing business

A business that sells goods that it has produced.

service business

A business that sells services

Sales Returns and Allowances

A contra revenue account where sales returns and sales allowances are recorded; sales returns and allowances are subtracted from sales to determine net sales.

invoice

A customer billing for merchandise bought on credit.

sales return

A firm's acceptance of a return of goods from a customer.

Worksheet

A form used to gather all data needed at the end of an accounting period to prepare financial statements.

Balance sheet

A formal report of a business financial condition on a certain date; reports the assets, liabilities and owners 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.

subsidiary ledger

A ledger dedicated to accounts of a single type and showing details to support a general ledger account.

schedule of accounts receivable

A listing of all balances of the accounts in the accounts receivable subsidiary ledger.

What type of contra account is accumulated depreciation?

Contra asset - accumulated depreciation

What type of contra account is sales returns and allowances?

Contra revenue account

Left side of T account

Debit

Expense T-Account

Debit + Credit -

Liabilities T-Account

Debit: decrease / credit: increase

Owner's Equity T Account

Debit: decrease / credit: increase

Revenue T-Account

Debit: decrease / credit: increase

Asset T-Account

Debit: increase / credit: decrease

Owners drawing account T

Debit: increase / credit: decrease

What is debited and credited during a sales return

Debit: sales returns and allowances Debit: sales tax payable Credit: Accounts receivable Posted in general journal

Components of Owner's Equity

Investments by the owner Withdrawals by the owner for personal use Revenue Expenses

Classification

Is a means of identifying each account as an asset, Liability, or owners equity

capital account

Is an owners equity account

Adjusting entries

Journal entries made to update accounts for items that were not recorded during the accounting period

Closing entries

Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero.

How does depreciation get recorded?

Not recorded as expense at time of purchase - recorded as an asset and charged to expense over time asset is used for business

4 types of credit

Open account credit - personal Business credit cards - large dept stores(retail) Bank credit cards - Mastercard/visa(retail) Cards issued by credit card companies - issued by firms or subsidiaries (hotels/restaurants)

Auditing

The review of financial statements to assess their fairness and adherence to generally accepted accounting principles.

GAAP (Generally Accepted Accounting Principles)

The standards and rules that accountants follow while recording and reporting financial activities.

Merchandise Inventory

The stock of goods a merchandising business keeps on hand.

If the account contains entries on only one side then...

The total of those entries is the balance

Interpret

To understand and explain the meaning and importance of somethjng

What two things do closing entries accomplish?

Transfer results of operations to owners equity Reduce revenue, expense, and drawing accounts to zero

All financial statements must include a heading containing

Who - name of business What - the name of the financial statement When - the specific period or date

Partnership

a business owned by two or more people who share its risks and rewards

Assets

property or items of value owned by a business

Asset Accounts

show the property a business owns


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