ACCT CLEP
When Assets are listed on the left-hand side and Liabilities and Owner's Equity are listed on the right-hand side, this is called the _______ form of the balance sheet.
Account. For example: http://www.instantcertonline.com/members2/accounting/chart1-3.gif
On January 15, LJM, Inc receives a check for $200 payment on account. ___________________ is credited $200 and Cash is debited $200.
Accounts Receivable. http://www.instantcertonline.com/members2/accounting/chart2-28.gif The asset Cash is increased (dr) and the asset Accounts Receivable is decreased (cr) thus the effect on the Accounting equation is 0 and it remains balanced.
When preparing financial statements, the account ________ must be determined.
Balances. In order to report what the value of each account is after a series of transactions, the total debits and total credits must be calculated and the final balance supplied.
In a Corporation, paid-in-capital is listed as ____________.
Common stock. This represents the amount the shareholders paid to invest in the entity. When the market value of the shares is less than the actual "paid-in" value, the difference is listed as Additional Paid-In Capital. Able Company has I million shares outstanding with a par (market) value of $2,000,000 but investors actually paid-in $5,000,000 to the entity. The Equity Section looks like this: http://www.instantcertonline.com/members2/accounting/chart1-10.gif
The ____________ concept requires that revenues are recognized only when they are reasonable certain, and expenses are recognized as soon as they are reasonably possible.
Conservatism. By taking this conservative approach, revenues are not overstated and expenses are not understated which would in-turn lead to a misstatement of net income. Example: Tom Jones orders a new vehicle in December 2000 that will be delivered in January 2001. The car dealership does not realize (record) this revenue until the car is delivered in January because there are a multitude of things could happen to hinder the final sale. The revenue is recorded for the year of 2001 not 2000. In general revenues are recognized in the period in which the goods were delivered to customers and expenses are recognized in the period they were incurred.
Equity accounts increase on the ___________ side.
Credit (CR). You can refer to it as the Credit or the CR side of the account. Equity accounts increase on the right-hand, credit (CR) side, and decrease on the left-hand or debit (DR) side. http://www.instantcertonline.com/members2/accounting/chart2-11.gif
An increase in revenue is recorded on which side of the account? ______ (CR), or right-hand side.
Credit. Revenue increases equity, equity is on the right hand side of the equation, thus an increase is recorded on the right, which is a credit.
Expense accounts increase on the __________ side.
Debit (DR). http://www.instantcertonline.com/members2/accounting/chart2-13.gif Because expenses have the effect of decreasing owner's equity, they are treated the opposite of an equity account. Expense accounts decrease on the right-hand or credit (CR) side.
A useful way to remember which side an account increases or decreases on is to identify which side of the ___________ accounting equation the account is on.
Fundamental. Assets = Liabilities + Owner's Equity For example: Assets are on the left hand side of the equation, thus an increase in assets is recorded on the left, which is a debit. Liabilities are on the right hand side of the equation, thus an increase in liabilities is recorded on the right, which is a credit. Equity is on the right hand side of the equation, thus an increase in equity is recorded on the right, which is a credit.
___________ is the total invoice price of goods sold (shipped) or services rendered during a given period.
Gross sales. Gross sales does not include taxes as that is collected on behalf of the government and is accounted for as a liability until it is paid.
Goodwill represents the premium a buyer is willing to pay for an entity over and above the value of __________.
Net assets. Goodwill represents the economic value of the entity's reputation. For example: Alby Company has $1.5 million in assets and $500,000 in liabilities. Begbie Company purchases Alby for $1.4 million. Goodwill is generated as follows: http://www.instantcertonline.com/members2/accounting/chart1-6.gif
Assets that are valuable but ___________ are called intangible assets.
Nonphysical. These assets are controlled by the company but you can not touch or feel them. Examples include goodwill, trademarks, and patents. The name Coca Cola has inherent value even though it can not be physically touched. A company's reputation may be extremely valuable in a marketplace and that value can be quantified in terms of goodwill.
LJM Inc. borrows $4,000 from a bank with 9% interest payable quarterly and a term of two years. Cash is debited $4,000, and _____________ is credited $4,000.
Notes Payable. http://www.instantcertonline.com/members2/accounting/chart2-18.gif
The claim against an entity's assets that the owner(s) has is called _______________.
Owner\'s equity. Owner's Equity represents the amount of capital that has been supplied to the entity in the form of investment (paid-in capital) and earnings (retained earnings). http://www.instantcertonline.com/members2/accounting/chart1-9.gif Owners of a public corporation are called shareholders and their claim is listed as Common or Preferred Stock.
When an account has a balance on the side opposite the one where increases are recorded, then it has a deficit balance and it is recorded as a negative number or in ___________.
Parenthesis. http://www.instantcertonline.com/members2/accounting/chart2-30.gif This cash account has a deficit balance of $1,550. Note the balance is still recorded on the debit side but as a negative entry.
The amounts that an entity owes to its suppliers resulting from the furnishing of goods or services are called accounts _______.
Payable. Accounts Payable (AP) are typically unsecured and represent the claim the suppliers (vendors) have against the entity's assets. When a bank is the specific vendor owed the payable is usually called Notes Payable or Short-Term Loan Payable or Bank Loan Payable.
Dividing the Gross Margin by the Net Sales gives the Gross Margin __________.
Percentage. This gross margin percentage indicates the average margin obtained on goods or services sold. This percentage is useful in comparing income statements between companies or from period to period within the same company. Although Gross Margin percentages vary widely from industry to industry, the value should be relatively the same in companies in the industry or between periods.
Accounting principles are based on a set of concepts that underlie accounting _________.
Practices. There are 9 basic concepts that are used to form the foundation of accounting. These concepts are the assumptions underlying the preparation of financial statements, i.e. the basic assumptions of going concern, accruals, costing, etc... When reading a financial statement prepared according to GAAP, one can be assured these principles have been adhered to.
Goods that are being held for sale or needed to _______ a saleable item or service are called inventory.
Produce. Inventories include finished product ready for sale and supplies, raw materials, and partially completed products that will be sold when finished. For example, if a car dealer owns a car intended for resale, that car is an inventory asset. If a car is owned by a courier service, that car is not an inventory asset (it is not intended for sale). Inventories are current assets.
An entity's equity increases when the owners provide capital (buy shares or invest directly) and when _______ increase the retained earnings.
Profits. When Jones and Co was incorporated the owner bought $20,000 in shares thus the equity in the firm increased $20,000. Through business transactions, the company realized profits and the retained earnings increased $1,350, thus increasing the total owner's equity. This increase in earnings is the income of the entity for the period. Income is reported on the Income Statement.
A Balance Sheet with Assets listed at the top and Equities listed underneath is called the ______ form of a balance sheet.
Report. For example: http://www.instantcertonline.com/members2/accounting/chart1-4.gif
Creditors have a direct claim on an entity's assets, whereas Owners have a ________ claim.
Residual. In the case of insolvency (where the entity cannot pay its debts), the creditors have first claim to recover amounts owing to them and the owners are paid with any remaining assets.
The Statement of _________________ links the previous year's retained earnings with the current year's Net Income, less any dividends or drawings, and calculates the current retained earnings.
Retained Earnings. http://www.instantcertonline.com/members2/accounting/chart2-6.gif This new value of retained earnings is what is reported on the Balance Sheet for the end of the period.
The amount of equity that has been earned by the activities of the entity is called ________ Earnings.
Retained. Retained Earnings represent the profit that the entity retains after owners' drawings or shareholders dividends are paid. Retained Earnings = Profits - Drawings or Dividends It is important to remember that Retained Earnings are not cash. Cash is an asset; retained earnings are the profits that have been reinvested in the entity and can be in any of the resources on the assets side of the balance sheet.
In January, LJM Inc. cash sales total $12,000. What account is credited? _______
Revenue. http://www.instantcertonline.com/members2/accounting/chart2-21.gif Rather than recording the revenue directly into the Retained Earnings account, the temporary account Revenue is increased (credited) to show an increase in the equity of LJM. Inc. The end result of this transaction will be that cash is increased (dr) and equity is increased (cr) by the same amount and the accounting equation remains balanced.
In accounting, debit means left and credit means _____.
Right. This is the rule - don't forget it!
The amount an entity owes the government for taxes is called _____________.
Taxes payable. Taxes payable is listed separately on the balance sheet because it is a large amount and it is often difficult to know what the precise dollar figure will be.
The Revenue and Expense accounts are considered _________ because they are closed out to the Retained Earnings account at the end of an accounting period.
Temporary. The Retained Earnings account is made up all the revenues (credits) less all the expenses incurred to generate the revenue (debits). The net result of Revenues minus Expenses is Net Income. Net Income is the amount that the entity's equity increases (decreases) in a given period.
___________ analysis is the process whereby the concept of Dual Affect is applied to determine what effect the transaction had on the entity's accounts.
Transaction. Remember, each transaction must affect at least 2 accounts to keep the fundamental accounting equation in balance. Assets = Liabilities + Owner's Equity
____________ are business activities that change the balances in an entity's accounts.
Transactions. For example: An entity purchases office supplies using cash. The balance in the Cash account is now less and the balance in the Office Supplies account is more than the balances were prior to the purchase.
Jones and Co. sells $2500 of inventory that cost $1600. $1200 of the sale is received as cash and the remainder is sold on account. What is the total value of the assets? _______ Here is Jones and Co.'s balance sheet as of the last problem: http://www.instantcertonline.com/members2/accounting/chart1-15.gif
$36,350. http://www.instantcertonline.com/members2/accounting/chart1-16.gif Cash increases by $1200, and Accounts Receivable increases by $1300. Inventory is decreased $1600 (cost of the inventory) and the difference between the value of the inventory and the selling price ($900) is recorded as Retained Earnings.
Given the following Income Statement excerpt, calculate the Gross Margin as a Percent. _____ http://www.instantcertonline.com/members2/accounting/chart2-3.gif
25.5%. http://www.instantcertonline.com/members2/accounting/chart2-4.gif
The Bagel Company has Net Sales of $28,000, and a Net Income of $12, 240, what is the Profit Margin? _____
43.7%. http://www.instantcertonline.com/members2/accounting/chart2-5.gif
If a company has assets of $25,750 and liabilities of $18,400, what is the total of its Owner's Equity? $_____
7,350. Given the fundamental accounting equation: Assets = Liabilities + Owner's Equity 25,750 = 18,400 + x x = 25,750 - 18,400 = 7,350
Revenue accounts increase on the ___________ side.
Credit (CR). http://www.instantcertonline.com/members2/accounting/chart2-12.gif Because revenue serves to increase owner's equity, it is treated the same as an equity account. Revenue accounts decrease on the left-hand or debit (DR) side.
On January 1, T. Riff invested $5,000 cash into LJM Inc. as the owner of the business. The cash account is debited (dr) $5,000 and the Owner's Capital Account is ______________ $5,000.
Credited or CR. http://www.instantcertonline.com/members2/accounting/chart2-16.gif This is dual-aspect or double-sided accounting in action. This transaction represents equity financing, as the owner invested capital into the business.
Liabilities are the obligations of an entity to pay outside parties (_________).
Creditors. Liability obligations result from events that have already happened. On December 31, wages owed for the period December 17 - 31 are liabilities but wages for the first week of January are not. Creditors have a claim against all of the assets of an entity, not just the assets specific to their claim. For example, when a bank loans money to a company, its claim is not limited to cash assets, but to the assets of the company as a whole. If the liability is for a specific asset or group then it is listed as such: mortgage loan, secured debt, etc... http://www.instantcertonline.com/members2/accounting/chart1-7.gif Creditors' claims are divided into current and long-term (non-current) liabilities depending on the repayment period of the claim and how the liability will be paid.
___________________ are those obligations that are expected to be paid within one year.
Current liabilities. These liabilities are paid using current assets or by creating other current liabilities (i.e. line of credit).
The _______ Portion of the Long Term Debt is the amount of the long term debt that is to be paid in one year.
Current. It is listed separately so as to give an accurate statement of the current financial obligations of the entity. For example XYZ company has a $16,000 loan outstanding. $1,000 is due within a year and the remaining $15,000 is due according to the terms of the loan. http://www.instantcertonline.com/members2/accounting/chart1-8.gif
_______ assets are cash and assets that are expected to be used up or converted into cash within a year.
Current. The amount of current assets an entity owns is important information as it tells interested parties how much cash or its equivalent is available to pay off debt. Common current assets include: cash, marketable securities (easily converted into cash within 1 year), accounts receivable, inventory and prepaid expenses.
The amount owed to an entity by its _________ is called accounts receivable.
Customers. These amounts are expected to be converted to cash within one year (hopefully within 90 days of issuing an invoice!) and represent an extension of credit to a customer. It is usually assumed that some percentage of accounts receivable (AR) will not be collected and this is called Allowance for Doubtful Accounts. The total AR (accounts receivable) is a net of AR less the Allowance for Doubtful Accounts. Accounts receivable are current assets.
Mayberry Inc. has sales of $14,000 and $10,000 of that is collected in cash. If the Net Income for Mayberry Inc. is $4,000, what are the total expenses? _______
$10,000. Net Income = Revenue - Expense 4,000 = 14,000 - expenses expenses = 10,000 http://www.instantcertonline.com/members2/accounting/chart1-18.gif
If an entity has Sales of $171,846, Sales Returns of $3,396, and a Gross Profit of 32%, what is the Cost of Goods sold? ________
$114,546. NOTE that Gross Margin is sometimes referred to as Gross Profit, or Gross Profit Margin. Net Sales = Sales - Sales Returns = $171,846 - $3,396 = $168,450 Net Sales - COGS = Gross Margin $168,450 - COGS = 0.32 * $168,450 $168,450 - COGS = $53,904 COGS = $168,450 - $53,904 = $114,546
What is the balance of LJM's Accounts Payable account given the Account shown below? Type in the $ value, then CR or DR, for example, your answer might be $500, CR. __________ http://www.instantcertonline.com/members2/accounting/chart2-31.gif
$2,200, CR. http://www.instantcertonline.com/members2/accounting/chart2-32.gif The total credits are $7,000, total debits are $4,800. The $2,200 credit balance is recorded on the right-hand side (cr) of the account. Since Accounts Payable is a liability, it is assumed to have a credit balance and the amount is a positive number.
Suppose Jones and Co. sells merchandise for $1200 cash that originally cost $750. What is the total Owner's Equity after this transaction? _______ Here is Jones and Co.'s balance sheet as of the last problem: http://www.instantcertonline.com/members2/accounting/chart1-14.gif
$20,450. http://www.instantcertonline.com/members2/accounting/chart1-15.gif Inventory is decreased by $750 and cash increases by $1200. If we leave the transaction there we are out of balance! The $450 difference is the profit (earnings) therefore the net effect is that assets increase by $450 and Total Equity increases by $450.
If Abacus Corp has Net Sales of $28,460, a Gross Margin of 28%, and Net Income of $4,550; what is the total Cost of Goods Sold? __________
$20,491.20. This requires us to put together a couple of the equations we learned earlier: http://www.instantcertonline.com/members2/accounting/chart2-8.gif
Suppose Jones and Co. now borrows $15,000 from a bank and this transaction is evidenced as a note. What is the new value of the assets? _______ Here is Jones and Co.'s balance sheet as of the last problem: http://www.instantcertonline.com/members2/accounting/chart1-12.gif
$35,000. http://www.instantcertonline.com/members2/accounting/chart1-13.gif
Jones and Co. buys inventory of $8,000 and pays cash for it. What is the value of Total Assets after this transaction? _______ Here is Jones and Co.'s balance sheet as of the last problem: http://www.instantcertonline.com/members2/accounting/chart1-13.gif
$35,000. http://www.instantcertonline.com/members2/accounting/chart1-14.gif The value of the total assets does not change, just the values of the individual assets: cash and inventory. Cash is used in exchange for inventory.
Financial accounting is governed by basic ground rules that are referred to as Generally ________ Accounting Principles.
Accepted. Generally Accepted Accounting Principles are usually referred to as GAAP. These principles set the rules for accounting practices. They were established by the Financial Accounting Standards Board (FASB) to assist with the fair and objective comparison of business performance either within the same entity (from period to period) or with other entities. If an entity is following GAAP principles then it can be accurately compared to any other entity that follows GAAP. Although adherence to GAAP is not legally mandatory, the pressure to conform is huge, given our global marketplace.
An _______ is the device used in accounting to record balance changes per item on the financial statements.
Account. The shape of an account looks like a letter "T" with the account name written at the top and a left-hand side called the Debit (DR) side and a right-hand side called the Credit (CR) side. Because of the shape this simple account form is called a T- account. http://www.instantcertonline.com/members2/accounting/chart2-9.gif
The communication of economic events that have taken place in an entity is called __________.
Accounting. Accounting is the system that takes raw data that is generated in the course of doing business and translates it into useful information and statements that outside sources use to evaluate the business.
The dual aspect concept refers to the double sided nature of all __________ transactions.
Accounting. The concept can be written as an equation: Assets = Liabilities + Owner's Equity The liabilities are claims against the assets by creditors, and owner's equity is the claim the owner(s) has against the assets.
During January, the $4,800 of Accounts Payable is paid. Using a comma to separate your answers, first give the account that is debited and then give the account that is credited. ______________________
Accounts Payable, Cash. http://www.instantcertonline.com/members2/accounting/chart2-26.gif Paying bills decreases the asset cash (cr) and decreases the liability Accounts Payable (dr).
At the end of January, various utility bills totaling $450 are received. Utilities Expense is debited $450 and ________________ is credited $450.
Accounts Payable. http://www.instantcertonline.com/members2/accounting/chart2-25.gif The bills arrived but have not been paid, therefore they are recorded as a liability (obligation to pay) and the utilities expense for January is increased. The liability is increased (cr) and the expense is increased which has the effect of decreasing retained earnings, thus equity is ultimately decreased (dr).
On January 12, LJM, Inc. makes a $200 sale on credit (customer will pay within a month). What account is debited? ___________________
Accounts Receivable. http://www.instantcertonline.com/members2/accounting/chart2-27.gif The assets are increased (dr) by $200 even though the cash has not yet been received. The corresponding credit is to Revenue which will increase the equity portion of the accounting equation and keep the records balanced.
A ledger is a group of ________ that is either bound together in a book or kept together in a computer file.
Accounts. The General Ledger consists of all the accounts for an entity. There are also Receivable Ledgers (Receipts), Payments Ledgers (Payments), Payroll Ledgers, etc... In manual or computerized accounting systems, daily transactions are recorded in the ledgers.
_______ revenue is revenue that has been earned by the entity but not yet paid to the entity.
Accrued. For example, a bank may have earned interest on a loan in 2002 but will not actually collect the interest until 2003. This interest income is recorded as accrued income to accurately state the amount of revenue earned in the year ending 2002.
The fundamental accounting equation is ______ = liabilities + owner's equity.
Assets. This is the formal expression of the dual aspect concept of accounting. All the assets of a business are claimed by someone (owners or creditors) and the total of these claims can not exceed the total of the assets. When a transaction takes place, the result must balance the fundamental accounting equation thus the dual aspect or double sided entry method of accounting. For example: Ms. Smith starts a business and puts $10,000 into the entity's bank account. The transaction is recorded as a $10,000 increase in the entity's cash and a $10,000 increase in Ms. Smith's equity (claim on the assets). The next day, Ms. Smith receives a bank loan of $5,000. This is recorded as a $5,000 increase in cash and a $5,000 liability (claim by a creditor on the assets). http://www.instantcertonline.com/members2/accounting/chart1-1.gif Every transaction affects as least two accounts thus keeping the fundamental accounting equation balanced.
The financial position of an entity at a specific point in time is called a _____________.
Balance Sheet. A Balance Sheet (also known as a Statement of Financial Position) reports the assets, liabilities and owner's equity at a specified moment in time. It is a status report that is only valid for the point in time indicated - note the words "as at" in the title of the sample Balance Sheet below. http://www.instantcertonline.com/members2/accounting/chart1-2.gif The balance sheet demonstrates the following concepts: - Entity - XYZ Company is separate from the owner(s) - Going-concern - is assumed and values are not reported at market rate - Money Measurement - all amounts are expressed in monetary terms - Cost - assets are reported at their initial cost less depreciation - Dual-Aspect - the two sides balance (Assets = Liabilities + Owner's Equity)
The amounts of assets, liabilities and equity change from day to day, therefore the amounts shown on the _____________ change also.
Balance Sheet. A Balance Sheet shows the financial position of an entity at one specific point in time. Whenever a business transaction takes place, the amounts on the balance sheet will change. Consider when a company opens a bank account. The amount of cash has increased and the amount of equity (owner's or shareholders') has increased. Note: The dual-aspect concept states that at least two accounts are affected by every transaction because the fundamental accounting equation must stay balanced. Example: Marla Jones incorporates a novelty store called Jones and Co. and deposits $20,000 into the business' bank account and takes $20,000 stock in return. The balance sheet is as follows: http://www.instantcertonline.com/members2/accounting/chart1-12.gif
The going concern concept refers to the fact that the ________ under consideration will remain in existence for the foreseeable future.
Business. This is the underlying assumption that any accountant makes when he/she prepares a set of accounts. It is because of this assumption that assets of the entity are not reported at the value they could be sold for, rather they are valued in terms of original cost less depreciation (cost concept).
The cost to the entity of the goods or services being sold is called COGS (__________________).
Cost of Goods Sold. COGS is also referred to as Cost of Sales (COS). In most non-service businesses, the COGS is represented by a decrease in the inventory assets which have been consumed to generate the sales revenue. For example, a grocery store's COGS is the cost it paid for the groceries it sells to consumers.
During January, additional inventory is purchased for $5,750 on credit. Using a comma to separate your answers, Inventory is (dr / cr) $5,750 and Accounts Payable is (dr / cr) $5,750 (for example, your answer might be dr,dr) _____
DR,CR. http://www.instantcertonline.com/members2/accounting/chart2-23.gif This is another example of a financing transaction where an asset is increased (dr) and a liability is increased (cr).
Account balances are recorded on the same side as an entry that increases the account; therefore Asset accounts have _____ balance.
Debit. http://www.instantcertonline.com/members2/accounting/chart2-29.gif The Cash account is an asset account and thus it has a debit balance. The total debits equal $21,200 and the total credits equal $15,750. The difference of $5,450 is the balance and it is shown on the debit side of the account. If a cash account has a credit balance (meaning debits are less than credits) then the account is considered overdrawn.
Asset accounts increase on the _____ side.
Debit. You can refer to it as the Debit, or DR side of the account. Asset accounts increase on the left-hand, debit (DR) side, and they decrease on the right-hand or credit (CR) side. http://www.instantcertonline.com/members2/accounting/chart2-10.gif
On January 1, T. Riff invested $5,000 cash into a business as the owner. The cash account is _____________ $5,000.
Debited or DR. http://www.instantcertonline.com/members2/accounting/chart2-15.gif If the accounts are left this way, there will be an imbalance in the accounting equation. We increased an asset (Cash) but now we need an entry to balance this to ensure the equation Assets = Liabilities + Equity remains true.
On January 1, LJM Inc. paid $750 rent for the month of January. The cash account is credited (decreased) $750 and the asset account prepaid expense is _____________ $750.
Debited or DR. http://www.instantcertonline.com/members2/accounting/chart2-17.gif The rent is paid (cash decreases) in advance, therefore this prepaid expense is considered an asset of the company because the benefit of using the rented space for January is not used-up. This is an asset acquisition transaction: prepaid rent was acquired in exchange for cash.
During January, LJM, Inc paid employees' wages totaling $3,000 (payroll taxes are not considered in this example). The Wage Expense account is _____________ $3,000.
Debited or DR. http://www.instantcertonline.com/members2/accounting/chart2-22.gif Cash is decreased (credited) to pay the wages of $3,000 and the associated expense is increased (debited). Expenses decrease Equity thus an increase is recorded as a debit. Assets are decreased (cr) and Equity is decreased (dr).
Increases or decreases in account balances are recorded as either ______ or credits.
Debits. You may be familiar with the terms debit and credit from reading a bank statement. Bank's use the words in a qualitative manner. A credit is a positive event or increase to your account i.e. your account has been credited $200. A debit is a negative event or decrease to your account i.e. your account has been debited $50 to pay for the checks you ordered. HOWEVER, in accounting debit and credit have no qualitative element. Debit simply means left and credit simply means right. A debit entry is one that happens on the left hand side of an account and a credit is an entry that happens on the right hand side.
In non-corporate entities (proprietorships or partnerships), the paid-in-capital section consists of capital, earnings, and ________.
Drawings. For example: http://www.instantcertonline.com/members2/accounting/chart1-11.gif
The ______ concept refers to the separation of business transactions from those of the business owner(s).
Entity. This means that financial accounting and reporting relates only to the activities of a specific business entity and not to the activities of the owners of that entity. For example, the owner of a shoe store takes $100 cash out of the register for personal use. Even though the $100 belongs to the owner whether it is in the register or not, it is accounted for as a withdrawal of equity. The owner now has $100 more cash but he/she has less equity in the business. The entity concept applies regardless of the ownership structure (corporation, partnership, sole proprietorship).
When analyzing transactions, the amount debited must be ________ the amount credited.
Equal to. This is necessary to keep the fundamental accounting equation balanced. Assets = Liabilities + Equity http://www.instantcertonline.com/members2/accounting/chart2-14.gif Notice the following relationships: Asset Transfer - one asset is debited and one is credited. For example: Purchase inventory with cash. The asset cash is decreased (cr) and the asset inventory is increased (dr). The net effect on the accounting equation is 0 and it remains balanced. Equity or Liability Financing - an asset is debited and equity is credited. For example: Owner pays-in capital to a business. The asset cash is increased (dr) and the equity Paid-In Capital is also increased (cr) -an increase in equity is recorded as a credit- therefore the accounting equation is increased by the same amount on both sides and remains balanced. The same is true if the firm borrows money from a bank, asset is debited and the liability Bank Loan is credited. Another form of financing (very short-term) is purchasing on account; the asset is debited and the Accounts Payable is credited. Earnings Transaction - an asset is increased or decreased as a result of the entity's operations. For example: A business makes a cash sale. The asset cash is increased (dr) and the Sales Revenue account is increased (cr). Remember that revenues serve to increase equity therefore they are treated the same as an equity account and increases are made as credits. If a sale is made on credit, then the asset that is debited is Accounts Receivable. When a business pays the utility bill, the asset cash is decreased (cr) and the expense Utilities is increased (dr). Expenses decrease equity; therefore they are recorded as a debit. The end result is that the accounting equation will balance because assets increase or decrease by the same amount as the equity.
An _______ is a cost incurred in the normal course of business to generate revenues.
Expense. An expense is a decrease in retained earnings that results from the operations of an entity. Expenses are the costs of doing business and do not include costs associated with improving the business or increasing the asset base in any way. Expenses are considered used-up and have no residual value. Expenditures that contribute to future revenue generation are considered assets.
An increase in an _______ is recorded on which side of the account? Debit (DR) or left-hand side
Expense. Expenses decrease equity, equity is on the right hand side of the equation, thus a decrease is recorded on the left, which is a debit.
The difference between revenues and ________ in called net income.
Expenses. Net Income = Revenue - Expense Net income is also referred to as Net Earnings or Net Profit. It is important to distinguish income from revenue - revenue is the inflow of assets, whereas income is the difference between the inflow (revenue) and outflow (expenses).
Pre-paid ________ are intangible current assets that will be used up in the near future.
Expenses. These assets include insurance policies, security services, etc... The entity has paid money in exchange for a service or protection yet the usefulness of the asset will expire. If an entity purchases a 2 year insurance policy for $10,000, then $5,000 of that will be still be considered a current asset (prepaid expense) in the second year.
The end product of _________ accounting is the preparation of financial statements.
Financial. There are three main statements that are prepared: - Balance Sheet - a report of the entity's financial position at a given point in time - Income Statement - a report of an entity's financial activity for a given period of time. - Cash-Flow Statement - a report of the movement of cash in and out of the entity for a given period of time.
_______________ in accounting dictates that all relevant and explanatory information be included in the statements.
Full disclosure. This means that most of the entries will have lengthy footnotes explaining how the final figure was arrived at. These notes are very important because they tell the whole story of how the numbers and statements were derived.
Returns and Allowances and Sales Discounts are subtracted from the ___________ figure to determine Net Sales.
Gross Sales. Sales returns and allowances represent the sales value of goods that were returned or allowances made to customers because of defective product/service. Sales discounts are often given to volume customers or customers who pay invoices within a short period of time. Example: a business offers a 2% discount to customers who pay with 10 days of receiving an invoice (2, 10, net 30). If a customer who bought $1000 worth of goods takes advantage of this discount, the business still records $1000 revenue but cash is increased by $980 and sales discounts increases by $20. The effect on the Income statement will be that Net sales is $20 less than Gross Sales. http://www.instantcertonline.com/members2/accounting/chart2-1.gif
The materiality concept refers to the practice of accountants to use Generally Accepted Accounting Principles (GAAP) except when to do so would be expensive or difficult, and where it makes no real difference if the rules are _______.
Ignored. For example, a telephone bill arrives in April and it includes charges for March and April. It is possible to figure out the exact cost of calls in March and then expense that amount in March; however, that is very time consuming and tedious thus the whole bill is expensed the month it is received. Phone bills are fairly consistent from month to month therefore there is no material affect on the value of the net income for the month of April. Generally, if a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader's ability to judge the financial statements be impaired.
The ________________ is a financial report that reports the results of business operations for a specific period of time.
Income Statement. The Income Statement shows the flows of an entity's revenue and expenses for a specific period of time. The difference between the total revenue and the total expense is the entity's net income. http://www.instantcertonline.com/members2/accounting/chart1-17.gif A key element of this statement, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time while the items represented on the balance sheet show information as of a specific date (or point in time). Another name for an income Statement is a Profit and Loss Statement.
The Balance Sheet and Income Statement are said to be articulate because they are ____________.
Interrelated. The amount of Net Income together with any dividends or drawings, explains the change in retained earnings between the two Balance Sheets prepared at the beginning and end of the accounting period. Below are two balance sheets side-by-side from 2002 and 2003, related by the income statement: This is a huge, full-screen picture, so please click here to open it up in a new window.
An initial inventory of supplies is purchased on credit for $800. Using a comma to separate the answer, first give the account that is debited and then give the account that is credited (for example Answers1,Answer2). ___________________________.
Inventory, Accounts Payable. http://www.instantcertonline.com/members2/accounting/chart2-20.gif This is a financing transaction involving a purchase of an asset on account. Assets are increased (dr) and liabilities are increased (cr).
To generate January's sales, $6,000 of supplies were used. _________ is decreased (credited) $6,000 and COGS is increased (debited) by $6,000.
Inventory. Cost of Goods Sold is also known as COS (Cost of Sales). http://www.instantcertonline.com/members2/accounting/chart2-24.gif The inventory was used-up in the generation of sales therefore the inventory is decreased and expenses related to revenue generation (Cost of Sales or COGS) are increased. An asset decreases and an expense increases which serves to decrease total equity and the accounting equation balances.
Paid-in-capital is the amount of capital supplied by equity _________.
Investors. Paid-in-capital represents the owners' or shareholders' direct investment in the entity. In a corporation this investment is termed stock.
PPE are _________ assets that are currently being used to generate income.
Long term. PPE stands for Property, plant, and equipment. Property, plant, and equipment (PPE) are assets the entity owns that assist in their operations and contribute to revenue generation. PPE does not include investment in assets that are being held for a future use. For example, if an entity buys a parcel of land for future use, that land is not considering part of PPE, but is rather a long-term investment asset. Likewise, purchase of a building for future expansion is an investment until that premise is occupied and used to generate revenue.
Equipment is purchased for $7,200 cash. The equipment is expected to last 10 years. Cash is credited $7,200 and the _________ asset Equipment is debited $7,200.
Long-term. http://www.instantcertonline.com/members2/accounting/chart2-19.gif This is an asset transfer transaction and the Equipment account is increased by the amount actually paid for it by the business. One asset increases and one asset decreases.
The liabilities that are not expected to be paid within one year are called _________ liabilities.
Long-term. Long-term liabilities are also called non-current liabilities. These liabilities typically have long repayment schedules i.e. mortgages, long-term loans and it is not expected that an entity will pay these off with its current assets or by creating another current liability. The current portion of these liabilities is paid off and the balance remains as a long-term liability.
Assets that are expected to be useful for more than one year are called _________.
Long-term. They are also called non-current assets. Examples of long term tangible assets are property, plant or equipment or long-term investments. They are reported as their original cost less any accumulated depreciation. Bonds and securities that are not expected to be converted to cash within a year are long term assets. Non-tangibles such as patents and trademarks (right to use a valuable product name like Microsoft or Pepsi), and Goodwill are also long term assets.
The _________________ concept stipulates that all business transactions must be expressed in money terms.
Money measurement. This means that if something cannot be measured in money, it will not be included in accounting books. Accounting does not give a complete account of the happenings in an entity (management discord, strike pending, etc) therefore the reader of financial statements must find that information from other sources.
The profit margin is derived from __________ divided by Net Sales.
Net Income. Profit margins indicate the average amount of income generated per net sale. This figure is also equivalent within an industry but varies widely depending on the nature of the business. Profit Margins are easily calculated and provide a very elementary assessment of a firm's profitability.
The difference between _________ and the COGS (Cost of Goods Sold) is called Gross Margin.
Net Sales. The Gross Margin is usually shown on a separate line of the Income Statement. It is sometimes referred to as gross profit. http://www.instantcertonline.com/members2/accounting/chart2-2.gif
The cost concept is an accounting principle requiring all financial statement items to be based on ________ cost.
Original. This is sometimes referred to as the historical cost and it is usually based upon the dollar amount originally exchanged in an arm's-length transaction. The amount reported on the statement is assumed to reflect the fair market value of an item at the transaction date. The main reason why this is done is because the market value of an item is very difficult to determine and can change very rapidly. The second reason is because an entity is assumed to be a going concern, therefore its assets are assumed to keep the operation running and there is no need to know what the current selling price is. The cost concept does consider that assets have a limited useful life and therefore their value is depreciated over a set period of time. The difference between an asset's historical cost and its accumulated depreciation is the book value of the asset.
The economic _________ of an entity are called assets.
Resources. An entity needs cash, equipment, and other resources in order to operate and these valuable resources that are owned by the entity are called its assets. http://www.instantcertonline.com/members2/accounting/chart1-5.gif To be considered an asset, the item must be owned or controlled by the entity, it must be valuable to the entity, and it must have been acquired at a measurable cost. NOTE: Employees are a valuable (if not the most valuable) resource of an entity but because the entity does not "own" the employees, they are not considered accounting assets. Assets are divided into current and long-term (non-current) assets depending on their liquidity.
Equity = Paid-in-Capital + _________________.
Retained Earnings. The fundamental accounting equation can be written as: Assets = Liabilities + Paid-in-Capital + Retained Earnings Notice that "Paid-in-Capital + Retained Earnings" was substituted for Equity in the original equation (Assets = Liabilities + Equity).
The inflow of assets from selling goods and providing services to customers is called _______.
Revenue. A revenue is an increase in retained earnings resulting from the operations of an entity. Revenue does not equal cash - remember that Jones and Co. had revenues of $3700 but only received $2400 in cash and the rest was Accounts Receivable.
The realization concept states that the amount recognized as _______ is the amount that is reasonably certain to be realized.
Revenue. An example is the selling of a car for $24,000 which is less than the manufacturer's suggested retail price of $26,000. The revenue realized is $24,000.
The matching concept states that when a given event affects both revenues and expenses, the effect on each should be recorded in the ____ accounting period.
Same. The matching concept ensures accuracy when reporting net income and discourages the overstatement or understatement of revenues and expenses for a given period. Example, Gord's Gift Boutique purchases $70,000 inventory in 2002. This is recorded as a decrease in cash and an increase in inventory in 2002. If he sells $60,000 of that inventory for $100,000 in the year ending 2002, then the 2002 revenue is $100,000, the 2002 expenses are $60,000, and the 2002 Net income is $40,000. When the remaining $10,000 in inventory is sold, it is recorded as an expense in the period in which it is sold. If the whole $70,000 is recorded as an expense in 2002, the net income would be inaccurate and would not reflect the true business environment for 2002.
Marketable __________ are current assets.
Securities. These are short term investments the entity makes in order to earn some return on cash that would otherwise be sitting idle.
Revenue that has been collected for goods or services not yet provided is called ________ revenue.
Unearned. An example is a subscription to a magazine. The customer pays for a year of product but only receives a product monthly. The subscription amount is recorded as unearned (pre-collected) revenue and this represents a liability that the entity is obligated to provide. Once the obligation is realized (the magazine is delivered) the liability is reduced and revenue is recorded. Example: In December 2002, Julie pays $120 for a year subscription to Word Games Monthly. Word Games Monthly, Inc. records the $120 as unearned revenue for 2002. Each month in 2003, the unearned revenue is decreased by $10 and revenue is increased $10. This continues until the unearned revenue is all used -up or accounted for. Note the dual aspect concept is observed because two accounts are affected by each transaction.