ACTG 2010 Chapter 2

Asset

Probable future economic benefits owned by the business as a result of past transactions

Transaction

An exchange or an event that has a direct economic on the assets, liabilities, or stockholders' equity of a business

A company received $2,000 of equipment and promised to pay for it next month. The increase in equipment would be recorded with a ______________ to the Equipment account

Debit

A company's beginning equipment is $100,000. It purchased $10,000 of new equipment and sold $4,000 of its equipment during the period. The company's ending Equipment balances equals a ___________ balance

$106,000 debit

Which line items must have normal credit balances?

1. Notes Payable 2. Accounts Payable 3. Common Stock

If a company issues $100,000 common stock, the Common Stock T-account will have $100,000 posted on the ____ and _____ side

1. Right 2. Credit

Chart of Accounts

A summary of all account names and corresponding account numbers used to record financial results in the accounting system

Financial information needed to manage a company is provided by an ________ system

Accounting

The beginning balance in Lucre's Notes Payable account was $50,000. During the month, Lucre borrowed $60,000 cash from Last National Bank and then paid First National Bank the $40,000 it had borrowed 5 months prior. The balance in Lucre's Notes Payable account is now a ______.

Credit of $70,000

Acme Enterprises borrowed $20,000 from Last Bank on a 5-year note payable. Acme's journal entry to record this transaction will include a _____ of $20,000.

Credit to Notes Payable Debit to Cash

Liabilities represent the __________ claims to a business's assets

Creditor's

Liabilities represent the _________ claim to a business's assets

Creditors'

A company made a $1,000 payment on its $100,000, 20-year mortgage. The decreases in liabilities would be recorded with a ________ to Notes Payable

Debit

A company paid $500 for supplies that it purchased last month. The decrease in liabilities would be recorded with a ______ to Accounts Payable

Debit

Assets have a normal _____ balance

Debit

The beginning balance in Acme's Cash account was $100,000. During the month, Acme issued $25,000 of common stock for cash. The balance in Acme's Cash account is now a

Debit of $125,000

A non-current liability

Does not need to be repaid in the next 12 months

What are two sources of financing

Equity Debt

Duality of Effects

Every transaction has at least two effects on the basic accounting equation

Transactions include what two types of events?

External Exchanges Internal Events

True or False: A profitable company will record more debits than credits

False

True or False: If one asset increased, it must be the case that either liabilities or stockholders' equity increased by the same amount

False

Which account title is used to record borrowing cash in exchange for a promissory note

Notes Payable

On a balance sheet, Land is reported at its

Original cost

On the balance sheet, Equipment is reported as its

Original cost

Accounts ____________ is a liability account and represents amounts owed to suppliers

Payable

Liabilities

Probable debts or obligations of the entity that result from past transactions, which will be fulfilled by providing assets or services

Journals are used to

Record transactions chronologically

Debt

Refers to financing a business through loans and other amounts that must be repaid

Equity

Refers to financing a business through owners' contributions and reinvestments of profit

Cost Principle

Requires assets to be initially recorded at the historical cash-equivalent cost, which is the amount paid or payable on the date of the transaction

Accounts Payable is increased with an entry of the ____ side of the T-account

Right/Credit

Stockholder's Equity

The financing provided by the owners and the operations of the business

External Exchanges

These are exchanges involving assets, liabilities, and/or stockholders' equity between the company and someone else

Internal Events

These events do not involve exchanges with others outside the business, but rather occur within the company itself

What is the effect on total assets when a company buys a building in exchange for a 20-year note payable?

Total assets will increase

True or False: A transaction can cause one asset to increase and different asset to decrease and still have the accounting equation balance

True

One asset account increases and one stockholders' equity account _______

increases

Liabilities have a normal ________ balance

Credit

A company's beginning Accounts Payable is $1,000. It had a $10,000 of purchases on account and paid $7,000 of the amounts owed. The Accounts Payable ending balance equals a _____ balance.

$4,000 credit

A company's beginning Notes Payable is $100,000. It borrowed $50,000 by issuing a promissory note to the bank and repaid $60,000 of the amounts owed. The Notes Payable ending balance equals a _____ balance.`

$90,000 credit

What are two possible effects on the accounting equation when recording a transaction that increases a liability by $100?

1. A stockholders' equity account decreases by $100 2. An asset increases by $100

What 3 steps in order make up the accounting cycle?

1. Analyze the transaction 2. Record the transaction 3. Summarize the transaction

Show the effect of recording the borrowing of $10,000 from a bank on the accounting equation

1. Assets increase 2. Liabilities increase

Which 2 types of transactions are recorded in the accounting system?

1. External exchanges 2. Internal events

All transactions

1. Have at least two effects on the accounting equation 2. Affect assets, liabilities, and/or stockholders' equity

A transaction may be recorded with an increase in an asset and a decrease in an

Another asset

The duality of effects refers to the fact that each transaction

Has at least two effects on the basic accounting equation

A company paid $200 cash for supplies that were purchased last month. However, the company recorded a debit to Accounts Payable of $200 and a credit to Cash of $20. This company's accounting records are

Incorrect, because debits do not equal credits

Events that do not involve exchanges between the company and someone else but affect assets, liabilities and/or stockholders' equity are called ______ events

Internal

The Equipment account is increased with an entry on the ____ side of the Equipment T-account

Left/Debit

The beginning balance in Acme's Accounts Payable was $4,000. Acme then bought $100 of supplies on account and paid $700 of the amount that it owed for supplies purchased on account last month. The ending balance in Acme's Accounts Payable was a credit of ______.

$3,400

Melon-Cauli Grocers, Inc. had a $10,000 balance in its Accounts Payable account at the beginning of the month. During the month, it made $60,000 of purchases on account due within 1 month and paid $40,000 of the amounts owed. The Accounts Payable balance at the end of the month has a ______ balance.

$30,000 credit

Company X receives $10,000 from issuing common stock to its owners. The effect on the accounting equation is an

1. Increase in assets 2. Increase in stockholders' equity

What 3 line items appear on a balance sheet?

1. Liabilities 2. Assets 3. Stockholders' Equity

When a company buys an asset on account.....

1. Liabilities increase 2. Assets increase

Company X issues $10,000 of common stock to its owners for cash. It recorded the transaction by increasing assets and increasing liabilities. What two things happen?

1. Liabilities will be too high 2. Stockholders' equity will be too low

The current ratio measures a company's

1. Short-term liquidity 2. Ability to pay in the upcoming year

What two groups have claims to a business's assets?

1. Stockholders 2. Creditors

What 3 things come from normal debit balances?

1. Supplies 2. Cash 3. Equipment

A company purchased a $100,000 building in exchange for a 20-year note payable. The company recorded a $100,000 increase in the Building account and a $100,000 decrease in Cash. As a result of this error,

1. Total liabilities are too low 2. Total assets are too low

A = L + SE

Assets = Liabilities + Stockholders' Equity

Burrows, Inc. borrowed $100,000 from Last Bank by signing a formal agreement to repay the bank in 10 years. Burrows' journal entry to record this transaction will include a debit to ______.

Cash

What does a business typically receive when it issues stock to owners?

Cash

The issuance of common stock is recorded with a debit to _______ and a credit to ______

Cash; Common Stock

A company paid $2,000 cash to an employee for this month's salary. The entry to record this transaction would include a ______ to cash

Credit

A company paid $500 cash for a new printer. The entry to record this transaction would include a ______ to Cash

Credit

A company purchased land in exchanged for a $25,000, 10-year note payable. The increase in the Notes Payable account would be recorded with a

Credit

Current assets divided by current liabilities is the ____ ratio

Current

True or False: When a company issues common stock, it gives cash to its owners in exchange for stock

False

What is the effect on total assets when a company purchases land for a cash payment of $10,000

No effect

The Mortgage Payable account is increased with an entry on the ___ side of the T-account

Right/Credit

The Retained Earnings account is increased with an entry on the ___________ side of the account

Right/Credit

A classified balance sheet

Shows subtotals for current assets and current liabilities

When a business issues common stock, what does it give to its owners?

Stock certificates

Morris Lest, Inc. purchased machinery for $10,000 cash. The effect of this transaction is to cause

Total assets to remain the same

MMM Pizza bought $1,500 of equipment on account (i.e., on credit). What is the effect of recording this transaction on the company's total liabilities?

Total liabilities will increase

What is the effect on total liabilities when a company buys a building in exchange for a 20-year note payable?

Total liabilities will increase

What is the process of recording journal entries?

Transactions are recorded chronologically showing the accounts debited along with the corresponding accounts credited

One asset account increases and one asset account ________

decreases

A company purchased a new cash register in exchange for a cash payment of $1,200. The company recorded only an increase of $1,200 in the Equipment account. No entry was made to the Cash account. As a result....

1. The accounting equation is not in balance 2. Total assets are too high