MGMMT study

1. What is a T-account? On which side is the debit? On which side is the credit? Where does the account name go on a T-account?

A T-account is a shortened form of each account in the ledger. The debit is on the left side, credit on the right side, and the account name is shown on top.

1. What does a ledger show? What's the difference between a ledger and the chart of accounts?

A chart of accounts and a ledger are similar in that they both list the account names and account numbers of the business. A ledger, though, provides more detail. It includes the increases and decreases of each account for a specific period and the balance of each account at a specific point in time.

1. What is a contra account?

A contra account is an account that is paired with and listed immediately after its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the balance of the related account.

1. What is a deferred expense? Provide an example.

A deferred expense is an advance payment of a future expense, and is considered an asset rather than an expense. When the prepayment is used up, the used portion of the asset becomes an expense via an adjusting entry. An example of a deferred expense is Prepaid Insurance.

1. What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?

A fiscal year is an accounting year of any 12 consecutive months. A company might choose to use a fiscal year that is not a calendar year, if the low point in business activity is other than December 31.

1. Which method of accounting (cash or accrual basis) is consistent with Generally Accepted Accounting Principles?

Accrual basis accounting is consistent with generally accepted accounting principles.

1. What does accumulated depreciation represent?

Accumulated depreciation is the sum of all depreciation expense recorded to date for a depreciable asset.

1. When are adjusting entries completed, and what is their purpose?

Adjusting entries are completed at the end of the accounting period to record revenues in the period in which they are earned and expenses in the period in which they are incurred. Adjusting entries also update asset and liability accounts. Adjustments are needed to properly measure net income (loss) on the income statement and assets and liabilities on the balance sheet.

1. What is an accrued expense? Provide an example.

An accrued expense is an expense that a company has incurred but not yet paid. For example, salaries expense is incurred by a company as employees work, even though the company might not pay the employees until a later period.

1. What is an accrued revenue? Provide an example.

An accrued revenue is a revenue that a company has earned but not yet collected in cash. For example, service revenue is earned by a company as it provides services to a customer, even though the company might not collect cash from the customer until a later period.

1. When is an adjusted trial balance prepared, and what is its purpose?

An adjusted trial balance is prepared after adjustments have been journalized and posted. An adjusted trial balance is a list of all of the accounts with their adjusted balances, and its purpose is to ensure that total debits equal total credits of all accounts. The adjusted trial balance is used to prepare the final financial statements.

1. Identify which types of accounts have a normal debit balance and which types of accounts have a normal credit balance.

Assets, dividends, and expenses have a normal debit balance. Liabilities, common stock, and revenue have a normal credit balance.

1. How is book value calculated, and what does it represent?

Book value is a depreciable asset's cost minus accumulated depreciation. Book value represents the cost invested in the asset that the company has not yet expensed.

1. What is the difference between cash basis accounting and accrual basis accounting?

Cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned and expenses when incurred.

1. What is the purpose of the chart of accounts? Explain the numbering typically associated with the accounts.

Companies need a way to organize their accounts so they use a chart of accounts. Accounts starting with 1 are usually Assets, 2 - Liabilities, 3 - Equity, 4 - Revenues, and 5 - Expenses. The second and third digits in account numbers indicate where the account fits within the category.

1. When are credits increases? When are credits decreases?

Credits are increases for liabilities, common stock, and revenue. Credits are decreases for assets, dividends, and expenses.

1. When are debits increases? When are debits decreases?

Debits are increases for assets, dividends, and expenses. Debits are decreases for liabilities, common stock, and revenue.

1. What is a deferred revenue? Provide an example.

Deferred revenue is a liability created when a company collects cash from customers in advance of doing work. For example, an example of a deferred revenue is the collection of cash for services to be provided by the company in the future.

1. If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

If an accrued expense is not recorded at the end of the year, the financial statements will be inaccurate. On the balance sheet, liabilities will be understated and equity will be overstated. On the income statement, expenses will be understated (thus net income will be overstated).

1. Under the revenue recognition principle, when is revenue recorded?

In essence, the company records revenue when the entity satisfies each performance obligation.

1. What are the four parts of a journal entry?

Part 1: Date of the transaction. Part 2: Debit account name and dollar amount. Part 3: Credit account name and dollar amount. The credit account name is indented. Part 4: Brief explanation.

1. What are source documents? Provide examples of source documents that a business might use.

Source documents provide the evidence and data for accounting transactions. Examples of source documents a business would have are: bank deposit slips, purchase invoices, bank checks, and sales invoices

1. Explain the five steps in journalizing and posting transactions.

Step 1: Identify the accounts and the account type. You need this information before you can complete the next step. Step 2: Decide if each account increases or decreases, then apply the rules of debits and credits. Reviewing the rules of debits and credits, we use the accounting equation to help determine debits and credits for each account. Step 3: Record transactions in the journal using journal entries. Step 4: Post the journal entry to the ledger. When journal entries are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date on the journal entry should also be transferred to the accounts in the ledger. Step 5: Determine whether the accounting equation is in balance. After each entry the accounting equation should always be in balance.

1. What is the process of allocating the cost of a plant asset over its useful life called?

The process of allocating the cost of a plant asset over its useful life is called depreciation.

1. Identify the three categories of the accounting equation, and list at least four accounts associated with each category.

The three categories of the accounting equation are assets, liabilities, and equity. Assets include Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses, Land, Building, Equipment, Furniture, and Fixtures. Liabilities include Accounts Payable, Notes Payable, Accrued Liability, and Unearned Revenue. Equity includes Common Stock, Dividends, Revenue, and Expenses.

1. Which accounting concept or principle requires companies to divide their activities into small time segments such as months, quarters, or years?

The time period concept requires companies to divide its activities into small time segments such as months, quarters, or years.

1. What are the two basic categories of adjusting entries? Provide two examples of each.

The two basic categories of adjusting entries are deferrals and accruals. · Two examples of deferrals are prepaid expenses (such as Prepaid Rent and Office Supplies) and unearned revenues (such as Unearned Service Revenue). · Two examples of accruals are accrued expenses (such as Accrued Salaries Expense) and accrued revenues (such as Accrued Service Revenue).

1. What are the two rules to remember about adjusting entries?

The two rules to remember about adjusting entries are: 1. Adjusting entries never involve the Cash account. 2. Adjusting entries either a. Increase a revenue account (credit revenue) or b. Increase an expense account (debit expense).

1. Where are transactions initially recorded?

Transactions are first recorded in a journal, which is the record of transactions in date order.

1. Under the matching principle, when are expenses recorded?

Under the matching principle, expenses are linked to the revenues they generate. Expenses are recorded in the same period as the revenues generated by the expenses.

1. In the recording of depreciation expense, which account is credited?

When recording depreciation expense, the Accumulated Depreciation account is credited.

1. What is involved in the posting process?

When transactions are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date of the journal entry is also transferred to the accounts in the ledger. The posting reference columns in the journal and ledger are also completed. In a computerized system, this step is completed automatically when the transaction is recorded in the journal.

1. Accounting uses a double-entry system. Explain what this sentence means.

With a double-entry you need to record the dual effects of each transaction. Every transaction affects at least two accounts.