ACC 151 Exam 1

A.L.O.R.E.D. balances

debit credit + A - - L + - O + - R + + E - + D -

how is depreciation recorded?

debit depreciation expense, credit accumulated depreciation

how do we close the books?

debit or credit (whichever one is the opposite of the normal balance for that account) the account you want to close and do the other to retained earnings (ex: normal balance for revenue accounts is under credit, so to close the account we would debit the revenue account $x and credit retained earnings for the same amount)

what are current liabilities?

debts due within one year

what are long-term liabilities?

debts payable after one year

how is depreciation calculated?

depreciation = cost/life

what are dividends?

distributions of assets to stockholders

what is the time-period concept?

ensures that accounting information is reported at regular intervals

what question does the income statement answer?

how well did the company perform this year?

what is the accounting cycle?

identify and measure transactions ↓ enter into journal ↓ post to accounts ↓ trial balance ↓ adjusting entries ↓ adjusted trial balance ↓ prepare financial statements ↓ closing entries

what is the order of the financial statements?

income statement → statement of retained earnings → balance sheet → statement of cash flows

what is a t-account?

record of increases and decreases in a specific asset, liability, equity, revenue, or expense account

what is cash-basis accounting?

records revenues when we receive the cash and expenses at the time we pay cash; ignores important info; results in incomplete financial statements; only used by the smallest businesses

what is accrual accounting?

records the impact of a business transaction as it occurs; required by GAAP; records revenues when earned and expenses when incurred

what is accumulated depreciation?

the sum of all the depreciation expenses; contra-asset account = always has a companion account (depreciation expense), normal balance is opposite of that of the companion account (credit)

what does it mean to "adjust the accounts"?

to make journal entries at the end of an accounting period to adjust the accounts' balances to accurately reflect the revenues and expenses of the current period

why do we close the books?

to prepare the accounts for the next period

what is the flow of accounting data?

transaction occurs → transaction analyzed → transaction entered in the journal → amounts posted to general ledger

what question does the balance sheet answer?

what is the company's financial position at year end?

where does the normal balance for each account lie?

where the + sign is in A.L.O.R.E.D.

what question does the statement of retained earnings answer?

why did the company's retained earnings change during the year, from the beginning balance ($0) to what they are at year end?

what are the 3 types of adjusting entries?

1.) deferrals 2.) depreciation 3.) accruals

what are the 3 transaction rules?

1.) every transaction must impact at least 2 accounts 2.) at least 1 debit and 1 credit 3.) the debit must equal the credit

what are the 2 purposes of the adjusting process?

1.) measure income 2.) update the balance sheet ** therefore, every adjusting entry affects both a revenue or expense account (to measure income) and an asset or liability account (to update the balance sheet) **

what are the 3 steps for a journal entry?

1.) specify each account affected by the transaction and classify by type 2.) determine if each account is increased or decreased (debit or credit them) 3.) record in the journal

examples of long term assets

PP&E (Property, Plant & Equipment -- land, buildings, computers, equipment), intangibles (patents), long-term investments

what are the 6 types of accounts?

A.L.O.R.E.D. - Assets Liabilities Owner's equity Revenues Expenses Dividends

what is a journal?

a chronological record of transactions

what is a trial balance?

a list of all accounts and their balances at a given time; usually prepared at the end of the period; shows that the debits equal the credits; facilitates preparation of the financial statements

what is liquidity?

a measure of how quickly an item can be converted to cash (cash is the most liquid asset then accounts receivable, then inventory, then equipment and buildings)

what is the general ledger?

a record containing all individual accounts used by a company

examples of current liabilites

accounts payable, short-term notes payable, income taxes payable, salaries payable, accrued liabilities

what is depreciation?

allocates the cost of a plant asset to expense over the asset's useful life; will decline in usefulness over time so we must account for this; exception to this is the asset of land

what are deferrals?

an adjustment made for payment of an item in advance or receival of cash in advance (ex: prepaid expenses, unearned revenues)

what are accruals?

an adjustment made for revenue earned, but not yet received or an expense incurred, but not yet paid; the opposite of deferrals (ex: accrued salary expense

what is book value?

an asset's original cost, less any accumulated depreciation that has been subsequently incurred

what appears on the balance sheet?

assets (current and long term) ----------------------------------------------------- liabilities (current and long term) owner's equity (common stock & retained earnings) * total assets should = total liabilities + total owner's equity *

what is the basic accounting equation?

assets = liabilities + owner's equity

what are current assets?

assets that are expected to be converted to cash, sold, or used within the next year or within the businesses' operating cycle (whichever is longer)

what are long-term assets?

assets that will be held longer than one year

what appears on the statement of retained earnings?

beginning retained earnings + net income (or - net loss) - dividends -------------------------------- ending retained earnings

what account is NEVER adjusted?

cash

examples of current assets

cash, accounts and notes receivable, inventory, prepaid expenses, short-term investments

what do the left and right side of t-accounts represent?

left side = debit right side = credit

examples of long-term liabilities

long-term notes payable, long-term bonds payable

what are the revenue principle and the expense recognition principle?

revenue principle -- says to record revenue when it is earned expense recognition principle -- record expenses when they are incurred

what appears on the income statement?

revenues - expenses ----------------------- net income/loss

what type of accounts do we close?

revenues, expenses, and dividends (temporary accounts)

what is another name for the balance sheet?

statement of financial position

what is another name for the income statement?

statement of operations

what is the adjusted trial balance?

summarizes all accounts and their final balances after all adjusting entries have been journalized and posted