Accounting Chapter 3

True or false: A business that reports profits will always have sufficient cash.

False, A business operating at a profit can still run short of cash. Net income does not directly correspond with a change in cash.

Use of debits and credits

Record changes in assets, liabilities, and owners' equity

Cash transactions

Recorded in the cash account, the receipts are listed on the debit side and the payments are recorded on the credit side

Double entry account

Refers to the need for both credit and debit entries, equal in dollar amount, to record every transaction

Cash Basis Accounting

Reporting income when the cash is received and expenses when the cash is paid. Does not provide a good measure of profitability

If revenue is recognized when cash is received, and expenses are recognized when cash is paid, the accounting system in use is the

cash basis.

An owners' equity account is increased via a ______ entry

credit

An owners' equity account is decreased via a ______ entry

debit

If debit entries to an account exceed the total of credit entries to an account, that account has a _________ balance

debit

A company purchased a $30,000 piece of equipment by paying $10,000 cash and issuing a note payable for the unpaid balance. This transaction required a:

debit to Equipment of $30,000 credit to Notes Payable of $20,000 credit to Cash of $10,000

The entry to record the issuance (sale) of stock to investors in exchange for cash, requires a ________ to cash and a __________ to capital stock

debit, credit

In every transaction that is recorded,

debits must equal credits.

Sum of all _____ in ledger must be _____ to the sum of all ____

debits, equal, credits

Expenses _______ owners' equity. They are reported by _______

decreases, debits

Dividends

distributions of money, stock, or other property that a corporation pays to stockholders. Reduces total assets and stockholders' equity

Credit Balance

if the credit total exceeds the debit total, the account has a credit balance

Realization principle

indicates that revenue should be recognized at the time goods are sold or services are rendered

All of the accounts of a business are kept together in an accounting record called a

ledger

The __________ _____________ calls for offsetting expenses against revenue on the basis of cause and effect

matching principle

The most important concept involved in accrual accounting is the

matching principle

By offsetting revenue with resources consumed in generating that revenue, the matching principle provides the best measure of

net income.

Revenue increases __________ ________ therefore, revenues are recorded with _______ and entries

owners' equity, credit

Expenses are incurred to

produce revenue expense incurred is the cost when an asset is consumed.

The cash basis of accounting is particularly poor in assessing

profitability for a particular accounting period.

The purpose of accrual accounting is to most accurately measure

profitability for a particular accounting period.

An expense always

reduces owners' equity

Balance of a T account

the difference between the debit and credit entries

T Account Sides

Left (debit side) Right (credit side)

Credit

(Dealer) Liabilities Equities Revenues

Debit

(Dealer) Dividends Expenses Assets

Under the accrual basis of accounting

- revenue is recognized when it is earned. -expenses are recognized as goods or services are consumed to generate revenue.

Revenue reported in the income statement generally occurs at the same time as

-products are sold (delivered) to customers. -services to customers are rendered (provided).

Daves, Inc., purchased a 1-year insurance policy for $4,800 on July 1. Insurance expense for the quarter ending September 30 is

1,200

Role of Accounting Records

1. Establish accountability of the assets/transactions under an individual's control 2. Keep track of routine business activities 3. Obtain detailed information about a particular transaction 4. Evaluate the efficiency and performance of various departments within the organization 5. Maintain documentary evidence of the company's business activities

Financial Statement Order

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

Eight steps of the accounting

1. Journalize (record) transactions 2. Post each journal entry to the appropriate ledger accounts 3. Prepare trial balance 4. Make end of period adjustments 5. Prepare an adjusted trial balance 6. Prepare financial statements 7. Journalize and post closing entries 8. Prepare an after-closing trial balance

General Journal Steps (3)

1. The name of the account debited (cash) is written first, and written in the left hand money column 2. The name of the account credited (capitol stock) appears below the account debited and is indented to the right. The dollar amount appears in the right - hand money column 3. A brief description of the transaction appears immediately below the journal

Fiscal year

12 month accounting period

If a company bought a $60,000 piece of equipment on July 1, and the useful life of the equipment is 5 years, the equipment's depreciation expense for the month of August is

5 x12 = 60 60,000 / 60 = 1,000 $1,000

The balance in Johnston, Inc.'s, Cash account on July 1 is $82,000. During July, the following debit entries were posted to the Cash account: 7-7, $10,000; 7-14, $12,000; 7-21, $16,000; and 7-31, $22,000. The following credit entries were posted to the Cash account: 7-7, $14,000; 7-14, $19,000; 7-21, $17,000; and 7-31, $32,000. Johnston, Inc.'s, Cash account balance at July 31 is

60,000

As a company generates revenue, which asset accounts are most likely to increase?

Accounts Receivable Cash

Debit Balances in asset accounts

All asset accounts normally have debit balances. An increase in assets is recorded on the left and an asset account normally has a debit balance

Net Income

An increase in owners' equity resulting from the profitable operation of business. Net Income always results in an increase of owners' equity

The allocation of an expenditure to expense is particularly judgmental for which accounts?

Building Equipment

To record the cash purchase of buildings requires a debit entry to ___________ and a credit entry to __________

Buildings Cash

The entry to record the issuance (sale) of stock to investors in exchange for cash, requires a _________ to cash and a _______ to capital stock

Debit, Credit

A company purchased land for $50,000 by paying $20,000 cash, and by issuing a note payable for the remainder of the amount owed. It recorded this transaction by _________ Land for $50,000, __________ Cash for $20,000, and ________ Notes Payable for ________

Debiting, crediting, crediting, 30000

Revenue is recognized when a business has completed the ________ process

Earnings

Debit Balance

If the debit total exceeds the credit total, the account has a debit balance

The Journal

In an accounting system, the information about each business transaction is initially recorded in an accounting record called the journal -Chronicles day-to-day record of business transactions -Debits and credits are recorded in the journal and transferred (posted) to the accounts in the ledger

Matching Principle

In the measurement of net income for a period, revenue should be offset by all the expenses incurred in producing that revenue The concept of offsetting expenses against revenue on a case by case basis is called matching principle *Timing is important

Revenues ______ owners' equity. They are reported by ______

Increase, credits

Credit Balances in Liability and Owners' Equity

Increases in liability and owners' equity are recorded by credit entries and decreases of these accounts are recorded by debits. Liabilities and owners' equity have credit balances

Assets = ________ + ________

Liabilities + Owner's Equity

What effect does earning revenue have on the accounting equation?

Owners' Equity Increases

Which of the following results when a business reports a profit, but declares (pays) no dividends?

Owners' equity increases.

Expenses

The cost of goods and services used up in the process of earning revenue. "Cost of doing business" *ALWAYS causes a decrease in owners' equity *Decrease in assets if payment occurs at the time the expense is incurred, if the expense will not be paid until later the recording of the expense will be accompanies by an increase in liabilities increase in liabilities ex. cost of employee salaries advertising rent utilities depreciation of buildings automobiles office equipment

Ledger

The entire group of accounts is kept together in an accounting record called a ledger

Accrual Basis Accounting

The policy of recognizing revenue in the accounting records when it is earned and recognizing expenses when the goods and services are used

Revenue

The price of goods sold and services rendered during a given accounting period -Earning revenue causes owners' equity to increase -Selling merchandise to customers = cash or accounts receivable, increasing total assets

Posting

The process of transactions being first recorded in the journal and ledger accounts updated later

Ledger Account (Account)

The record used to keep track of increases and decreases in financial statements.

Accounting Cycle

The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements.

Time period principle

To provide the users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The period of time covered by an income statement is termed the company's accounting period.

True or false: Revenue is recognized when it has been earned, regardless of when cash is received from customers.

True

The cash settlement (payment) of a $40,000 account payable results in:

a decrease in Cash of $40,000 results in a decrease in total liabilities no change to owners' equity.

An account

a means of accumulating in one place all the information about changes in specific financial statement items, such as a particular asset or liability

When a company's expenses exceed its revenue, its income statement will report

a net loss

Accounting period

a period of time covered by an income statement

The equality of debits and credits in the general ledger is proved by preparing

a trial balance