Ch 3

Objectivity

Accountants preference for using dollar amounts that are relatively factual

net loss

A decrease in owners' equity resulting from unprofitable operations.

Dividends

A distribution of resources by a corporation to its stockholders. the resource most often distributed is cash.

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Fiscal Year

A fiscal period consisting of 12 consecutive months.

General Journal

A journal with two amount columns in which all kinds of entries can be recorded

Account

A record used to summarize all increase and decreases in a particular asset, such as cash, or any other type of asset equity, revenue or expense.

double-entry accounting

A system of recording every business transaction with equal dollar amounts of both debit and credit entries. As a result of this system, the accounting equation always remains in balance; in addition, the system makes possible the measurement of net income and also the use of error-detecting devices such as a trial balance.

Trial Balance

A two-column schedule listing the names and the debit or credit balances of all accounts in the ledger.

retained earnings

That portion of stockholders' (owners') equity resulting from profits earned and retained in the business.

Accountability

The condition of being held responsible for ones action

Prepare a trial balance and explain its uses and limitations:

explain its uses and limitations: - In a trail balance, separate debit and credit columns are used to list the balances of the individual ledger accounts. The two columns are then totaled to prove the equality of the debit and credit balances. This process provides assurance that (1) the total of the debits posted to the ledger was equal to the total of the credits and (2) the balances of the individual ledger accounts were correctly computed. While a trail balance proves the equality of debit and credit entries in the ledger, it does not detect such errors as failure to record a business transaction, or the posting of debit or credit entries to the wrong accounts.

Describe a ledger account and a ledger.

- A ledger account is a device for recording the increases or decreases in one financial statement item, such as a particular asses, a type of liability, or owners' equity. The general ledger is an accounting record that includes all ledger accounts - that is, a separate account for each item included in the company's financial statements.

Explain the double-entry system of accounting:

- The double-entry system of accounting takes its name from the fact that every business transaction is recorded b y two types of entries: (1) debit entries to one or more accounts and (2) credit entries to one or more accounts. In recording any transaction, the total dollar amount of the debit entries must equal the total dollar amount of the credit entries.

Explain the purpose of a journal and its relationship to the ledger:

- The journal is the accounting record in which business transactions are initially recorded. The entry in the journal shows which ledger accounts have increased as a result of the transaction and which have decreased. After the effects of the transaction have been recorded in the journal, the changes in the individual ledger accounts are then posed to the ledger.

Apply the realization and matching principles in recording revenue and expenses:

- The realization principle indicates that revenue should be recorded in the accounting records when it is earned - and that is, when goods are sold or services are rendered to customers. The matching principle indicates that expenses should be offset against revenue an the basis of cause and effect. Thus, an expense should be recorded in the period in which the related good or service consumed in the process of earning revenue.

Understand how balance sheet accounts are increased or decreased.

-Increases in asses are recorded by debits and decreases are recorded by credits. Increases in liabilities and in owners equity are recorded by credits and decreases are recorded by debits. Notice that the debit and credit rules are related to an account's location in the balance sheet. If the account appears on the left side of the balance sheet (asset accounts), increases in the account balance are recorded by left side entries (debits). If the account appears on the right side of the balance sheet (liability and owners equity accounts), increases are recorded by right side entries (credits).

Explain the nature of net income, revenue, and expenses:

-Net income is an increase in owners equity that results from the profitable operation of a business during an accounting period. Net income also may be defined as revenue minus expenses. Revenue is the price of goods sold and services rendered to customers. The matching principle indicates that expenses should be offset against revenue on the basis of cause and effect. Thus, an expense should be recorded in the period in which the related good or service is consumed in the process of earning revenue.

Identify the steps in the accounting cycle and discuss the role of accounting records in an organization:

-The accounting cycle generally consists of eight specific steps: (1) Journalizing (recording) transactions, (2) posting each journal entry to the appropriate ledger accounts, (3) preparing a trail balance, (4) making an end-of-period adjustments, (5) preparing an adjusted trail balance, (6) preparing financial statements, (7) journalizing and posting closing entries, and (8) preparing an after-closing trail balance.-Accounting records provide the information that is summarized in financial statements, income tax returns, and other accounting reports. In addition, these records are used by the company's management and employees for such purposes as:-establishing accountability for assets and transactions.-keeping track of routine business activities.-obtaining details about specific transactions-evaluating the performance of units within the business-Maintaining a documentary record of the business's activities (such a record is required by tax laws and is useful for many purposes, including audits.)

Understand how revenue and expense transactions are recorded in an accounting system:

-The debit and credit rules for recording revenue and expenses are based on the rules for recording changed in owners equity. Earning revenue increases owners equity; therefore, revenue is recorded with a credit entry. Expenses reduce owners equity and are recorded with debit entries.

Distinguish between accounting cycle procedures and the knowledge of accounting:

Accounting procedures involve the steps and processes necessary to prepare accounting information. A knowledge of the discipline enables one to use accounting information in evaluating performance, forecasting operations, and making complex business decisions.

Credit

An amount entered on the right side of a ledger account. A credit is used to record a decrease in an asset or an increase in a liability or in owners equity.

Debit

An amount recorded on the left side of a ledger account. A debit is used to record an increase in an asset or a decrease in a liability or in owners equity.

Net Income

An increase in owners equity resulting from profitable operations. Also, the excess of revenue earned over the related expenses for a given period

Accrual Basis Accounting

Calls for recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred. The effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.

Matching Principle

Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period.

Realization Principle

The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.

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.

Accounting Period

The span of time covered by an income statement. One year is the accounting period for much financial reporting, but financial statements are also prepared by companies for each quarter of the year and for each month.

Conservatism

The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower amount of income being recognized in the current accounting period. This concept is designed to avoid overstatement of financial strength or earnings

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.

journal

an accounting record in which transactions are initially recorded in chronological order

Expenses

the cost of the goods and services used up in the process of obtaining revenue.

Ledger

the group of accounts maintained by a company An accounting system includes a separate record for each item that appears in the financial statements. Collectively, these records are referred to as a company's ledger. Individually, these records are often referred to as ledger accounts.

revenue

the price of goods and services charged to customers for goods and services rendered by a business.

Posting

transferring information from a journal entry to a ledger account