Chapter 2
Business transaction
A financial event that changes the resources of a firm
Balance Sheet
A formal report of a business's financial condition on a certain date; reports the assets, liabilities, and owner's equity of the business
Income statement
A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses
Statement of owner's equity
A formal report of changes that occurred in the owner's financial interest during a reporting period
Break Even
A point at which revenue equals expenses
What are examples of liabilities?
Accounts Payable
Accounts Payable
Amounts a business must pay in the future
On account
An arrangement to allow payment at a later date; also called a charge account or open-account credit
revenue
An inflow of money or other assets that results from the sales of goods or services or from the use of money or property; also called income
expense
An outflow of cash, use of other assets, or incurring of a liability
equity
An owner's financial interest in a business
If an owner gives personal tools to the business, how is the transaction recorded?
As an additional investment by the owner recorded on the basis of fair market value.
What information does the balance sheet contain?
Assets Liabilities Owner's equity
What is the difference between buying for cash and buying on account?
Buying for cash results in an immediate decrease in cash; buying on account results in a liability recorded as accounts payable.
What are examples of assets?
Cash, AR, Supplies, Equipment, Prepaid Rent.
Accounts Receivable
Claims for future collection from customers
liabilities
Debts or obligations of a business
capital
Financial investment in a business; equity
withdrawals
Funds taken from the business by the owner for personal use.
A new business is starting out operating at a loss. What recommendations would you make?
Make a projection of income and expenses to determine how much new business will be needed to earn an income. Make sure they have an organized financial record keeping procedure.
Assets
Property owned by a business
What effect does revenue and expenses have on owner's equity?
Revenue increases owner's equity. Expenses decrease owner's equity.
What information is shown in the heading of a financial statement?
The business name The type of financial statement The period of time
Fair market value
The current worth of an asset or the price the asset would bring if sold on the open market
Owner's equity
The financial interest of the owner of a business; also called proprietorship or net worth
In what order are the financial statements prepared and why?
The income statement is prepared first because the net income or loss is needed to complete the statement of owner's equity. The statement of owner's equity is prepared next to update the change in owner's equity. The balance sheet is prepared last and the number from the change in owner's equity is incorporated.
Fundamental accounting equation
The relationship between assets and liabilities plus owner's equity
Net loss
The result of an excess of expenses over revenue
Net income
The result of an excess of revenue over expenses
True or False: The total amount of liabilities doesn't include inventory.
True
True or false: Services or goods sold on account is reflected as revenue.
True
Is the rent paid for future months an asset or expense?
asset