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business transaction

answer

is any financial event that changes the resources of a firm. example: purchases, sales, payments, and receipts of cash

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steps to analyze the effect of a business transaction:

answer

1. Describe the financial event. • Identify the property. • Identify who owns the property. • Determine the amount of increase or decrease. 2. Make sure the equation is in balance.

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equity

answer

An owner's financial interest in a business

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capital

answer

Financial investment in a business; equity.

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basic accounting equation

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Assets = Liabilities + Owners Equity

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assets

answer

property owned by the business

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liabilities

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Debts or obligations owed by the business

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owner's equity

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the financial interest of the owner business; proprietorship or net worth

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balance sheet

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A financial statement that reports assets, liabilities, and owner's equity on a specific date.

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Revenues

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Revenues increase owner's equity.

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Expenses

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decrease owner's equity.

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revenue

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is the inflow of money or other assets that results from the sales of goods or services or from the use of money or property.

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expense

answer

involves the outflow of money, the use of other assets, or the incurring of a liability. Expenses include the costs of any materials, labor, supplies, and services used to produce revenue.

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accounts receivable

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Amounts owed by clients; claims for future collection from customers

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income statement

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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 ; The income statement shows the revenue earned and the expenses of doing business.

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Net income

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The result of an excess of revenue over expenses

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net loss

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The result of an excess of expenses over revenue.

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break even

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when revenue and expenses are equal

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financial statements

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Financial statements are reports that summarize a firm's financial affairs.

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statement of owner's equity

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A formal report of changes that occurred in the owner's financial interest during a reporting period reports the changes that occurred in the owner's financial interest during the reporting period. prepared before the balance sheet so that the amount of the ending capital balance is available for presentation on the balance sheet.

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Statement of owner's equity format

answer

1. The first line of the statement of owner's equity is the capital balance at the beginning of the period. 2. Net income is an increase to owner's equity; net loss is a decrease to owner's equity. 3. Withdrawals by the owner are a decrease to owner's equity. 4. Additional investments by the owners are an increase to owner's equity. 5. The total of changes in equity is reported on the line "Increase in Capital" (or "Decrease in Capital"). 6. The last line of the statement of owner's equity is the capital balance at the end of the period.

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Fair market value

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The current worth of an asset or the price the asset would bring if sold on the open market is the current worth of an asset or the price the asset would bring if sold on the open market.

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...

answer

The ending capital balance from the statement of owner's equity is also used to prepare the balance sheet

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balance sheet shows

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Assets—the types and amounts of property that the business owns, Liabilities—the amounts owed to creditors, Owner's Equity—the owner's equity on the reporting date.

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financial statement preparation

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Financial statements are prepared in a specific order: 1) income statement 2) statement of owner's equity 3) balance sheet

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classification

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A means of identifying each account as an asset, liability, or owner's equity

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T account

answer

A type of account, resembling a T, used to analyze the effects of a business transaction

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T Account: Assets - Left Right Rule

answer

LEFT Increases to asset accounts are recorded on the left side of the T account. RIGHT Decreases to asset accounts are recorded on the right side of the T account.

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T Account: Liabilities - Right Left Rule

answer

RIGHT Increases in liabilities are on the right side of liability T accounts. LEFT Decreases in liabilities are on the left side of liability T accounts.

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Account balance

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The difference between the amounts recorded on the two sides of an account

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footing

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A small pencil figure written at the base of an amount column showing the sum of the entries in the column.

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normal balance

answer

Usually account balances appear on the increase side of the account. The increase side of the account is the normal balance

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credits are used to record

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increases in liabilities and owner's equity.

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When charge customers pay cash to apply against their accounts, the amount is recorded

answer

on the left side of the Cash account and the right side of the Accounts Receivable account.

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The "Net Income" or "Net Loss" is transferred from the income statement to the

answer

statement of owner's equity.

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accounting cycle

answer

A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information

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general journal

answer

A financial record for entering all types of business transactions; a record of original entry

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Journalizing

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Recording transactions in a journal is the process of recording transactions in the general journal.

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The Diary of a Business

answer

The general journal is similar to a diary. The general journal details, in chronological order, the economic events of the business.

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audit trail

answer

A chain of references that makes it possible to trace information, locate errors, and prevent fraud : :To maintain the audit trail, descriptions should refer to document numbers whenever possible.

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compound entry

answer

A journal entry with more than one debit or credit

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ledger

answer

is called the record of final entry because the ledger is the last place that accounting transactions are recorded.

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Posting

answer

The process of transferring data from the journal to the ledger. takes place after transactions are journalized. Posting is the third step of the accounting cycle.

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general ledger

answer

A permanent, classified record of all accounts used in a firm's operation; the master reference file for the accounting system.

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balance ledger form

answer

A ledger account form that shows the balance of the account after each entry is posted

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The Posting Reference column of a journal is used to

answer

record the number of the ledger account to which the information is posted.

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The general ledger

answer

contains the accounts that are used to prepare the financial statements.

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worksheet

answer

A form used to gather all data needed at the end of an accounting period to prepare financial statements

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worksheet structure

answer

worksheet contains five sections: Trial Balance; Adjustments; Adjusted Trial Balance; Income Statement; Balance Sheet. Each section includes a Debit column and a Credit column. The worksheet has 10 columns in which to enter dollar amounts.

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Worksheet Trial balance section preparation

answer

1. Enter the general ledger account names. 2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. 3. Total the Debit and Credit columns to prove that the trial balance is in balance. 4. Place a double rule under each Trial Balance column to show that the work in that column is complete.

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adjustments or adjusting entries

answer

Journal entries made to update accounts for items that were not recorded during the accounting period.

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trial balance account listing

answer

On the trial balance, accounts are listed in this order: assets, liabilities, owner's equity, revenue, and expenses.

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Prepaid expenses

answer

Expense items acquired, recorded, and paid for in advance of their use

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Depreciation

answer

Allocation of the cost of a long-term asset to operations during its expected useful life

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straight-line depreciation

answer

Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life Depreciation = Cost - Salvage Value/Estimated useful Life

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Salvage value

answer

an estimate of the amount that may be received by selling or disposing of an asset at the end of its useful life

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contra account

answer

An account with a normal balance that is opposite that of a related

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book value

answer

That portion of an asset's original cost that has not yet been depreciated

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Locating Errors

answer

If total debits do not equal total credits, find the difference between total debits and total credits. If the difference is divisible by 9, there could be a transposition error. If the difference is divisible by 2, an amount could be entered in the wrong (Debit or Credit) column.

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The book value of long-term assets is reported on

answer

the balance sheet

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If a worksheet is prepared at the end of the accounting year,

answer

the financial statements are prepared using the worksheet data.

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On a worksheet, the adjusted balance of a contra asset account would be extended to

answer

the Balance Sheet Credit column.

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On a worksheet, the adjusted balance of the Supplies Expense account is extended to:

answer

the Income Statement Debit column.

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The adjusting entry to account for the expiration of prepaid insurance consists of

answer

a debit to Insurance Expense and a credit to Prepaid Insurance.

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If long-term assets are not adjusted, expenses on the income statement

answer

will be understated.

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Which of the following need not be completed separately if a worksheet is prepared?

answer

a statement of owner's equity

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The seventh step in the accounting cycle

answer

to journalize and post closing entries

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Closing entries

answer

Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero

question

Income Summary account

answer

a special owner's equity account that is used only in the closing process to summarize results of operations; Income Summary has a zero balance after the closing process, and it remains with a zero balance until after the closing procedure for the next period; Income Summary is classified as a temporary owner's equity account. Other names for this account are Revenue and Expense Summary and Income and Expense Summary.

question

four steps in the closing process

answer

1. Transfer the balance of the revenue account to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the balance of the Income Summary account to the owner's capital account. 4. Transfer the balance of the drawing account to the owner's capital account.

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special journal

answer

a journal that is used to record only one type of transaction

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subsidiary ledger

answer

A ledger dedicated to accounts of a single type and showing details to support a general ledger account

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sales journal

answer

A special journal used to record sales of merchandise on credit

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Double-entry accounting

answer

a procedure wherein the amount of all debit entries must equal the amount of all credit entries.

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invoice

answer

a customer billing for merchandise bought on credit.

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open-account credit

answer

A system that allows the sale of services or goods with the understanding that payment will be made at a later date. also referred to as charge-account sales

question

charge-account sales

answer

Sales made through the use of open-account credit or one of various types of credit cards.

question

A business credit card sale is recorded as:

answer

a debit to Accounts Receivable, a credit to a revenue account such as Sales. ::A customer payment is recorded as: a debit to Cash, a credit to Accounts Receivable.

question

conceptual framework

answer

A basic framework developed by the FASB to provide conceptual guidelines for financial accounting and statements; the most important topics are explanations of qualitative features of financial statements, basic assumptions underlying statements, basic accounting principles, and modifying constraints

question

The process used by the FASB in developing the conceptual framework statements

answer

reflects deductive reasoning and involves essentially the following steps: 1.Define the goals and objectives of accounting. 2.Identify users of financial reports and the uses made of the reports. 3.Examine the qualitative characteristics that make accounting information useful. 4.Identify and define the financial elements such as assets, liabilities, revenues, and expenses, whose inclusion and classification make financial statements meaningful and useful. 5.Establish the form and content of financial statements. 6.Set forth fundamental recognition criteria. 7.Develop measurement standards for financial elements that appear in the financial statements.

question

Accounting Standards Executive Committee (AcSEC) issues three important types of documents:

answer

1. Accounting and auditing guides. These releases provide guidance on accounting matters not addressed directly by the FASB and summarize the accounting and auditing practices in specific industries—for example casinos, airlines, insurance companies, and oil- and gas-producing companies. 2. Statements of position (SOP). SOPs provide guidance on a financial accounting question that has been raised until the FASB issues an official pronouncement on the topic. 3. Practice bulletins. Practice bulletins express the AICPA's position on narrow accounting issues that have not been considered by the FASB or SEC.

question

IFRS

answer

International Financial Reporting Standards (IFRS)

question

The conceptual framework of the FASB is focused on four levels of concepts: four levels of concepts:

answer

(1) qualitative characteristics of financial reports, (2) basic assumptions underlying financial reports, (3) basic accounting principles, and (4) modifying constraints.

question

qualitative characteristics

answer

These are necessary characteristics that must be present in financial statements if they are to be credible

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separate economic entity assumption

answer

This is the concept that a business is separate from its owner or owners and the financial statements reflect the affairs of the business, not those of the owner

question

going concern

answer

The assumption that a business will continue to operate indefinitely

question

monetary unit assumption

answer

It is assumed that only those items and events that can be measured in monetary terms are included in the financial statements. An inherent part of this assumption is that the monetary unit is stable. Thus, assets purchased one year may be combined in the accounts with those purchased in other years even though the dollars used in each year actually may have different purchasing power.

question

periodicity of income assumption

answer

Periodicity is the idea that economic activities of an entity can be divided logically and identified with specific time periods, such as the year or quarter

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historical cost basis

answer

The principle that requires assets and services to be recorded at their cost at the time they are acquired and that, generally, long-term assets remain at historical costs in the asset accounts

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revenue recognition principle

answer

Revenue is recognized when it has been earned and realized

question

realization

answer

Realization of revenue takes place only when cash, a financial claim, or other consideration is received for the sale of goods or services

question

matching principle

answer

The concept that revenues and the costs incurred in earning those revenues should be matched in the appropriate accounting periods.

question

accrual basis

answer

A system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period, regardless of when the cash related to the transaction is received or paid

question

full disclosure principle

answer

All information that might affect the user's interpretation of the profitability and financial condition of a business should be disclosed

question

transparency

answer

The transparency notion is that information provided in the financial statements and the notes accompanying them should provide a clear and accurate picture of the financial affairs of the company. The key to this idea is that of disclosure

question

Materiality

answer

In some cases where an accounting item is deemed too small to affect a user's decisions, the "required" accounting may be ignored

question

cost-benefit test

answer

If accounting concepts suggest a particular accounting treatment for an item but it appears that the theoretically correct treatment would require an unreasonable amount of work, the accountant may analyze the benefits and costs of the preferred treatment to see if the benefit gained from its adoption is justified by the cost

question

Conservatism

answer

If alternative treatments of items are of equal validity, the conservatism constraint suggests that the alternative resulting in lowest profit should be used

question

industry practice

answer

In a few limited cases, the unusual operating characteristics of an industry, usually based on risk, special accounting principles, and procedures, have been developed; these may not conform completely with GAAP for other industries

question

allowance method

answer

A method of recording uncollectible accounts that estimates losses from uncollectible accounts and charges them to expense in the period when the sales are recorded,

question

valuation account

answer

An account, such as Allowance for Doubtful Accounts, whose balance is revalued or reappraised in light of reasonable expectations.

question

direct charge-off method

answer

A method of recording uncollectible account losses as they occur

question

aging the accounts receivable

answer

Classifying accounts receivable balances according to how long they have been outstanding.

question

Fees Income closing

answer

The entry to close the revenue account Fees Income requires a debit to that account.

question

Owner's equity, closing

answer

After the closing entries are posted, the balance of the owner's capital account agrees with the amount of owner's equity shown on the balance sheet for the period. correct True

question

expense account closing

answer

After the closing entries are posted to the ledger, each expense account will have

question

After the worksheet has been completed, the next step in the accounting cycle is to

answer

prepare the financial statements.

question

control account

answer

An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger

question

schedule of accounts receivable

answer

A listing of all balances of the accounts in the accounts receivable subsidiary ledger

question

In a firm that uses special journals, an allowance given for damaged merchandise is recorded in the

answer

general journal.

question

The Sales Returns and Allowances account is presented

answer

on the income statement as a deduction from Sales.

question

Which of the following describes Sales Tax Payable?

answer

A liability account with a normal credit balance.

question

purchase requisition

answer

A list sent to the purchasing department showing the items to be ordered

question

purchase order

answer

An order to the supplier of goods specifying items needed, quantity, price, and credit terms

question

Purchases account

answer

An account used to record cost of goods bought for resale during a period.

question

cost of goods sold

answer

The actual cost to the business of the merchandise sold to customers

question

Cost of goods sold accounts follow the debit and credit rules of expense accounts

answer

Purchases is a temporary account classified as a cost of goods sold account. It is increased by debits and decreased by credits; its normal balance is a debit

question

purchases journal

answer

A special journal used to record the purchase of goods on credit.

question

cash discount

answer

A discount offered by suppliers for payment received within a specified period of time;

question

purchases discount

answer

A cash discount offered to the customer for payment within a specified period.

question

accounts payable ledger

answer

A subsidiary ledger that contains a separate account for each creditor

question

purchase allowance

answer

A price reduction from the amount originally billed

question

cost of goods sold (normal balance)

answer

The normal balance of cost of goods sold accounts is a debit.

question

Purchases Returns and Allowances (normal balance)

answer

The normal balance of Purchases Returns and Allowances, a contra cost of goods sold account, is a credit.

question

...

answer

The use of a purchases journal strengthens the audit trail.

question

...

answer

To show that the totals of the amount columns in the purchases journal were posted, the appropriate account numbers are written in parentheses below the totals.

question

Which of the following statements is not correct?

answer

A credit purchase of equipment for use in the business would be recorded in the purchases journal.

question

The total of the balances in the individual creditor's accounts should agree with the balance of

answer

the Accounts Payable account in the general ledger.

question

petty cash fund

answer

special-purpose fund used to handle payments involving small amounts of money

question

cash payments journal

answer

A special journal used to record transactions involving the payment of cash

question

petty cash voucher

answer

A form used to record the payments made from a petty cash fund

question

petty cash analysis sheet

answer

A form used to record transactions involving petty cash

question

endorsement

answer

A written authorization that transfers ownership of a check

question

blank endorsement

answer

A signature of the payee written on the back of the check that transfers ownership of the check without specifying to whom or for what purpose

question

full endorsement

answer

A signature transferring a check to a specific person, firm, or bank

question

restrictive endorsement

answer

A signature that transfers a check to a specific party for a stated purpose.

question

The entry to record an additional cash investment by the owner is recorded in

answer

cash receipts journal

question

The Payroll Tax Expense account is used to record

answer

Federal unemployment compensation tax

question

The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is most dependent on

answer

the amount owed

question

To record a deposit of federal income taxes withheld and social security and Medicare taxes, the accountant would

answer

debit one or more liability accounts and credit an asset account.

question

To record the deposit of FUTA tax, the accountant would

answer

debit Federal Unemployment Tax Payable and credit Cash.

question

Merchandise Inventory

answer

On the worksheet, the amount of the ending merchandise inventory is shown in the Income Statement Credit column in the account Income Summary and the Balance Sheet Debit column in the account Merchandise Inventory.

question

The net income for an accounting period can be determined using the worksheet by comparing the balances and determining the difference between the balances in the two

answer

only the Income Statement columns.

question

classified financial statement

answer

a format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group

question

multiple-step income statement

answer

a type of income statement on which several subtotals are computed before the net income is calculated

question

single-step income statement

answer

a type of income statement where only one computation is needed to determine the net income (total revenue - total expenses = net income).

question

Merchandise Inventory appearance

answer

Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. Beginning and ending merchandise inventory balances appear on the income statement. Ending merchandise inventory also appears on the balance sheet in the Assets section

question

gross profit

answer

the difference between net sales and the cost of goods sold (gross profit = net sales - cost of goods sold)

question

Operating expenses

answer

expenses that arise from normal business activities.

question

Current assets

answer

assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year

question

Plant and equipment

answer

Property that will be used in the business for longer than one year

question

Current liabilities

answer

debts that must be paid within one year

question

Long-term liabilities

answer

debts of a business that are due more than one year in the future

question

accounting cycle (steps)

answer

Step 1. Analyze transactions. Analyze source documents to determine their effects on the basic accounting equation. Step 2. Journalize the transactions. Record the effects of the transactions in a journal. Step 3. Post the journal entries. Transfer data from the journal to the general ledger accounts. Step 4. Prepare a worksheet. At the end of each period, prepare a worksheet. •Use the Trial Balance section to prove the equality of debits and credits in the general ledger. •Use the Adjustments section to enter changes in account balances that are needed to present an accurate and complete picture of the financial affairs of the business. •Use the Adjusted Trial Balance section to verify the equality of debits and credits after the adjustments. Extend the amounts from the Adjusted Trial Balance section to the Income Statement and Balance Sheet sections. • Use the Income Statement and Balance Sheet sections to prepare the financial statements. Step 5. Prepare financial statements. Prepare financial statements to report information to owners, managers, and other interested parties. •The income statement shows the results of operations for the period. •The statement of owner's equity reports the changes in the owner's financial interest during the period. •The balance sheet shows the financial position of the business at the end of the period. Step 6. Record adjusting entries. Use the worksheet to journalize and post adjusting entries. The adjusting entries are a permanent record of the changes in account balances shown on the worksheet. Step 7.Record closing entries. Journalize and post the closing entries to: • transfer net income or net loss to owner's equity; • reduce the balances of the revenue, expense, and drawing accounts to zero. Step 8. Prepare a postclosing trial balance. The postclosing trial balance shows that the general ledger is in balance after the closing entries are posted. It is also used to verify that there are zero balances in revenue, expense, and drawing accounts. Step 9. Interpret the financial information. Use financial statements to understand and communicate financial information and to make decisions.

question

gross profit percentage

answer

the amount of gross profit from each dollar of sales (gross profit percentage = gross profit ÷ net sales) gross profit/net sales (219000/540000 = .40555 x 100 = 40.56%)

question

Working capital

answer

the difference between current assets and current liabilities. it is a measure of the firm's ability to pay current obligations. Current assets - Current Liabilities = x

question

current ratio

answer

a relationship between current assets and current liabilities that provides a measure of a firm's ability to pay its current debts (current ratio = current assets ÷ current liabilities)

question

Inventory turnover

answer

the number of times inventory is purchased and sold during the accounting period (inventory turnover = cost of goods sold ÷ average inventory)

question

Inventory turnover calculation

answer

Inv. Turn = Cost of Goods Sold/Average Inventory; Avg. invnt = Beg. Inventory + Ending Inventory/2

question

Reversing entries

answer

journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses to avoid problems in recording future payments or receipts of cash in a new accounting period

question

Allowance for Doubtful Accounts

answer

is a contra asset account. Its normal balance is a credit. It is reported in the balance sheet as a deduction from Accounts Receivable to provide an estimate of collectible receivables. For this reason, it is called a valuation account.

question

net credit sales

answer

Net credit sales is calculated as total credit sales minus the sales return and allowances on credit sales.

question

percentage of net credit sales calculation

answer

losses from uncollectable accounts/net credit sales

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