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Accounting

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the process by which financial information about a business is recorded, classified, summarized, interpreted and communicated to owners, managers and other interested parties; provides financial information about a business (for profit) or a nonprofit organization; often referred to as the "language of business"

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Accounting systems

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designed to accumulate data about a firms financial affairs, classify the data in a meaningful way and summarize the information into reports called financial statements

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Financial statements (balance sheet, income statement, statement of owners equity and cash flow statement)

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The most important output of an accounting system is ________.

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Accountants

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establish the records and procedures that make up the accounting system, supervise the operations of the accounting system and interpret the resulting financial information

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-Public accounting -Managerial accounting -Governmental accounting

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Accountants usually choose to practice in one of three areas:

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Public accountants

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these accountants work for public accounting firms

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Public accounting firms

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these firms provide accounting services for other companies

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-Auditing -Tax accounting -Management advisory services

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Usually, public accounting firms offer three services:

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Auditing

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the review of financial statements to assess their fairness and adherence to generally accepted accounting principles. They aren't looking for fraud.

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Tax accounting

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involves tax compliance and tax planning

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Tax compliance

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deals with the preparation of tax returns and the audit of those returns

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Tax planning

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involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability (the amount you owe)

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Management advisory services

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involves helping clients improve their information systems or their business performance

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Certified public accountants (CPA)

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Many public accountants are called ______.

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Private accounting

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Managerial accounting is also referred to ________. It involves working for a single business in an industry.

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-Establishing accounting policies -Managing the accounting system -Preparing financial statements -Interpreting financial information -Providing financial advice to management -Preparing tax forms -Performing tax planning services -Preparing internal reports for managment

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Managerial accountants perform a wide range of activities, including:

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Governmental accounting

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involves keeping financial records and preparing financial reports as part of the staff of federal, state or local governmental units

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Governmental units

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do not earn profits; however, these units receive and pay out huge amounts of money and need procedures for recording and managing this money

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-Securities and Exchange Commission (SEC) -Internal Revenue Service (IRS) -Federal Bureau of Investigation (FBI) -Homeland Security

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These four government agencyies employ a large number of accountants

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Entity

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recognized as having its own separate identity (i.e. an individual, a town, a university or a business)

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Economic entity

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a business or organizations whose major purpose is to produce a profit for its owners

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Social entity

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a non-profit organization such as cities, public schools, and public hospitals

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Sole proprietorship

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a business entity owned by one person

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Separate entity assumption

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the concept of keeping the firm's financial records separate from the owner's personal financial records

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-Simplest business to start -Least regulated form of business

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Advantages of a sole proprietorship:

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-Lifespan limited to the owner's lifespan or financial span -Unlimited liability -Tax liability

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Disadvantages of a sole proprietorship:

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Partnership

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a business entity owned by two or more people

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-the amount each partner will contribute -percentage of ownership for each partner -each partners share of the profits -the duties of each partner -the responsibility each partner has for the amounts owed by the business to creditors and tax authorities

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At the beginning of the partnership, the individuals enter into a contract detailing the rights, obligations, and limitations of each partner, including:

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Corporation

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a business entity that is separate from its owners and has a legal right to own property and do business in its own name

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Stock

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represents the ownership of the corporation

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Stock certificates

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stock is issued in the form of ________

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Stockholders (shareholders)

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the owners of a corporation

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Private corporations

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referred to as closely held corporations; ownership is limited to specific individuals; the stock of this type of corporation is not traded on a stock market exchange

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Public corporations

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the stock of this type of corporation is bought and sold on stock exchanges and in over-the-counter markets

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-indefinite life of the corporation; ends only when the business goes bankrupt or when voted to liquidate by stockholders -ownership is readily transferrable -limited liability - stockholders can only lose the amount they invested -ability to borrow money in its own name

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Advantages of a corporation:

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-double taxation - corporation pays taxes on income and shareholders pay taxes on dividends

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Disadvantages of a corporation:

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Generally Accepted Accounting Principles (GAAP)

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developed by the Financial Accounting Standards Board (FASB)

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Financial Accounting Standards Board (FASB)

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issues Statements of Financial Accounting Standards

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-writes discussion memorandum to explain the topic being considered -holds a public hearing where interested parties can express their opinions, either orally or in writing -issue an exposure draft which describes the proposed statement -votes - a minimum of four members must approve and then becomes part of GAAP

answer

things the FASB do:

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International accounting

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the study of accounting principles used by different countries

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Business transaction

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any financial event that changes the resources of a firm

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-Describe the financial event 1. Identify the property 2. Identify who owns the property 3. Determine the amount of increase or decrease

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Steps to analyze the effect of a business transaction:

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Assets

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property owned by a business

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Liabilities

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debts or obligations of a business

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Owner's equity

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the financial interest of the owner of a business

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-investment by the owner -withdrawals by the owner for personal use -revenue -expenses

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Components of owners equity

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increase

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investments by the owner and revenue _________ owner's equity

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decrease

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withdrawals by the owner for personal use and expenses ___________ owner's equity

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balance sheet

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a financial statement that shows the firms financial position on a given date; reports the assets, liabilities and owners equity of the business

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ASSETS = LIABILITES + OWNER'S EQUITY

answer

Fundamental accounting equation:

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fundamental accounting equation

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the relationship between assets and liabilities plus owners equity

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Income statement

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a formal report of business operations covering a specific period of time, such as a month or a year; also called a profit and loss statement or a statement of income and expenses; shows only revenue and expenses

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net income

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Revenue > expenses =

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net loss

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Expenses > revenue =

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break even

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Revenue = expenses

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-Who -What -When

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the heading on the Income Statement shows:

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Statement of owners equity

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a formal report of changes that occurred in the owners financial interest during a reporting period

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Capital balance

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the first line of the statement of owners equity is the ______ at the beginning of the period

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net income, net loss

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______ is an increase to owner's equity; _____ is a decrease to owner's equity

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withdrawals

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_______ by the owner are a decrease to owners equity

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Businesses

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establish separate records, called accounts, for asset, liabilities, and owners equity

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classification

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Accounts are recognized by their ________ as assets, liabilities or owners equity

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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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Asset Accounts

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show the property a business owns

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Liability Accounts

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show the debts of the business

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Owner's Equity Accounts

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show the owner's financial interest in the business

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debit

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The left side of the account is called the ______ side, regardless of the account title

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credit

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The right side of the account is called the ______ side, regardless of the account title

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normal balance

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The _________ side of the T account is the increase side of the account

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cash

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_____ is an asset

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left

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Assets appear on the ____ side of the accounting equation

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left, right

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Cash increases appear on the _____ side; decreases are shown on the ______ side

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capital

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_______ is an owners equity account

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right

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owners equity appears on the _______ side of the accounting equation

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right, left

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capital increases on the ____ side; decreases appear on the _____ side

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1. Analyze the financial event. 2. Apply the left-right rules for each account affected. 3. Make the entry in T account form.

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Use these steps to analyze the effects of the business transactions:

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Liability

answer

when a purchase is made on account, a _________ is created

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liabilities

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are amounts a business owes its creditors

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account balance

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the difference between the amounts on the two sides of the account.

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footing

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the small pencil footing written at the base of an amount column showing the sum of the entries in the column

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the balance is recorded on the right side (credit)

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If the total on the right side (credit) of the account is larger than the total on the left side (debit) of the account then...

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the balance is recorded on the left side (debit)

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If the total on the left side of the account (debit) is larger than the total on the right side (credit) of the account then...

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that amount is the balance

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If an account shows only one amount then...

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the total of those entries is the account balance

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If an account contains entries on only one side then...

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revenue

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The right side of the _______ account shows increases and the left side shows decreases.

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drawing account

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An owners equity account called a ________ is set up to record withdrawals

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double entry system of accounting

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The accounting system is called the _______ because each transaction has at least two entries - a debit and a credit

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Asset accounts: increase - left decrease - right Liability accounts: decrease - left increase - right Owners capital accounts: decrease - left increase - right Owners drawing accounts: increase - left decrease - right Revenue accounts: decrease - left increase - right Expense accounts: increase - left decrease - right

answer

Rules for debits and credits (T accounts):

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Trial balance

answer

a statement that test the accuracy of the total debits and credits after transactions have been recorded

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1. Enter the trial balance heading showing the company name, report title, and closing date for the accounting period. 2. List the accounts in the same order as they appear on the financial statements-assets, liabilities, owners equity, revenue, expenses 3. Enter the ending balance of each account in the appropriate debit or credit column 4. Total the debit column 5. Total the credit column 6. Compare the total debits with the total credits

answer

SIX STEPS TO PREPARE THE TRIAL BALANCE:

question

-Adding trial balances columns incorrectly -Recording only half of a transaction - for example, recording a debit but not recording a credit, or vice versa -Recording both parts of a transaction as debits or credits rather than recording one debit and one credit -Recording an amount incorrectly from a transaction -Recording a debit for one amount and a credit for a different amount -Making an error when calculating balances

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Trial Balance Errors

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-Check the arithmetic -Check that the correct account balances were transferred to the correct trial balance columns -Check the arithmetic used to compute the account balances -Check that each transaction was recorded correctly in the amounts by tracing the amounts to the analysis of the transaction

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Finding Trial Balance Errors

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Net income

answer

from the income statement is used on the statement of owner's equity

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chart of accounts

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is a list of all the accounts used by a business; shows the account name an the account number (account number is assigned based on the type of account)

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balance sheet accounts

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The _______ are listed first, followed by the income statement accounts

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1, 2, 3, 4, 5

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Assets - begin with the number ___ Liabilities - begin with the number ___ Owner's equity - begin with the number ___ Revenue - begin with the number ___ Expenses - begin with the number ___

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Permanent Temporary

answer

There are two types of accounts:

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Permanent account

answer

an account that is kept open from one accounting period to the next; examples include balance sheet accounts (assets, liabilities, and owners equity)

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Temporary account

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an account whose balance is transferred to another account at the end of an accounting period; examples include income statement accounts (revenue and expenses) and the drawing account

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Accounting cycle

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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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Step 1: Analyze transactions Step 2: Journalize the data about transactions Step 3: Post the data about transactions Step 4: Prepare a worksheet Step 5: Prepare financial statements Step 6: Record adjusting entries Step 7: Record closing entries Step 8: Prepare a postclosing trial balance Step 9: Interpret the financial information

answer

The 9 accounting cycle steps:

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Journal

answer

a record of original entry; a diary of business activities

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chronological order

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Transactions are entered in the journal in ________.

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Chronological order

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the order in which events occur

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General journal

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a financial record for entering all types of business transactions

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Journalizing

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the process of recording transactions in a journal

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Audit trail

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a chain of references that makes it possible to trace information, locate errors, and prevent fraud

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1. Analyze the financial event. 2. Apply the rules of debit and credit. 3. Make the entry in T-account form. 4. Record the complete entry in general journal form.

answer

Recording a business transaction steps:

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Compound entry

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a journal entry that contains more than one debit or credit

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equal

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No matter how many accounts are affected by a transaction, total debits must _______ total credits.

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Ledger

answer

the record of final entry. It is the last place that accounting transactions are recorded

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Posting

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the process of transferring data from a journal to a ledger

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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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1. enter the date of the transaction. 2. enter the general journal page in the Posting Reference column. 3. enter the debit amount in the Debit column or the credit amount in the Credit column. 4. compute the balance and enter it in the Debit Balance column or the Credit Balance column. 5. enter the ledger account number in the Posting Reference column.

answer

Post to the general ledger in five steps:

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-Assets -Liabilities -Owner's equity -Revenue -Expenses

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In the general ledger accounts, the balance sheet accounts appear first and are followed by the income statement accounts. The order is:

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Order of accounts

answer

speeds the preparation of the trial balance and the financial statements

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neatly cross out the incorrect item and write the correct data above it

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If an error is discovered before the entry is posted then...

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a correcting entry is journalized and posted.

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If the error is discovered after posting then...

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Correcting entry

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a journal entry made to correct the erroneous entry

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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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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.

answer

Complete the Trial Balance section in four steps:

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Adjustments (adjusting entries)

answer

are journal entries made to update accounts for items that were not recorded during the accounting period

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adjustment

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An ________ must be made to transfer part of the cost of the equipment to an expense account

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. . . is NOT recorded as an expense at the time of purchase.

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The cost of a long-term asset such as equipment . . .

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Depreciation

answer

the loss in value of a fixed asset due to wear and tear and the passage of time; the process of allocating the cost of long-term assets over their useful lives

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Straight-line depreciation (S/L)

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allocates an asset's cost in equal amounts to each accounting period of its useful life

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Cost - salvage value/ Estimated months of useful life

answer

S/L depreciation equation:

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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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Book value

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

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credit

answer

To record expired rent, you ___________ the Prepaid Rent account.

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debit

answer

To record depreciation, you _________ the Depreciation Expense account.

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credit

answer

To record depreciation, you _________ the Accumulated Depreciation account.

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1. Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns. 2. Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits.

answer

Complete the Adjusted Trial Balance section in two steps:

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Asset, liability, and owner's capital

answer

Which accounts appear on the balance sheet?

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Revenue and expense

answer

Which accounts appear on the income statement?

question

the changes that have occurred in the owner's financial interest during the reporting period.

answer

What does the statement of owner's equity report?

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Account form balance sheet

answer

a balance sheet that lists the assets on the left and liabilities and owner's equity on the right

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Report form balance sheet

answer

a balance sheet that lists the asset accounts first, followed by liabilities and owner's equity

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-A financial statement -A permanent part of the accounting record

answer

The worksheet is NOT...

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Balance sheet debit

answer

On a worksheet, the adjusted balance of the Supplies account is extended to the __________________ column.

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Closing entries

answer

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

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Income summary account

answer

a special owner's equity account that is used only in the closing process to summarize the results of operations

question

? classified as a temporary owner's equity account. ? does not have a normal balance. ? has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

answer

Characteristics of the Income Summary Account

question

1. Transfer the balance of the revenue account to the Income Summary account. Debit each revenue account and credit income summary. 2. Transfer the expense account balances to the Income Summary account. Debit Income Summary and credit each expense account. 3. Transfer the balance of the Income Summary account to the owner's capital account. If you have net income, debit income summary and credit capital. If you have net loss, debit capital and credit income summary. 4. Transfer the balance of the drawing account to the owner's capital account. Debit capital and credit drawing.

answer

There are four steps in the closing process:

question

Capital, Drawing

answer

The journal entry to close the drawing account is debit ______ and credit ________.

question

zero

answer

After the closing entries are posted, the Income Summary account has a(n) ____ balance.

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temporary

answer

After the closing entries are posted, all _________ accounts have zero balances.

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Postclosing trial balance

answer

a statement that is prepared to prove the equality of total debits and credits after the closing process is completed

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permanent

answer

Only ________ accounts appear on the postclosing trial balance.

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Interpret

answer

to understand and explain the meaning and importance of something

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source document

answer

The flow of data through an accounting system begins with a(n) _______________.

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balance sheet

answer

The financial statement that reports the same items as the postclosing trial balance is the ____________.

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Net profit

answer

If the total of expenses is smaller than the total of revenues, than the difference is termed:

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a debit to Prepaid Expense and a credit to Cash

answer

The journal entry to record the payment of a prepaid expense would include:

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Accounts payable

answer

If assets are numbered from 100-199, what account would not be given a number in the 100 series?

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Financial statements

answer

are periodic reports of a firm's financial position or operating results

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Auditors report

answer

an independent accountant's review of a firm's financial statements

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Equity

answer

the owner's financial interest in a business

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Revenue

answer

an inflow of money or other assets that results from the sales of goods or services or from the use of money or property. It is also called income

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Accounts receivable

answer

claims for future collection from customers

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1st Income Statement 2nd Statement of Owner's equity 3rd Balance Sheet

answer

Financial statements are prepared in a specific order:

question

T-account

answer

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

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Account balance

answer

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

question

1. Compute the totals of each side of the T account. Use footings for columns that have more than one entry. 2. Subtract the smaller total from the larger total. The result is the account balance.

answer

Calculating the Account Balance:

question

Chart of accounts

answer

a list of the accounts used by a business to record its financial transactions

question

Assets Liabilities Owner's capital

answer

Permanent accounts are:

question

Drawing Revenue Expenses

answer

Temporary accounts are:

question

-Source documents are analyzed -Transactions are recorded in the general journal -Transactions are posted from the general journal to the general ledger -Financial information is proved, adjusted, and summarized on the worksheet -Financial information is reported on financial statements

answer

Flow of Data Through a Simple Accounting System:

question

Account

answer

a device for recording the changes (increases or decreases) in the fundamental accounting elements

question

Accountant

answer

one who is concerned with the design of the system of records, the preparation of reports based upon the recorded data, and the interpretation of the reports

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Accounting equation

answer

assets = liabilities + owner's equity

question

Account payable

answer

an unwritten promise to pay creditors for property such as merchandise, supplies or equipment purchased on credit, or for services received on credit

question

Account Receivable

answer

an unwritten promise by a customer to pay at a later date for goods sold or services rendered

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Accounts Receivable Turnover

answer

measures how many times per year receivables are collected

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Accrual Accounting

answer

recording in each fiscal period applicable expenses, whether paid or not, and income earned

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Accrued Expense

answer

an expense incurred in operating a business during an accounting period but not yet paid

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Accrued Income

answer

income actually earned during an accounting period but which will not be received until a future period

question

Acid Test Ratio/Quick Ratio

answer

quick assets divided by current liabilities

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Activity Analysis

answer

measures how efficiently a firm is utilizing its assets

question

Adjusted Trial Balance

answer

a trial balance taken after adjusting entries have been recorded

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Adjusting entries

answer

entries made at the conclusion of a fiscal period to bring accounts up to date

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Age of Accounts Receivable

answer

measures the average time required to collect receivables

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Age of Inventory

answer

measures the average time required to sell inventory

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Allowance for Doubtful Accounts (Allowance for Bad Debts)

answer

a contra account utilized to accumulate totals against accounts receivable

question

Analyzing

answer

determining the fundamental significance of business transactions so that financial information may be properly processed

question

Bad Debts Expense/ Uncollectible Accounts Expense/ Loss from Uncollectible Accounts

answer

accounts receivable that are uncollectible

question

Balance sheet (Statement of Financial Position; Statement of Financial Condition)

answer

a formal financial statement illustrating the assets, liabilities, and owner's equity of a business as of a specific date

question

Balance sheet common-size statements/ percentage method

answer

express the major items in the balance sheet as a percent of the total assets and compare with previous fiscal periods

question

Balance sheet comparative forms

answer

record the balance sheet date for two or more comparable periods on the same form so that the information can be readily compared

question

Bank Draft

answer

a check drawn by one bank on another bank in which it has funds on deposit

question

Bank statement reconciliation

answer

the process by which the depositor verifies agreement between his checkbook balance and the bank statement balance

question

Bank statement

answer

an itemized listing prepared by the bank of additions to and subtractions from a depositor's account

question

Banker's Method

answer

a method of computing interest based on the assumption that there are 360 days in a year

question

Blank Endorsement

answer

the handwritten signature of the payee on the back of the check

question

Bookkeeper/Information Processor

answer

one who is involved in the process of recording financial information in a prescribed manner

question

Bookkeeping

answer

the recording of financial information in a prescribed manner

question

Book Value/Undepreciated Cost

answer

the cost of a fixed asset less its accumulated depreciation

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Budget

answer

a formal written statement, which may be based upon adjusted historical data, of management's plans for the future expressed in financial terms

question

Business Papers (source documents)

answer

the first record of a business transaction, such as check stubs, receipts, sales invoices, purchase invoices, cash register tapes, etc

question

Calendar year

answer

a twelve-month period beginning January 1st and concluding on December 31st

question

Cancelled Check

answer

a check that has been paid by the bank and returned to the drawer for recordkeeping

question

Capital (net worth; owner's equity; proprietorship)

answer

the amount by which the total assets exceed the total liabilities of a business; an owner's financial interest in a business

question

Cash

answer

coins, currency (paper money), checks, credit card receipts, and money orders received from others, as well as money deposited in the bank

question

Cash basis accounting

answer

an accounting practice in which revenue is not recognized in the accounting records until received and in which expenses are not recognized until paid

question

Cash discounts

answer

discounts from quoted prices as an inducement for prompt payment of invoices

question

Cash payments journal

answer

a book of original entry in which only cash disbursements are recorded

question

Cash payments/Cash disbusements

answer

money and money substitutes paid

question

Cash receipts journal

answer

a book of original entries in which only cash receipts are recorded

question

Cash short and over

answer

a special ledger account that is used to keep track of unexplained shortages or overages of cash

question

Cashiers check

answer

a check drawn by a bank on its own funds and signed by an officer of the bank

question

Certified Check

answer

a check that carries the guarantee of the bank that sufficient funds are available to pay the check when it is presented

question

Certified public accountant (CPA)

answer

an individual possessing a college education, having practical experience in accounting and who has passed a comprehensive state examination in order to be certified to practice public accounting in that state

question

Check

answer

a piece of commercial paper drawn on funds in a bank account and payable to demand

question

Check stub

answer

a form on which information is recorded by the drawer of a check concerning the check drawn; a source document

question

Combination journal

answer

a book of original entry which combines into one journal the features of the two-column general journal and a special journal

question

Compound journal entry

answer

an accounting entry that involves more than two accounts

question

Contra account

answer

an account designed to accumulate totals to offset a related account

question

CR

answer

the abbreviation for credit

question

Credit balance

answer

a condition that occurs when the total of the credits in an account is larger than the total of the debits in that account

question

Credit memorandum

answer

a note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any tax that may have been involved

question

Creditor

answer

a business or individual to whom a debt is owed

question

Cross Referencing

answer

a process of entering the journal page number in the ledger and the ledger account number in the journal

question

Current Assets

answer

cash or other assets that will be converted into cash or consumed within one year

question

Current Asset Ration

answer

current assets divided by current liabilitie

question

Current Liabilities

answer

debts of a business that are generally paid within one year

question

Current Ratio

answer

current assets divided by current liabilities

question

Data Entry (recording)

answer

the committing of a business transaction and the events surrounding such into writing

question

Debit Balance

answer

a condition that occurs when the total of the debits in an account is larger than the total of the credits in that account

question

Debit memorandum

answer

items the bank deducts from the account balance

question

Debtor

answer

the business or individual who owes a debt

question

Deposits in transit

answer

deposits that have been made and added to depositor's checkbook, but which have not yet been listed on the bank statement

question

Deposit Ticket/Deposit Slip

answer

a bank form which lists those cash items (currency and coin) and individual checks to be deposited

question

Depreciation expense

answer

the portion of the original cost of a fixed asset that is assigned as an expense to the reporting period expected to benefit from its use

question

Disbursement

answer

a payment

question

Discount period

answer

a specific number of days during which a discount is available if the account is paid

question

Dishonored check

answer

a check not paid by the bank when properly presented

question

Dr.

answer

the abbreviation for debit

question

Drawee

answer

a person or concern, usually a bank, that has been ordered to make a payment of a check or draft

question

Drawer

answer

a person (depositor) who signs a check, ordering a payment to be made

question

Drawing Account

answer

a separate owner's equity account in which withdrawals of cash or other assets by the owner for personal use are recorded

question

Employee

answer

one who is under the control and direction of an employer with regard to the performance of employment

question

Endorsement

answer

the signature of the payee or other holder placed on the back of a check or other negotiable instrument

question

Endorser

answer

a person or company whose name is written on the back of a check

question

E.O.M

answer

end of month

question

Expense

answer

a decrease in assets, other than withdrawals by the owner, which result from efforts to produce revenues

question

Face of Note

answer

the principal sum the maker of a note promises to pay

question

Federal Income Tax Withholding

answer

the amount that an employer must withhold from an employee's pay for income tax purposes

question

Service business Merchandising business Manufacturing business

answer

The three types of business operations are:

question

Service business

answer

a business that sells services

question

Merchandising business

answer

a business that sells goods purchased for resale

question

Manufacturing business

answer

a business that sells goods that it has produced

question

Retail business

answer

a business that sells directly to individual customers

question

Merchandise inventory

answer

the stock of goods a merchandising business keeps on hand

question

Special journal

answer

a journal used to record only one type of transaction

question

Subsidiary ledger

answer

a ledger dedicated to accounts of a single type

question

Sales Purchases Cash receipts Cash payments General

answer

Journals used by Merchandising Businesses

question

General Accounts receivable Accounts payable

answer

Ledgers used by Merchandising Businesses

question

Sales journal

answer

a special journal used to record sales of merchandise on credit

question

- Saves time, effort, and recording space - Makes journalizing and posting more efficient - Requires only three summary postings to the general ledger at the end of each month - Allows division of work - Improves the audit trail

answer

Advantages of a Sales Journal

question

Accounts receivable ledger

answer

a subsidiary ledger that contains credit customer accounts

question

- Makes it possible to verify that customers are paying their balances on time and that they are within their credit limits - Provides a convenient way to answer questions from customers regarding their current balances or about a possible billing error

answer

An accounts receivable ledger:

question

- take a sales return, or - give a sales allowance

answer

A sale is entered in the accounting records when the goods are sold or the service is provided. If something is wrong with the goods or service, the firm may...

question

Sales return

answer

a firm's acceptance of a return of goods from a customer

question

Sales allowance

answer

a reduction in the price originally charged to customers for goods or services

question

sales allowance

answer

A reduction in the price originally charged to customers for goods or services is called a(n) ______________.

question

Contra revenue account

answer

The Sales Returns and Allowances account is a _________.

question

Contra Revenue Account

answer

an account with a debit balance, which is contrary to the normal balance for a revenue account

question

- use a general journal to record these transactions, or - use a special sales returns and allowances journal.

answer

Depending on the volume of sales returns and allowances, a business may

question

Net sales

answer

the difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account.

question

Control account

answer

an account that links a subsidiary ledger and the general ledger. Its balance summarizes the balances of the accounts in the subsidiary ledger

question

general ledger

answer

A control account links a subsidiary ledger and the _____________.

question

Schedule of accounts receivable

answer

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

question

Wholesale business

answer

a manufacturer or distributor of goods that sells to retail businesses or large consumers such as hotels and hospitals

question

- Cash discounts - Trade discounts

answer

The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers. However, many wholesalers offer:

question

Trade discount

answer

a reduction from the list price

question

List price

answer

the established retail price

question

Net price

answer

the list price less all trade discounts

question

List price - Trade discounts = net price

answer

Formula for net price

question

- single trade discount - series of trade discounts

answer

Trade discounts can be offered as:

question

Invoice

answer

a customer billing for merchandise bought on credit

question

The volume of both sales and profits will increase if buyers are given a period of a month or more to pay for the goods or services they purchase

answer

Advantages of Credit Sales:

question

- Sales on credit will lead to increases in profit only if each customer completes the transaction by paying for the goods or services purchased. - If payment is not received, the expected profits become actual losses and the purpose for granting the credit is defeated. - Therefore businesses need to closely analyze a customer's ability to pay before granting credit.

answer

Disadvantages of Credit Sales:

question

- Open-account credit - Business credit cards - Bank credit cards - Cards issued by credit card companies

answer

Types of credit sales

question

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

question

- A debit to Accounts Receivable - A credit to a revenue account such as Sales

answer

A business credit card sale is recorded as:

question

- A debit to Cash - A credit to Accounts Receivable

answer

A customer payment is recorded as:

question

- Sales Tax Payable - Sales - Sales Returns and Allowances

answer

At the end of each month, after the accounts have all been posted, The Style Shop prepares the sales tax return. Three accounts are involved:

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

Receiving report

answer

a form showing quantity and condition of goods received

question

Purchase invoice

answer

a bill received for goods purchased

question

Sales invoice

answer

a supplier's billing document

question

Purchases account

answer

an account used to record cost of goods bought for resale during a period; has a normal debit balance

question

Cost of goods sold

answer

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

question

Freight In account

answer

an account showing transportation charges for items purchased. It is also called Transportation In account

question

• The buyer is billed directly by the transportation company for the freight charge. The buyer issues a check directly to the freight company. • The seller pays the freight charge and includes it on the invoice. The invoice includes the price of the goods and the freight charge.

answer

There are two ways to handle freight charges paid by the buyer:

question

Purchases journal

answer

a special journal used to record the purchase of goods on credit

question

Net 30 days or n/30

answer

Payment in full is due 30 days after the date of the invoice

question

Net 10 days EOM or n/10 EOM

answer

Payment in full is due 10 days after the end of the month in which the invoice was issued

question

2% 10 days, net 30 days; or 2/10, n/30

answer

If payment is made within 10 days of the invoice date, the customer can take a 2 percent discount. Otherwise, payment in full is due in 30 days

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

Sales discount

answer

a cash discount offered by the supplier for payment within a specified period

question

1. Locate the general ledger account. 2. Enter the date. 3. Enter the posting reference. 4. Enter the amount from the purchases journal column. 5. Enter the new balance in the Debit Balance or Credit Balance column. 6. Go back to the purchases journal. Enter the general ledger account number under the column total.

answer

Post a column total to the general ledger in six steps.

question

- Allows for the division of accounting work among different employees - Strengthens the audit trail - Records all credit purchases in one place

answer

Advantages of a Purchases Journal:

question

purchasing department

answer

The purchase requisition is sent to the _____________________.

question

supplier

answer

The purchase order is sent to the _______.

question

Accounts payable ledger

answer

a subsidiary ledger that contains a separate account for each creditor

question

purchases

answer

The _________ account accumulates the cost of merchandise bought for resale

question

Purchase return

answer

a return of unsatisfactory goods

question

Purchase allowance

answer

a price reduction from the amount originally billed

question

Schedule of accounts payable

answer

a list of all balances owed to of the accounts in the accounts payable subsidiary ledger

question

contra cost of goods sold

answer

The Purchase Returns and Allowances account is classified as a ____________ __________ account.

question

Purchases, Freight In, and Purchases Returns and Allowances

answer

The accounts used to determine net delivered cost of purchases are __________, _________, and _______________________________.

question

Petty cash fund

answer

a fund of currency and coin established for the payment of small amounts of money

question

Cash Short or Over Account

answer

a special ledger account that is used to keep track of unexplained shortages and overages

question

Statement of Account

answer

a report sent to each customer, usually at the end of the month, which indicates the status of their account

question

Promissory note

answer

a written promise made by a person to pay a certain sum of money to another person or business at a specified time in the future

question

- Saves time and effort when recording and posting cash receipts - Allows for the division of work among the accounting staff - Strengthens the audit trail by recording all cash receipts transactions in one place

answer

The cash receipts journal:

question

funds on deposit in a bank

answer

Cash refers to currency, coins, checks, money orders, and _______________________.

question

Cash debit

answer

A cash receipts journal will always include a __________ column

question

Petty cash voucher

answer

a form used to reflect payments from the petty cash fund

question

Bonding

answer

the process by which employees are investigated by an insurance company that will insure the business against losses through employee theft or mishandling of funds

question

Cash credit

answer

The cash payments journal will always have a ___________ column.

question

Cash receipts and cash payments

answer

In a well-managed business, there are internal control procedures for handling and recording ____________ and _____________.

question

separation

answer

Good internal control requires a _________ of duties.

question

Payee

answer

the person or company who will receive payment on a promissory note, check, draft or money order.

question

Negotiable

answer

A financial instrument is this if ownership can be transferred to another person or business.

question

Blank endorsement Full endorsement Restrictive endorsement

answer

There are three types of endorsements:

question

Blank endorsement

answer

a handwritten signature of the payee on the back of the check

question

Full endorsement

answer

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

question

Restrictive endorsement

answer

an endorsement that limits the use of funds to the purpose stated

question

Deposit slip

answer

a blank form which list those cash and individual checks to be deposited.

question

Postdated check

answer

a check dated some time in the future

question

Canceled check

answer

a check paid by the bank on which it was drawn and returned to the drawer for recordkeeping

question

Service charge

answer

a fee charged by a bank to cover the costs of maintaining accounts and providing services

question

Outstanding checks

answer

checks that have been drawn and subtracted from the depositor's checkbook, but which have not yet been presented to the bank for payment

question

Deposit in transit

answer

a deposit that is recorded in the cash receipts journal but that reaches the bank too late to be shown on the monthly bank statement

question

Bank reconciliation statement

answer

a statement that accounts for all differences between the balance on the bank statement and the book balance of cash

question

1. Enter the balance on the bank statement. 2. Compare the deposits in the checkbook with the deposits on the bank statement. 3. List the outstanding checks. 4. List any bank errors. 5. Compute the adjusted bank balance. 6. Enter the balance in books from the Cash account. 7. Record any deposits made by the bank that have not been recorded in the accounting records. 8. Record deductions made by the bank. 9. Record any errors in the accounting records that were discovered during the reconciliation process. 10. Compute the adjusted book balance.

answer

Steps to prepare the bank reconciliation statement:

question

1. Limit access to the checkbook to designated employees. 2. Use prenumbered check forms. 3. Have a separation of duties. 4. File all deposit receipts, canceled checks, voided checks, and bank statements for future reference

answer

Well-run businesses put the following internal controls in place:

question

- Works under the control and direction of the employer - Uses tools or equipment provided by the employer - Works certain hours that are set by the employer

answer

Characteristics of an Employee

question

Independent contractor

answer

any person who agrees to perform a service for a fee and who is not subject to the control of those for whom the service is performed

question

- Does not work under the direct supervision or control of the company - Furnishes his or her own tools or equipment - Sets his or her own working hours

answer

Characteristics of an Independent Contractor

question

Time and a half

answer

the rate of pay for an employee's work in excess of 40 hours a week. It is one and one-half times the regular hourly rate of pay and we generally call this "overtime pay"

question

Social security tax

answer

a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits

question

- rate - earnings up to a calendar year earnings base

answer

The amount of social security tax is determined by:

question

Medicare tax

answer

a tax levied on employees and employers to provide medical care for the employee and the employee's spouse after each has reached age 65

question

- rate - earnings

answer

The amount of Medicare tax is determined by:

question

- Federal unemployment tax - State unemployment tax - Workers' compensation insurance

answer

Employers are required to pay:

question

Federal unemployment taxes

answer

taxes levied by the federal government against employers to benefit unemployed workers

question

State unemployment taxes

answer

taxes levied by the state government against employers to benefit unemployed workers

question

Workers' compensation insurance

answer

the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment

question

- Employee's name, address, social security number, and date of birth - Hours worked each day and week, and wages paid at the regular and overtime rates - Cumulative wages paid during the year - Amount of income tax, social security tax, and Medicare tax withheld for each pay period - Proof that the employee is a United States citizen or has a valid work permit

answer

For each employee the employer must keep a record of:

question

earnings base limit

answer

The Medicare tax does not have a(n) _________________.

question

6.2%, 1.45%

answer

Employers withhold social security tax at a rate of ____ and Medicare tax at a rate of _____.

question

Federal and state

answer

_______ and _____ unemployment taxes are levied against employers to benefit unemployed workers

question

- Hourly rate basis - Salary basis - Commission basis - Piece-rate basis

answer

The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings.

question

Hourly rate basis

answer

a method of paying employees according to a stated rate per hour

question

Commission basis

answer

a method of paying employees according to a percentage of net sales

question

Salary basis

answer

a method of paying employees according to an agreedupon amount for each week, month or other period

question

Piece-rate basis

answer

a method of paying employees according to the number of units produced

question

- Federal income tax withheld from employee earnings - Employees' share of social security and Medicare taxes withheld from earnings - Employer's share of social security and Medicare taxes

answer

Employers make payroll tax deposits for

question

- Electronic Federal Tax Payment System (EFTPS) - Federal Tax Deposit Coupon

answer

There are two ways to deposit payroll taxes:

question

- the amount of tax liability - the amount reported in the lookback period

answer

The frequency of deposits depends on

question

Employer's Quarterly Federal Tax Return, Form 941

answer

the Employer's Quarterly Federal Tax Return. It is a preprinted government form

question

Wage and Tax Statement, Form W-2

answer

a Wage and Tax Statement. It contains information about an employee's earnings and tax withholdings for the year

question

Transmittal of Wage and Tax statements, Form W-3

answer

the Transmittal of Wage and Tax Statements. It is a preprinted government form submitted with Forms W-2 to the Social Security Administration

question

Electronic Federal Tax Payment System (EFTPS)

answer

is a system for electronically depositing employment taxes using a telephone or a computer

question

Social security and Medicare

answer

The employer is required to match the employee's _____________ and ________ taxes.

question

Lookback period

answer

The ______________ is the four-quarter period ending on June 30 of the preceding year.

question

Unemployment Insurance program

answer

a program that provides unemployment compensation through a tax levied on employers

question

SUTA

answer

state unemployment tax

question

FUTA

answer

federal unemployment tax

question

Experience rating system

answer

a system that rewards an employer for maintaining steady employment conditions

question

Form 940 or 940-EZ

answer

the Employer's Annual Federal Unemployment Tax Return form. It is a preprinted government form.

question

- They paid unemployment tax to only one state. - They paid all federal unemployment taxes by January 31 of the following year. - All wages that were taxable for federal unemployment were also taxable for state unemployment.

answer

Businesses can use Form 940-EZ if:

question

- Pay an estimated annual premium in advance - Pay a deposit at the begin

answer

There are two ways to handle workers' compensation insurance:

question

Accrual basis/accrual accounting

answer

a system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period; recording in each fiscal period applicable expenses, whether paid or not, and income earned.

question

Inventory sheet

answer

a form used to list the quantity and type of goods a firm has in stock

question

Property, plant, and equipment

answer

long-term assets that are used in the operation of a business and that are subject to depreciation

question

Accrued expenses

answer

expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records; an expense incurred in operating a business during an accounting period but not yet paid

question

Prepaid expenses

answer

(also called deferred expenses) are expenses that are paid for and recorded before they are used, such as rent or insurance; items that are considered to be assets when acquired, but which will become expenses when consumed or expired

question

Accrued income

answer

income that has been earned but not yet received and recorded; income actually earned during an accounting period but which will not be received till the future

question

Unearned income

answer

(also called deferred income) is income received before it is earned

question

- Subscription income - Management fees - Rental income - Legal fees - Architectural fees - Construction fees - Advertising income

answer

Unearned Income Items include:

question

Land

answer

The one item classified as property, plant, and equipment that is not subject to depreciation is ____.

question

debit, income statement

answer

Net income is entered in the _____ column of the ______________ section of the worksheet.

question

credit, increase

answer

Net income is entered in the ______ column of the Balance Sheet section because it represents an ________ in capital.

question

income statement

answer

The Income Summary debit and credit amounts are extended to the _______ _________ columns of the worksheet

question

Asset

answer

Anything of value owned is considered:

question

Assets = Liabilities + Owners Equity

answer

The basic accounting equation is:

question

Accounting Cycle

answer

The steps involved in handling all of the transactions and events completed during an account period, beginning with analyzing transactions and ending with a interpreting financial transactions:

question

Interest

answer

Money paid for the use of money is called:

question

2% discount if paid in 15 days, full payment due 28 days from date of invoice

answer

The accounting expression "2/15, n/28" means a:

question

Account Balance

answer

The difference between the total debits and total credits in an account is the:

question

Social Security

answer

FICA refers to what type of taxes:

question

Debit equipment, credit accounts payable

answer

If a funeral home buys equipment on account, the entry to record the transaction would be:

question

Debit cash, credit accounts receivable.

answer

If a funeral director receives payment from a client who had purchased a service on a 30 day account, he would make which of the following entries:

question

Balance Sheet

answer

A statement regarding the status of assets, liabilities, and owners equity as of a specific date:

question

Federal Insurance Contributions Act

answer

a federal act which requires most employers and employees to pay taxes to support the federal social security program

question

Federal Unemployment Tax Act

answer

a federal act imposed upon each employer for the purpose of financing the administration costs of the federal and the state unemployment compensation programs

question

F.I.C.A.

answer

abbreviation for federal insurance contributions act

question

Final Processing/Reporting

answer

the process of communicating the results achieved during an accounting period to others

question

Fiscal period

answer

a period of time covered by an income statement

question

Fixed Assets

answer

property of a relatively permanent nature used in the operation of a business and not intended for resale

question

Fixed Liabilities

answer

liabilities that are not due and payable within one year

question

Footing

answer

a total, written in small pencil figures, under the last entry in a column of an account

question

Gross earnings

answer

income before any deductions have been made

question

Gross profit

answer

net sales minus the cost of goods sold

question

Gross profit percentage

answer

gross profit divided by net sales

question

In Balance

answer

a condition in which the total of the debits and the total of the credits are equal in an account

question

Income

answer

an inflow of asses as a result of selling a product or providing a service

question

Income statement common-size statements

answer

express the major items in the income statement as a percent of net sales and compare with previous fiscal periods

question

Income statement comparative forms

answer

record the income statement data for two or more comparable periods of the same form so that the information can be readily compared

question

Income tax

answer

a tax levied on the earnings of individuals and businesses by federal, state, and local governments

question

Interpreting

answer

explaining the significant events or developments that occur, usually taking the form of analysis and comparisons

question

Inventory turnover

answer

the number of times the average inventory has been sold or used up during a period. 365/Cost of goods sold for period/Average inventory

question

Inventory

answer

a source document showing quantity, description, prices of items, total amount of purchase and the terms of payment

question

Liquidity Analysis

answer

measures the ability of the firm to meet its current obligations

question

Maker

answer

an individual who promises to pay on a promissory not; an individual who signs a promissory note

question

Maturity Date

answer

the date on which payment is due on a promissory note

question

Merchandise

answer

goods purchased for resale at a profit

question

Mortgage Payable

answer

a long-term liability; a written promise that pledges real property as security for payment of a debt

question

N.S.F.

answer

not sufficient funds

question

Note payable

answer

a written promise to pay a creditor a certain amount in the future

question

Note receivable

answer

a written promise of a customer to pay the business a sum of money at a future date

question

Operating expenses

answer

expenses incurred in the normal operation of a business

question

Original cost basis

answer

the amount originally paid for a depreciable asset

question

Other expenses

answer

expenses incurred that are not the direct result of regular trading activities of a business

question

Other income

answer

income received that is not the direct result of regular trading activities of a business

question

Overdraft

answer

the issuance of a check without sufficient funds in the account when it is presented for payment

question

Post-Closing Trial Balance

answer

a work paper prepared after all the owner's temporary equity accounts have been closed and all permanent accounts have been balanced and ruled, proving the equality of the debits and credits

question

Principal

answer

the face value of a promissory note upon which interest is computed

question

Profit margin

answer

net income divided by net sales

question

Profitability analysis

answer

provides evidence concerning the earnings potential of a company and how effectively the firm is being managed

question

Proving the journal

answer

a process which examines each page of a journal, confirming that the debit entries equal the credit entries on each page

question

Proving cash

answer

the process of determining whether the amount of cash, both on hand and in the bank, is the same as that which is indicated in the accounting records

question

Purchases

answer

a temporary owner's equity account used to record the buying of merchandise for resale

question

Purchases returns and allowances

answer

a temporary owner's equity contra account utilized to record the return of merchandise to the manufacturer or supplier as the result of material defects in workmanship and/or inferior product quality

question

Quarterly

answer

a three-month period

question

Quick assets

answer

cash, marketable securities, accounts, and notes receivable

question

Rate

answer

the annual percentage rate used to compute interest

question

Recording

answer

the committing of a business transaction and the events surrounding such into writing

question

Retail sales tax

answer

a tax imposed on tangible personal property sold at retail

question

Salary

answer

generally considered to be compensation for managerial or administrative services, expressed in terms of a month or year

question

Sales

answer

a temporary owner's equity account used to record the earning of revenue

question

Sales returns and allowances

answer

a temporary owner's equity contra account used to record credit given to a customer for shortages or damaged goods

question

Source document

answer

the first record of a business transaction

question

Statement of Owner's Equity

answer

a formal financial statement which summarizes all of the changes in owner's equity during a specified period of time

question

Straight line depreciation

answer

a method in which the depreciable cost basis of an asset is apportioned equally over its estimated useful life expressed in terms of months or years

question

Stop payment order

answer

an order by a depositor requesting a bank not to pay on a check previously issued

question

Summarizing

answer

bringing accounting data together in a way that will further enhance its usefulness, usually by means of reports and statements

question

Supplies

answer

a type of asset that will be consumed as it is used

question

T account

answer

a skeleton form of an account used for instructional purposes

question

Take home pay

answer

the amount of pay after deductions have been subtracted

question

Temporary owner's equity accounts

answer

accounts utilized to accumulate income, expenses, and owner's withdrawals for one accounting period only

question

Term of note

answer

the period of time from the date of the note to the maturity date

question

Transaction analysis

answer

the effect of transactions on the accounting elements

question

Transaction

answer

any activity of a business enterprise that involves the exchange of values

question

Transposition error

answer

an amount written with the digits in incorrect order

question

U.C.F.

answer

uncollectible funds

question

Useful life

answer

the estimated life of a fixed asset

question

Wage

answer

a form of compensation usually for skilled and unskilled labor, expressed in terms of hours, weeks or prices completed

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