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185 Cards in this Set

  • Front
  • Back
fundamental accounting equation
A - L = OE or
A = L + OE
Assets
are measurable economic resources that the buiness owns and are likely to provide future benefits (resources a business owns)
Manufacturing business
make products from raw inputs
Service business
provide service to custormers or clients; they do not make or sell products
Merchandising business
sell manufactured goods to customers
Which finacila statement links together the income statement and balance sheet?
Statement of owner's equity
When a company distrubutes profits to its owners the result is
decrease in assets and owners's equity
A sole propietorship is an organizational form of business which
Is not legally separate from its owners
a company reported assets of $12,000 and liabilities of $2,500 what amount would be reported for owners equity
9,500
The income statement reports
Net income or loss for the period
Assets should originally be recorded at
Historical cost
historical cost
assets initially measured at the total cost to acquire them
Partnership agreement outlines
how the the profits (losses) are shared
Managerial accounting
this area of account primarily serves the decision making needs of internal users
bank is a major user of this accounting info
external financial statements also suppliers and creditors besides banks
If a company purchases supplies on account for 5,000 what is the affect on the account equation
Assets increase 5,000 liabilities increase 5000 no effect on equity
Income statement reports
net income or loss
an example of a claim to resources of a business
account payable
a company purchases equipment for 45,000 cash. what is the effect on the accounting equation
no effect on the accounting equation because assets increase and decrease by the same amount
which financial statement includes only those activities that result in cash changing hands during the period
statement of cash flows
Sole proprietorships
are woned by one individual, are not legally separate from their wones. Thus, all profits or losses become part of the taxable income of the owner, who is also personally responsible for all of the business's debts.
Parnerships
are legally similar to properiotorships, but they have two or more owners
corporations
seperate legal entities that sell shares of stock to investors. Stockholders in corpations cannot be held liable for more than their investment in the corporation
management accounting
the area of accounting that produces financial info for internal users
finacial acconting
the area of accounting that produces financial info for external users
Liabilities
measuable and probable obligations that require the business to pay cash or deliver goods or services to other in the future
owner's equity
the difference between the assets the business owns and the liabilities it owes
Revenues
the amount that the business erarnd in delivering goods and servised to custormer
Expenese
the amounts of resources an entity used to earn revenurs during a period
Income statement
its prupose is to report the performance of abuiness over aperiod of time
Income statement equation
revenues - expenses = net income or loss
Statement of owner's equity
purpose is to report the changes in owner's equity for a period of time and link the income statement to the balance sheet
balance sheet equation
assets = liabilities = owner's equity
Statement of cash flows
purpose is to report the cash inflows and outflows for operating, investing, and financing activities during a period of time
the cash flow equation
cash for operating activities-cash form investing activities+-cash form financing activities= change in cash during the period
operating activities
activities directly related toearningprofits
investing activitiew
buying and sellingproductive resources primarly with long lives
finacing activites
borrowing and repaying bank loans, receiving additional investments formowners and withdrawing profit form the fusiness by owners
monetary unit assumption
fincial information is reporte in the standard monetary unit of the country in which the business operatews
Terms for the left and right side of an account are known as
debit/credit
ordering supplies is an example of
an exchange of promises
an account with the word prepaid is
asset
equipment as an asset
is not a current asset
external exchanges
measurable exchanges of assets and services form one company for other assets or promises to pay form another company
internal events
those that are not exchanges between the business and others, but which have a direct and measurable effect on the entity, including use of supplies and use of building over many years
During the accounting period when a transaction occurs it is analyzed its effects are recorded in
the general journal (using journal entries) and the amounts are posted at the general ledger(similar to T-accounts)
at the end of accounting period a what is prepared
trial balance; adjustments are analyzed, recorded and posted; financial statements are prepared; and the records are closed
Journal entries express in debit = credit form

recording transactions
are used to record financial info in the accounting system which is later summarized by account in the ledger
adjusting entries affect
both income statements and balance sheet accounts
when a customer pays for goods or services before the company deliver them, this result in
unearned revenues
Permanent accounts
retain their balances form the end of one period ot the begining of the next period
temporary acconts are
start with a zero balance at the beginning of the period
the ending balance in the owner's capital account is determined by
owner's contributions, withdrawals and net income
the proose of the closing process is to
colose temproray account to prepare for the next acconting period
examples of permanent accounts
equipment
prepaid rent
accounts payable
net profit margin formula
net income(revenues-expenses)/total revenue
Which will not appear in a closing journal
sales revenue
wages expense
prepaid rent
owner's capital
prepaid rent
which is least likely to appear in an adjusting journal entry
cash
interest payable
unearned revenue
depreciation expense
cash
Expense
dollar amount of resources an entity uses to earn revenues during a period
finical accounting
area of account that prepares information used by external parties, such as investor, creditors,a d regulators
accounting cycle
1. analyze transactions,
2. record the effects of the transactions in the journal
3. then post the effects to the ledger
At the end of the cycle:
4.take trial balance
5. adjust accounts
6. prepare financial statements
7. close the records
classified balance sheet
balance sheet separated into classifications: current assets are listed separately from non-current liabilities
Conservatism
accounting concept that when doubt exist about the amount at which assets and liabilities should be reported, the least optimistic measurement should be used
continuity assumption
accounting concept that asumes a business will continue operating long enough to meet its contractual commitments and plan; it will continue to operate into the foreseeable future
Credit
right side of accounts
decrease assets and increase liabilities and owner's equity
current assets
resources the business will use or turn into cash withing one year
current liabilities
short-term obligations that will be paid with current assets or settled by providing goods or services within the current operating cycle of the business or within one year of the balance sheet date, whichever is longer
debit
left side of accounts
increase assets and dectrease liabilities and owner's equity
journal
chronological record of the effects of transactions on accounts
journal entry
form used to record the effects of a transaction in the journal. accounts to be debited are listed first with the amounts indicate3d in the left column accounts to be credited are listed below the debited accounts with amounts indicated in the right column
Ledger
record used to accumulate the effects of transactions on individual accounts
T-accounts
simplification of a page in the ledger, written in the form of a T with debit effects on the left of the T and credit effects on the right
transactions
business activities that affect the accounting equation
Trial balance
list of individual accounts, usually in financial statement order, with their ending balances form the ledger (T-accounts) indicated in the appropriate column. Its purposes are to ensure that debits equal credits, summarize account balance, review and analyze necessary adjustment, and prepare financial statements
When a company borrows cash form a bank, what will occur
increase to cash
Dual effects
every transaction affects at least two accounts
Accrual accounting
revenues are recorded when earned (the company performs the service or delivers goods to customers) and expenses are recorded when incurred to generate revenues in the same period
cash basis accounting
that revenues are recorded when cash is received and expenses are recorded when cash is paid. cash basis accounting is not a generally accepted accounting principle
Matching principle
costs incurred to generate revenues should be recognized(recorded) in the same period to match the costs with benefits.
operating (cash-to-cash) cycle
process by which a company acquires and pay for goods and services and then sells goods and services to customers who pay cash to the company
revenue principle
revenue should be recognized in the period earned. also known as the revenue recognition rule
time period assumption
assumption that, to measure income for a specific period of time, the long life of a company can be reported in shorter time periods
Unadjusted trial balance
list of individual account, usually in financial statement order, with their ending balances form the ledger indicated in appropriate column ( debit right, credit left) the purpose is to check the account system to ensure that debits equal credits
the income statement reports net income that is calculated by combining
revenues - expense's
the expanded transaction analysis model includes revenues, expenses and the owner's drawing account as subcatergories of owner's captial
revenues increase with credits, thus increasing owner's equity
expenses increase with debits, thus decreasing owner's equity
(chapter 3 summary) for diagram
classified income statement
revenues and expenses are classified into operating revenues, operating expenses and other items on a classified income statement
a company can report operations over various time periods , such as months, quarters, and years. is called
time period assumption
when sales are made on account, what occurs
accounts receivable will increase
Under accrual basis accounting, revenue is recorded when
a customer buys goods
the matching principle determines
when costs should be recognized as expenses
Is Interest expense included under operating expenses on the income statement
no, it is listed separately
separating operating revenues and expenses from other items allows users of financial statements to
identify activities that are ongoing as opposed to those that are not
Expenses are
costs incurred to generate revenues
what is used to determine when to recognize revenue
revenue principle
when does the operating cycle end
when the company receives a customer's payment
the unadjusted trial balance contains which type of accounts
both income statement and balance sheet accounts
revenue accounts would not include
unearned revenue
Under accrual basis accounting, revenue is recorded when
a customer buys goods
Accrued expenses
expenses that are incurred but not recorded until the end of the period because cash is paid after the goods or sevices are used
Accrued revenues
revenues earned but not recorded until the end of the period because cash is received after the services are performed or goods delivered
adjusted trial balance
listing of all accounts and their balances after adjustments have been posted to the accounts to verify that debits equal credits
adjusting entries
entries necessary at the end of the accounting period to measure all revenues when earned and expenses when incurred during that period
closing the books
process of making all temporary account have a zero balance for the start of the next accounting period; the balances in the temporary are transferred to owner's capital to update its balance
contra-account
account directly related to another but with an opposite balance
depreciation
allocation of the cost of long-lived tangible assets over their estimated productive lives using a systematic and rational method
income summary
temporary account used only during the closing process; all revenues and expenses are closed to income summary and then income summary is closed to owner's capital
net profit margin
ratio that measures how effective managers were at generating profit on every dollar of sales
Permanent accounts
accounts that retain their balances from period to period;assets, liabilities, and owner's equity accounts are permanent
prepaid expenses
previously recorded assets that must be adjusted for the amount of expense incurred by using the asset during the period to generate revenues
temporary accounts
accounts that accumulated data for the current accounting period only : revenues, expenses and owner's drawing are temp
Unearned revenues
previously recorded liabilities created when cash was received in advance of being earned, that need to be adjusted for the amount of revenue earned during the period
Adjusting entries affect
both income statement accounts
When a customer pays for goods or services before the company delivers them, this results in what account is adjusted
unearned revenues credit
debit cash
Permanent accounts
retain their balances form the end of one period to the beginning of the next period
Temporary accounts
start with a zero balance at the beginning of the period
The ending balance in the owner's capital account is determined by
owner's contribution, withdrawals and net income
The purpose of the closing process is to
close temporary accounts to prepare for the next accounting period
If revenues are less than expenses then the income summary account will have ______ balance before being closed at the end of the period
debit
Assets are listed
in order of liquidity
What is the formula for net profit margin
Revenues-expense(net income)
_________________________
total revenue

times by 100
Which account is least likely to appear in an adjusting journal entry
cash
analyzing net profit margin(NPM)
a measure of how much profit management generated on every dollar of sales during the period by:
computation of NPM
Assesses management's effectiveness at generating sales and/or controlling costs
a higher ratio suggest management is more effective at generating sales and/or controlling costs.
What accounts would be used to determine the balance owed by a specific customer
Accounts receivable subsidiary ledger
Special journals can be used for transactions that are
frequent
Transactions involving customer payments are often recorded in
Cash Receipts journal
a company experiences a large number of sales on account. in order to reduce the amount of time spent recording these transactions, they can use
Revenue journal
Transactions involving customer payments are often recorded in
cash receipts journal
a company experiences a large number of sales on account. In order to reduce the amount of time spent recording these transactions, they can use
Revenue journal
Dons auto repair services uses a cash receipts journal to record payments from customer for services provided. don received $500 form Thompson for repair work on this car. In which column of the cash receipts journal should this transaction be recorded
Fees Earned Cr.
Which of the following does not represent one of the three basic features of an effective accounting information system:
usefulness
accessible
flexibiblity
cost effectiveness
accessible
what is the list of the four phases in the development of an accounting information system
analysis, design, implementation, and feedback
Transactions involving customer payments are often recorded in
cash receipts journal
A company needs to pay its supplier were would look to determine how much is owed to supplier
accounts payable subsidiary ledger
the cash receipts journal provided by peachtree complete 2008 has__________colmns when compared to the manual version
less
all correcting entries should be recorded in the
general journal
what should be used to record end-of-period adjustments
general journal
When a company uses special journal in their computerized accounting system, a given transactions will be recorded in
in the general journal or one of the four special journal
Accounting Information system
(AIS)
collects, classifies, summarizes, and reports the financial information about a business to interested parties
Accounts payable subsidiary ledger
used to collect and maintain all individual transactions with creditors that occurred on account
Account receivable subsidiary ledger
used to collect and maintain all individual transactions with customers that occurred on account
Cash payments journal
used to record all transactions involving the payment of cash from a business
Cash receipts journal
used to record all cash receipts/collections in a business regardless of the reason for the receipt
Computerized accounting information system
performs all steps in the accounting cycle electronically with the aid of general ledger software packages
control account
performs all steps in the accounting cycle electronically with the aid of general ledger software packages
crossfoot the columns
to verify that the total amounts of the debit columns equal the total amounts of the credit columns in a multi column special journal
foot
to add the dollar amounts in a column
Manual accounting information system
performs all steps in the accounting cycle by hand without the aid of a computerized program
purchases journal
Used to record all purchases made or expenses incurred on account
Revenue journal
used to record services rendered to customers on account
special journal
used to record similar types of transactions in one convenient place
subsidiary ledger
group of accounts that share a common feature
components of an accounting information system
account receivable subsidiary ledger: collects and maintains individual customer records for transactions made on account

Accounts payable subsidiary ledger:collects and maintains individual creditor records for transactions made on account
Advantages of using subsidiary ledgers
Dedicated accounts for individual customers
Omission of unnecessary detail from the general ledger accounts
Ease of locating errors in individual customer and creditor accounts
Division of labor
The underlying assumptions of AIS
Usefulness: to adequately sever users, the AIS should be reliable, relevant,and accurate.
Cost effective: the usefulness of the AIS must be balanced against the cont of implementing it.
Flexibility: the AIS should meet the changing needs of a growing company
the developmental phases of a accounting system
Analysis: identify the needs of internal and external user
Design: create a system that meets users' needs and determine whether it should be manual or computerized
Implementation: transform a design on paper into a workable, effective, and efficient system.
Feedback: monitor the system periodically to ensure that needs are being met as planned
advantages of using a computerized accounting information system
Fewer errors
Simplified record keeping
Up-to-date balances
disadvantages of using a computerized accounting information system
Human errors made inputting information.
Loss of control over portions of the accounting process.
Ease of altering records and potential for fraud
Merchandising company operating cycle
Buy products
Sell products
Receive cash
Incur operating expenses
Manufacturing operating cycle
Buy raw materials
Make products
Sell products
Receive cash
Incur operating expenses
The sale of inventory should be recorded when
ownership is transferred to the customer
An income statement that separates cost of foods sold form other expenses is
multi-step income statement
Which of the following describes how payments to suppliers are recorded when they are made during the discount period using a perpetual inventory system
Decrease Cash; decrease Accounts payable' decrease inventory
the gross profit percentage
measures a merchandiser's ability to earn profit fro the sale of inventory
sales returns refer to
merchandise that customers return to the seller after the sale
FOB destination means that title to goods purchases is transferred when
goods reach the buyers place of business
cost of goods sold
is a term used for the cost of inventory sold
A debit to sales returns and allowances and credit to account receivable recognizes
a customer returned merchandise or received an allowance
cost of goods available for sale less ending inventory equals
cost of goods sold
Gross profit
must cover all operating expenses in order to generate a profit for the business
Cost of goods sold (CGS)
expense account including the total cost of inventory sold during the period
FOB destination
Sales term indicating that ownership changes when goods reach the buyer's premises and the seller pay the fright charges
FOB shipping point
sales term indicating that ownership changes when goods leave the seller's premises and the buyer pays the fright charges
Gross profit
amount the company earned from selling goods over and above their cost
Gross profit percentage
percentage of profit earned on each dollar of sales after considering the cost of products sold
Manufacturing company
sell goods it has made itself
Merchandising company
sells goods(merchandise) obtained from a supplier
periodic Inventory
inventory system that updates the inventory records"periodically" that is, at the end of the accounting period
perpetual inventory system
inventory system that updates the inventory records "perpetually" that is, every time inventory is bought,sold, or returned
Purchase discount
cash discount received for prompt payment of a purchase on account
purchase returns and allowances
reduction in the cost of inventory purchases associated with unsatisfactory goods
sales discount
discount given to customers for prompt payment of an account receivable
Service company
company that sells services rather than physical goods
Analyze merchandise purchases under a perpetual inventory system
The inventory account should include the purchase price and any cost, such as freight-in, that are needed to prepare the inventory for sale.

The inventory account is decreased whenever the purchaser returns goods to the supplier or receives a discount for prompt payment
Analyze merchandise sales under a perpetual inventory system
Two entries are made every time inventory is sold.

Sales discounts and sales returns and allowances are reported as contra-revenues, which reduce net sales.

credit card discounts and fright-out are recorded as operating expenses
merchandise sales under perpetual inventory has two entries
1. records the sale( and corresponding debit to cash or accounts receivable)
2. records the cost of goods sold(and a corresponding credit to invetory