Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
23 Cards in this Set
- Front
- Back
|
What is the normal balance of an asset account? |
Debit balance |
|
|
How can you increase/decrease an asset account? |
Debit = increase / Credit = decrease |
|
|
What is the normal balance of an liability account? |
Credit balance |
|
|
How can you increase/decrease an liability account? |
Credit = increase / Debit = decrease |
|
|
What is the normal balance of an equity account? |
Credit balance |
|
|
How can you increase/decrease an equity account? |
Credit = increase / Debit = decrease |
|
|
What is the primary account that changes in equity? |
Retained earnings |
|
|
What is retained earnings? |
Retained earnings is the historical balance of net income up to the date of the current period, less an distributions to shareholders. |
|
|
Since we know retained earnings (i.e., net income) is an equity account, the normal balance (assumed to be positive) should be a _ ___ balance. |
Credit |
|
|
Knowing that a positive net income is a credit balance in the equity account, we can now deduce that revenue is therefore a _______ balance and expenses are a _____ balance |
Revenue = Credit balance Expense = Debit balance (think of a debit card as something you primarily use to take money out with.) |
|
|
Double entry accounting requires that all journal entries have balancing entries that must zero in realtion to the following equation: ______ + _______ = Equity |
Assets + Liabilities = Equity |
|
|
Tip: on double entry accounting: try to start with cash or the income statement side of the entry and work towards the balance sheet. |
. |
|
|
J/E 1: Assume you are a wholesaler of widgets. Customer A comes in with cash to buy $20,000 worth of widgets. What is the journal entry? |
Debt Cash (BS): $20,000 Credit Revenue (IS): $20,000 |
|
|
J/E 1: What's the next part of this entry? The $20,000 was the retail cost of the widgets, but that is not what it cost you to make them ($15,000). So, at this point the $20,000 of revenue is going straight to net income (credit balance). TIP: start with the income statement side. |
Debt: Cost of Goods Sold (IS) $15,000 |
|
|
Recap on J/E 1 below is missing the offsetting entry for the COGS entry. What account is missing? Debit Cash: $20,000 Credit Revenue $20,000 Debit COGS: $15,000 Credit _______: $15,000 |
The offset to COGS is inventory. Inventory needs to be decreased (credit) by the widgets being sold. |
|
|
Checking this J/E is where we ensure that assets + liabilities = equity. What is the net change in assets from J/E 1? |
Cash/Revenue +20,000 Inventory/COGS - 15,000 Net assets/income 5,000 |
|
|
What is the net change in liabilties |
No change, no liabilities were impacted |
|
|
What is the net change in equity |
All through retained earnings (i.e., net income): Revenue +20,000 COGS - 15,000 Net income 5,000 |
|
|
Taking this all into consideration; if assets (debits) are positive numbers, what would net income and revenue look like on a company's trial balance. |
Net income and revenue are credit balances, and would therefore be negative balances on a trial balance, which should be flipped when aggregating a support schedule to show true revenue and net income as positives. |
|
|
J/E 1.2: What if I told you that Customer A has an account with our company because they have outstanding credit and you typically invoice them with 30 day terms? What account would change? |
This is typical in business. No cash comes in up front, but revenue is still recorded at the time of sale; as is the cost of goods sold. Instead of cash being debited, accounts receivable is the debit offset to the credit in revenue. |
|
|
J/E 1.3: It's been three months now since Customer A received the widgets and no cash has been received. Company policy at this time is to reserve 25% of the outstanding AR. Book that reserve journal entry. |
Dr. Bad debt expense $5,000 Cr. Bad debt allowance (BS offset to AR) $5,000 |
|
|
Layout the net asset summary as of J/E 1.3 |
Gross accounts receivable: +20,000 Dr. Bad debt allowance - 5,000 Cr. Inventory - 15,000 Cr. Net Asset Balance zero |
|
|
Layout the offsetting balance sheet accounts |
The offsetting entries are all income statement entries that flow to retained earnings in equity Gross Revenue +20,000 Cr. Bad debt expense - 5,000 Dr. Net revenue +15,000 Cr. COGS -15,000 Dr. Net income is zero |
