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35 Cards in this Set

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Rules/Guidelines for Preparing Accounting Info





Generally Accepted Accounting Principles

Dead as of 2011


Accounting Standards for Private Enterprises

- optional for private

- based on GAAP


International Financial Reporting Standards

- mandatory for public corporations

- for most countires

Business Entity Principle

Accounting for a business must be kept separate from the personal affairs of its owners.


- business account for usage based on percentage of use for both personal and business (car)

Cost Principle

Assets are shown on the balance sheet at the cost of their acquisition or construction. (not fair market val)

- GAAP/ASPE (private)

- buildings are listed at price bought, not current worth

Fair Value Principle

Assets are shown at their current market value.


- building listed at current worth


Form in which changes caused by transactions are recorded.


Group of accounts.

Double Entry Accounting

Requires debit amount to equal credit amount per transaction.

Things listed on Debit Side:

Asset balances

Asset increases

Liability decreases

Owners equity decrease

Things listed on Credit side:

Liabilities balances

Liability increases

Asset decreases

Owners equity increase

Rules for Creating Accounts

Balance account name and #

Transaction date, dollar value

Transaction Rules

Analyze transaction, enter date

Insure total DR = CD

Total each column for balances

Find surplus balance ( CR or DR)

Circle final amount.

Trial Balance

Financial statement that lists ledger account balances. Used to insure DR = CR.

Accounting Cycle

Balance Sheet -> enter balances -> t-charts -> trial balance -> new balance sheet

Working Capital

Current assets - current liabilities

Quick Ratio

(Cash + AR)/current liabilities

2:1 is good......4:1 is hard to manage

Equity Ratio

Owners equity/total assets

Banks like high ratio

Owner/investors like low ratio

Debit ratio

Total debts/total assets

Lower the better

Rate of return on net sales

Net income/net sales

Higher the better

Rate of return on OE

Net income/average OR

Higher the better

Should be at least more than 10%

Bad Debts expense

600s account

Loss due to uncollectible A/R

Allowance for Doubtful Accounts

Asset (100) contra account to AR

Amount of predicted bad debts

Adjust for Bad Debts: Income Statement Method

- estimates bad debts with % of net sales based on history of bad debts

Income Statement Method adjusting for Bad Debts

2% of net sales is not collectable. Net sales $500.

Bad debt exp is $10 (=500x.02%)

Bad debt exp....... 10

...... ADA.................... 10

Method adjusting bad debts Balance sheet method

Uses % of AR to estimate bad debt

Prepare AR age analysis.

Estimate % of loss.

Prepare adjusting entry.

Balance sheet method example for adjusting bad debts

173$ will be uncollectable

Current 70$ credit in ADA

Accrued Expenses

Expenses that have occurred but not yet recorded in books.

Accrued interest expense Example

Loan of 500$ at 5% APR (jan 1)

Record for (May 1)

Interest expense is 10.42$

(500$ x 5%)x 5 months/ 12 months

Debit interest expense....... 10.42

....... Credit interest payable....... 10.42


Annual percentage rate

Accrued Salaries Example

Commission is 10% of net sales.

Net sales = 100$

Salary Expense....... 10

........ salary payable.... 10

To record June commissions due to employees.

If accrued expenses aren't recorded:

Expense is understated

Liability is understated

Net income overstated

OE overstated

Accrued Revenue example

Jan 1

500$ 2yr investment, earns 10% apr.

Adjust for Dec 31

Interest receivable... 50

..... Interest revenue..... 50

Unearned Subscriptions Example

Receive 1000$ in advance for Jan 1.

Adjust subs. for year (500$)

Cash...... 1000

... Unearned rev (payable)... 1000

Unearned rev....... 500

..... Subs.. Rev.............. 500