2. The Accounting Process Flashcards
what is the purpose of an account
- to accumulate detailed information regarding the changes in a specific asset, liability or shareholders equity item
where are accounts maintained
- in a general ledger
what is the standard format of a T-account
- the account name is on top of the T
- debit is always on the left
- credit is always on the right
what is the significance of the type of account in a T-account
- the type of account determines whether an increase or decrease in a particular transaction is represented by a debit or credit
what types of financial transactions have increases being debited and decreases being credited
- transactions that affect: assets
- dividends
- expenses
what types of financial transactions have increases being credited and decreases being debited
- transactions that affect: liabilities
- share capital
- revenues
what is the normal balance
- the side on which increases occur
how would you calculate the account balance for cash and accounts payable
- for cash: account balance = sum of debits - sum of credits
- for accounts payable: account balance = sum of credits - sum of debits
- both of these amounts would be written on the normal balance side
what does double-entry accounting mean
- that each transaction is recorded in at least 2 accounts
- where the total debits always equals the total credits
if the sum of all debit balance accounts in the ledger must equal the sum of all the credit balance accounts, what is another interpretation of the accounting equation
- assets = liabilities + shareholder equity
- assets = debits, liabilities = credits and shareholder equity = credits
- so debits = credits + credits
what is a trial balance
- an internal document that lists all the account balances at a point in time
what is the link between the income statement and statement of changes in equity
- in the income statement, expenses are deducted from revenue to get the net income
- this net income is transferred to the statement of changes in equity as part of retained earnings
what is the link between the trial balance an the statement of changes in equity
- the share capital and dividends are transferred from the trial balance to the statement of changes in equity
- share capital fills in the shares issued section
- dividends are subtracted from retained earnings
what is the link between the statement of changes in equity and the balance sheet
- after the net share capital, retained earnings and total equity have been calculated
- they are transferred to the balance sheet to fill out the shareholders equity section
what is the link between the trial balance and the balance sheet
- the accounts in the trial balance are used to fill in the assets and liabilities on the balance sheet
what are financial transactions recorded into in practice
- a general journal
what is a journal entry
- the debit and credit entry recorded in the general journal
what is posting
- the process of transferring amounts from the journal to the matching ledger accounts
what is the accounting cycle in very simple terms
- general journal
- general ledger
- trial balance
- financial statements
what is the accounting cycle in 4 steps
- general journal: transactions are analyzed and journalized
- general ledger: transactions are posted to the appropriate general ledger accounts
- trial balance: a trial balance is prepared to prove the equality of the debits and credits
- financial statements: financial statements are prepared from trial balance amounts
if given a general journal, how do do prepare the general ledger T-accounts
- list all of the accounts mentioned in the general journal and label them based on whether theyre assets, liabilities or SH equity
- draw the lists of T-accounts in their assets, liabilities or SH equity columns (the SH equity has 2 columns, one for share capital and dividends)
- go through the journal and input all the information in the matching T-accounts, INCLUDING the dates
- calculate the final balances for any T-accounts with more than 1 entry
when preparing an income statement or balance sheet, what is the first thing you need to do
- write the the name of the org at the top
- the type of statement below that
- then the date below that
