Accounting 4 + 5 Flashcards
Ledger
a group/file of accounts
Accounts
A record that documents each change to items in the accounting equation
-one per each asset, each liability, etc
3 types of ledger types
card, paper, digital
T accounts
a simple type of account used for you to understand accounting theory (paper)
ledger account
a system used to maintain up to date financial information
Debit
The left side of an account
-means debere in latin (to owe)
-begins on the left
Credit
The right side of an account
-means credere in latin (to trust)
-begins on the right
Accounting entry
An entry of all changes in accounts caused by one business transaction. Expressed by debits and credits.
Exceptional Account Balances
A balance that is opposite to normal.
(more credit in an asset t chart)
(more debit in a liability + equity chart)
Overdraft Agreement
A financial contract that allows a deposit account to go below zero
Overdraft protection
Protection to avoid the embarrassment and service charges when there are non-sufficient funds
Short term credit
Credit where the purchaser can delay payment for usually 30 days. The purchaser then has that 30 days to inspect and test the product and may deny payment if the goods are unsatisfactory
Purchased on account
An item is purchased on credit, meaning that it is not paid for at the time of purchase
Payment on account
If money is paid to a creditor to reduce the owed amount
Sale on account
An item is sold on credit, meaning that the purchaser did not pay for it at the time of purchase
Receipt on account
If money is received from a debtor to to reduced the amount owed
Trial balance
A procedure to check if the dollar debit amount equals the dollar credit amount.
Important features of Ledger accounts
- Each account has its own T account
- The dollar amount is recorded in the amount on the first line. This is the beginning value
- The beginning value of an account corresponds to the side of the fundamental accounting equation
Debit and Credit Theory
Assets, expenses, and drawings are debited
Liabilities, Equity: Revenue and Capital are credited,
Use for trial balance
to balance
5 Steps of taking off a trial balance
- Write headings (who what when)
- List all accounts and balances (no dollar signs)
- place debit values and credit values in designated areas
- Add up columns for both debit and credit
- See if sum of debit and credit columns balance, if not, check errors.
3 steps of taking a trial balance off a calculator
- Clear the calculator
- enter values as they appear in the ledger. (Debits have a positive value while credits have a negative)
- press enter, if it is correct, the total should be zero.
The total of an account
pin total, pencil footing, bottom line
the 4 steps to fix an imbalanced ledger
- re-add the trial balance column
- check if the required accounts are present, on the right side, and accurate.
- recalculate the account balances
- check that there is a balanced accounting entry in the accounts for each transaction.
Revenues
an increase in equity resulting from the sale of goods or services in the usual course of business
-Usually 1 account but 2 can occur
-Listed on CREDIT
Expenses
a decrease in equity due to running the business. Supporting revenue-making activities
-listed on DEBIT
-some expenses don’t have the word “expense” but counts as one
Drawings
when the owner takes money out of the business
-not an expense
-doesnt go on income statement
-listed on DEBIT
Income statement
a financial report that shows the revenue of a business, subtracts its expenses, and reveals the profit made for a given period of time.
-obligated by law to be created every YEAR
-second most important financial statement.
Capital
-will not change unless unusual transactions (investments)
-Doesn’t go to income statement
-listed on CREDIT
Net Income
When Revenue is greater than Expense
Income Tax Return
A detailed report sent to the government in which they use the net income figure to determine the tax owed by the business
Chart of Accounts
A list of the ledger accounts and their numbers arranged in ledger order
100s=asset
200s=liabilities
300s=equity
400s=revenues
500s=expenses
-copies of accounts are given for employees and auditors for insight.
Net Loss
When Expense is greater than Revenue
Fiscal Period
A period of time over which earnings are measured.
-approximately a year (12 consecutive months)
-Some businesses use half, quarterly, and monthly fiscal periods but annually are required for income tax
-aka, financial period
-aka, accounting period
The Time Period Concept
An accounting standard that provides that accounting will take place over a specific time period (fiscal period) and that they are equal in length when measuring the financial progress of a business
The Revenue Recognition Principal
A longstanding principle of both GAAP and IFRS requires revenue to be recorded in the accounts at the time the transaction was completed.
-this is done so that it promotes accurate revenue recognition.
Income statements are used by
Owners and managers, Bankers, Investors, and income tax authorities. (all for insight)
Purpose of expanding the ledger
more detail and insight on information
What is a transaction analysis sheet used for
Provides a place to organize your thoughts about the transaction
The Matching Principle
A accounting principle stating that each expense item related to revenue earned must be in the same period as the revenue it helped to earn.
-done so that the accounting information does not mismatch.
-if split in 2 years, the expense must be split accordingly.
-failure to do so will mess up both years of misinformation
The equity equation (with net loss)
Beginning Capital - Net loss - drawings = ending capital
the equity equation (with net income)
Beginning Capital + net income -Drawings = Ending Capital
