Accounting Chapter 4-6 Flashcards
Define revenue
The earnings of a business generated by selling products or providing services over a period of time.
What does it mean to recognize revenue?
To record the revenue when it has been earned or expense in the accounting records (on the income statements).
What are the 3 possible ways revenue can be recognized?
When customer…
1) pay cash now
2) pay cash later (accounts receivable)
3) prepays (pays before work) (unearned revenue)
What is the entry to record revenue if a customer pays when the service is delivered?
Service revenue increases and cash increases.
What is the entry to record revenue if a customer pays after the service is delivered?
Accounts receivable increases and service revenue increases.
What is the entry if a customer pays before the service is delivered? What is the entry to record revenue when the service is finally delivered?
Cash is increased and unearned revenue is increased.
Service revenue increases and unearned revenue decreases.
What type of account is unearned revenue? Why is it that type of account?
Liability account. If service isn’t performed the money is owed back.
What are the three possible ways to pay for an expense?
1) Pay cash
2) Pay the cash after expense incurred
2) Prepaid the expense
What does it mean to incur an expense?
If the activities related to the expense have been used or consumed (utilized or used).
What is the entry to record an expense if a company pays when the expense is incurred?
increase in expense account and decrease cash account.
What is the entry to record an expense if a company pays after the expense is incurred?
increase to accounts payable and increase to expense.
What is the entry if a company pays before the expense is incurred? What is the entry to record an expense when the expense is finally incurred?
Cash decreases and prepaid accounts increase.
Prepaid account decreases and “whatever the expense is” increases.
How does a company decide whether to include office supplies as a prepaid expense on the balance sheet (an asset) or an expense on the income statement?
The decision is dependent on the materiality.
What is an accounting period?
Time period covered by the financial statements.
State the purpose of adjustments.
To bring the accounts up to date.
What does accrual accounting state regarding revenue and expenses?
Revenues recorded when they are earned, expenses recorded when incurred regardless of whether or not we have received money or paye out money.
Provide 4 example of adjustments. (Bring accounts up to date.)
Supplies, insurance, accrued interest expense, depreciation.
Define accrued expenses.
Expenses incurred in one period and paid in a later period.
What is the entry to recognize accrued interest expense?
An increase to interest expense and an increase to interest payable.
Provide the entry to recognize depreciation expense at the end of accounting period.
Increase depreciation expense account and increase accumulated depreciation account.
What is the purpose of contra account?
A contra account is linked to another account and records decreases in the value of the account w/o changing the original value shown.
True or False: All long term assets are depreciated.
False, because land is never depreciated, everything else does depreciate.
What is the residual value of an asset?
Estimated amount that a long term asset could be sold for at the end of its useful life.
What does the term debit refer to?
An entry that increases assets, expenses and the owner’s drawings account or decreases liabilities, revenue and the owner’s capital account; recorded on the left side of a T-account.
True or False: A credit will always be an increase to any account.
False
Which three types of accounts use the credit side of the T-Account to increase their value?
Liabilities, Credit, and Capital Account
What is the normal balance of an asset?
Debit
What is the normal balance of a liability?
Credit
Explain the purpose of a chart of accounts.
It is a list of all the accounts used by a company and it includes the identification number assigned to each account.
What are the six steps of the accounting cycle?
1) Journals, 2) General Ledger, 3)Trial Balance, 4) Income Statement, 5) Balance Sheet, 6) Post Closing Trial Balance
In the accounting cycle, what is the purpose of creating journals?
To record all initial entries of every transaction (1 debit and 1 credit) and the purpose of the transactions.
In the accounting cycle, what is the purpose of the general ledger?
To group the activities of each account together and record the account balances.
In the accounting cycle, what is the purpose of the trial balance?
To make sure the total debits equal the total credits and that each entry posted from the journal were entered w/o a debit and a credit.
In the journal, what information will be entered in the PR (posting reference) column?
The number assigned to the account from the chart of accounts.
What is the relationship between the closing balance and the opening balance for an asset?
The closing balance for an asset at the end of a month is the beginning balance for the next month.
If the trial balance balances, were all transactions correctly recorded? Explain.
No, it would mean that each entry has a credit and a debit however a mistake could have been mad while recording transactions.
9 steps
1) Analyze transactions
2) Prepare Journal Entries
3) Post J.E. into the General Ledger
4) Prepare unadjusted Trial Balance
5) Prepare Adjusting Journal Entries
6) Prepare Worksheets
7) Prepare 3 Financial statements
8) Close the Books
9) Prepare Post Closing Trial Balance
What is the purpose of a worksheet?
To test that accounts balance and will continue to balance during th period end procedures.
Why must adjustments be made at the end of the accounting period?
So that assess, liabilities, revenues, and expenses are updated to their correct balances.
When making an adjustment to record unearned revenue that is now earned, which accounts are used and how are they affected?
Unearned Revenue is debited.
Earned Service Revenue is credited.
When making an adjustment to record depreciation on property, plant and equipment, which accounts are used and how are they affected?
Credit - Accumulated Depreciation.
Debit - Depreciation Expense.
*Accumulated Depreciation is a contra account.
When making an adjustment to record the used portion of prepaid insurance, which accounts are use and how are they affected?
Insurance Expense - Debit
Prepaid insurance - Credit
When making an adjustment to record accrued interest on a bank loan, which accounts are used and how are they affected?
Interest Expense - Debit
Interest Payable - Credit
What is an adjusted trial balance?
The adjustments previously recorded need to be added or subtracted to the original balance in a new column this is the adjusted trial balance.
What does the income statement report?
Net income or loss. (revenues and expenses)
Which statement is prepared after the income statement but before the balance sheet?
Statement of owner’s equity
What does the statement of owner’s equity report?
Changes in equity over the reporting period.
What two items will cause owner’s equity to increase?
1) if the owner invests more cash or assets into the business.
2) If the business earned a profit during the period.
What two items will cause owner’s equity to decrease?
1) If owner withdrawals any capital from the business for personal use.
2) If the business suffered a loss during the period.
Which categories of accounts will be reported on the balance sheet?
Assets, Liabilities, and Owner’s Equity
How does accumulated depreciation affect the value of property, plant and equipment?
It lowers the book value
What does it mean to close the books?
Updates the capital account (owner’s equity) and starts with a new income statement for the next accounting period.
What are the 3 steps to close directly to the capital account?
1) Zero out the revenue account to capital account.
2) Zero out the expense accounts to capital account.
3) Zero out the owners drawings account to capital account.
Which categories of accounts will appear on the post closing trial balance?
Only accounts that have a balance - Assets, Liabilities, and the Capital Account.
Identify two benefits of a computerized accounting system.
1) Allows companies to transfer electronic information to each other.
2) Information is processed almost instantaneously and transfers it when and where it is needed.
Net Worth:
Net worth = Assets-Liabilities
Accounting Definition
Accounting is an information system which provides a report to users about economic conditions and financial activity of a business or organization.
Journals-
Explains which accounts are affected and provides an explanation for each entry.
General Ledger-
Groups the activities of each account together and records the account balances (like double entry T-account).
Trial Balance-
A list of accounts and their balances at a point in time; the total debit balances should equal the total credit balances.
Income Statement-
The temporary record (financial statement) used to record revenue and expenses thereby calculating a profit or loss for the accounting period.
Balance Sheet-
A permanent document that shows what a company owns (assets) and what it owes (liabilities). The difference between assets and liabilities represents the net worth (or equity) at a specific point in time.
Post-Closing trial balance-
Ensures the balance sheet is in balance after closing the previous period.
Statement of Owner’s equity
Changes in equity over the reporting period
Ending O.E. = Beginning O.E. + Owner’s contribution + Net Income (loss) - Owner’s Withdrawals.
Owner’s Equity: Which transactions increase it and which decrease it?
Owner’s equity will increase if owner invests more cash or assets int o the business, or if the business earned a profit during the period.
Owner’s equity will decrease if the owner withdrawals any capital (cash or assets) from the business for personal use, or if a business suffered a loss during the period.
Balance Sheet-
Assets listed first, then Liabilities, then Owner’s Equity all presented vertically.
Income Statement-
Revenue-Expenses=Net Income (loss)
