Accounting Equation Flashcards
What is the accounting equation for a sole proprietorship?
Assets = Liabilities + Owner’s Equity
What is the accounting equation for a corporation?
Assets = Liabilities + Stockholders’ Equity
Define assets in the context of the accounting equation.
Resources that a company owns, such as cash, inventory, and equipment.
Define liabilities in the context of the accounting equation.
Obligations or amounts that a company owes to others.
What is owner’s equity?
The amount remaining after liabilities are deducted from assets.
How is owner’s equity calculated?
Assets - Liabilities = Owner’s (or Stockholders’) Equity
What is the purpose of the double-entry accounting system?
To ensure that every business transaction affects at least two accounts, maintaining balance in the accounting equation.
What does the balance sheet report?
A company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time.
What does the income statement report?
A company’s revenues and expenses, resulting in net income over a period of time.
True or False: The accounting equation must always remain in balance.
True
Fill in the blank: Withdrawals of company assets by the owner for personal use are known as _______.
draws
What happens when a company borrows money from a bank?
Assets increase and liabilities increase by the same amount.
What is the effect of purchasing equipment for cash on the accounting equation?
One asset increases and another asset decreases, resulting in no effect on total assets.
How does an expense affect the accounting equation?
It decreases assets and decreases owner’s equity.
What is the effect on the accounting equation when the owner invests personal funds into the business?
Assets increase and owner’s equity increases by the same amount.
List examples of assets.
- Cash
- Accounts Receivable
- Inventory
- Prepaid Insurance
- Investments
- Land
- Buildings
- Equipment
- Goodwill
List examples of liabilities.
- Notes Payable
- Accounts Payable
- Salaries and Wages Payable
- Interest Payable
- Income Taxes Payable
What is the effect of an owner’s drawing on the accounting equation?
Assets decrease and owner’s equity decreases.
What accounts are involved when a company records an owner’s investment?
- Cash
- J. Ott, Capital
What accounts are involved when a company records an owner’s drawing?
- Cash
- J. Ott, Drawing
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
What happens to assets when ASC pays $600?
Assets decrease by $600
How does an expense affect owner’s equity?
Owner’s equity decreases
What is recorded in the expense account when ASC incurs an expense?
Advertising Expense
What is the general journal entry to record the $600 advertising expense?
Debit Advertising Expense $600, Credit Cash $600
What are the total assets for Accounting Software Co. after the first five transactions?
$16,300
What is the total liabilities after the first five transactions?
$7,000
What is the owner’s equity after the first five transactions?
$9,300
What does the income statement report?
Company’s revenues, expenses, gains, and losses during a specified time interval
What is the net income for ASC for the first five days of December?
-$600
What effect does ASC’s consulting service transaction on December 6 have on the accounting equation?
+$900 = No Effect + +$900
What journal entry is made for the consulting services billed on December 6?
Debit Accounts Receivable $900, Credit Service Revenues $900
What are the total assets for ASC after six transactions?
$17,200
What is the total owner’s equity after the sixth transaction?
$10,200
What is the effect on the accounting equation for the temporary help service used on December 7?
No Effect = +$120 + -$120
What journal entry is made for the temp service expense on December 7?
Debit Temp Service Expense $120, Credit Accounts Payable $120
What is the net income for ASC for the first seven days of December?
$180
What happens to assets when ASC receives $500 from clients on December 8?
+$500 - $500 = No Effect + No Effect
What is the journal entry for the collection of accounts receivable on December 8?
Debit Cash $500, Credit Accounts Receivable $500
What is the ending owner’s equity for ASC on December 8?
$10,080
What does the statement of changes in owner’s equity summarize?
Changes in owner’s equity over a period of time
What is the owner’s equity at December 31, 2022, given assets and liabilities?
$60,000
Fill in the blank: The income statement is a link between __________.
balance sheets
True or False: The owner’s draws reduce owner’s equity.
True
What is the accounting equation for a sole proprietorship?
Assets = Liabilities + Owner’s Equity
What was the owner’s equity at December 31, 2022?
$60,000
How is owner’s equity at December 31, 2023 calculated?
$128,000 - $34,000 = Owner’s Equity, which is $94,000
What is the subtotal of owner’s equity after adding owner’s investment and net income?
$134,000
Fill in the blank: Owner’s equity at December 31, 2023 is ______.
$94,000
What is the net income calculated in Step 5?
$64,000
What happens to the accounting equation when a corporation receives an investment?
Assets increase and Stockholders’ Equity increases by the same amount.
In Corporation Transaction C1, how much did the Ott family invest?
$10,000
What is the journal entry for the investment made by the Ott family?
Debit Cash $10,000, Credit Common Stock $10,000
What effect does the purchase of treasury stock have on the accounting equation?
Assets decrease and Stockholders’ Equity decreases by the same amount.
What was the total assets after Transaction C2?
$9,900
What is the effect on the accounting equation when a corporation purchases equipment?
One asset increases while another asset decreases, resulting in no effect on total assets.
In Transaction C4, how much did ASI borrow from the bank?
$7,000
What effect does borrowing money have on the accounting equation?
Assets increase and Liabilities increase by the same amount.
What was the total assets after Transaction C4?
$16,900
What happens to stockholders’ equity when an expense is incurred?
Stockholders’ equity decreases.
What is the journal entry for the advertising expense transaction in Transaction C5?
Debit Advertising Expense $600, Credit Cash $600
What is the total assets after Transaction C5?
$16,300
True or False: The purchase of a corporation’s own stock results in an amount to be reported on the income statement.
False
What are the total assets for Accounting Software, Inc. as of December 5, 2023?
$16,300
What is the total liabilities for Accounting Software, Inc. as of December 5, 2023?
$7,000
What is the total stockholders’ equity for Accounting Software, Inc. as of December 5, 2023?
$9,300
What does the income statement report?
The company’s revenues, expenses, gains, and losses for a specified time period.
What was the net income for Accounting Software, Inc. for the five days ended December 5, 2023?
$(600)
True or False: The income tax expense is reported on the income statement for a Subchapter S corporation.
False
What amount was billed for consulting services performed on December 6, 2023?
$900
What is the effect on the accounting equation when a service is performed and billed?
+$900 in Assets, No Effect on Liabilities, +$900 in Stockholders’ Equity
What is the general journal entry for recording service revenues on December 6, 2023?
Debit Accounts Receivable $900, Credit Service Revenues $900
What were the total assets for Accounting Software, Inc. as of December 6, 2023?
$17,200
What is the total liabilities for Accounting Software, Inc. as of December 6, 2023?
$7,000
What is the total stockholders’ equity for Accounting Software, Inc. as of December 6, 2023?
$10,200
What were the total expenses for Accounting Software, Inc. for the six days ended December 6, 2023?
$720
What is the ending retained earnings for Accounting Software, Inc. as of December 6, 2023?
$300
What transaction occurred on December 7, 2023, and what is its effect on the accounting equation?
Used temp service for $120, resulting in No Effect on Assets, +$120 in Liabilities, -$120 in Stockholders’ Equity
What is the general journal entry for utilizing the temp service on December 7, 2023?
Debit Temp Service Expense $120, Credit Accounts Payable $120
What is the total assets for Accounting Software, Inc. as of December 7, 2023?
$17,200
What are the total liabilities for Accounting Software, Inc. as of December 7, 2023?
$7,120
What is the total stockholders’ equity for Accounting Software, Inc. as of December 7, 2023?
$10,080
What was the net income for Accounting Software, Inc. for the seven days ended December 7, 2023?
$180
What was the effect on the accounting equation when ASI received $500 from clients on December 8, 2023?
+$500 in Assets, -$500 in another Asset, No Effect on Liabilities or Stockholders’ Equity
What is the general journal entry to record the increase in Cash and decrease in Accounts Receivable on December 8, 2023?
Debit Cash $500, Credit Accounts Receivable $500
What is the expanded accounting equation for a corporation?
Assets = Liabilities + Paid-in Capital + Revenues - Expenses - Dividends - Treasury Stock
What is the net income calculated from the expanded accounting equation for the corporation?
$180
What is the expanded accounting equation used to calculate net income?
Revenues - Expenses = Net Income
In this case, Revenues are $900 and Expenses are $720, resulting in a Net Income of $180.
If Revenues are $900 and Expenses are $720, what is the Net Income?
$180
Net Income is calculated as Revenues minus Expenses.
True or False: The materials provided are a comprehensive guide to all accounting and bookkeeping topics.
False
The materials are an introduction and do not cover all complexities.
What should you do for assistance with specific accounting and tax circumstances?
Consult with accounting and tax professionals
This ensures that you receive tailored advice for your situation.
Fill in the blank: The net income can be calculated using the formula _______ - Expenses.
Revenues
This formula is essential for determining profitability.
What are the total Revenues and Expenses in the example provided?
Revenues: $900, Expenses: $720
These figures are used to calculate the Net Income.
What is the conclusion regarding the complexity of accounting topics covered in the materials?
Some complexities are not presented
Differences between financial statement reporting and income tax reporting are examples of complexities.
What is the formula for calculating Net Income?
Revenues - Expenses
This formula highlights the relationship between income and expenses.
What is the value of the Expenses in the provided accounting example?
$720
This figure is subtracted from Revenues to find Net Income.
