Bookkeeping Flashcards
What does the term bookkeeping mean?
Bookkeeping refers to the recording of financial transactions and may differ in meaning among people.
What is the common misconception about bookkeeping?
Many people think bookkeeping is the same as accounting, involving financial statements and tax reports.
How has technology affected bookkeeping?
Computers and accounting software have blurred the distinctions between bookkeeping and accounting.
What were journals used for in traditional bookkeeping?
Journals were the books of original entry where transactions were recorded in date order.
What are special journals?
Special journals include sales journal, purchases journal, cash receipts journal, and cash payments journal.
What is a trial balance?
A trial balance is an internal report listing each account name and balance to check for errors.
What must be true for a trial balance to be correct?
The total of the debit column must equal the total of the credit column.
What are adjusting entries?
Adjusting entries are made to ensure accounts reflect the accrual basis of accounting.
What is the purpose of closing entries?
Closing entries reset the balances of income statement accounts to zero for the new accounting year.
What is the difference between the accrual method and cash method of accounting?
Accrual method recognizes revenues and expenses when earned or incurred, while cash method recognizes them when cash is received or paid.
What does the accrual method provide in terms of reporting?
A more complete reporting of assets, liabilities, and stockholders’ equity.
What is a key requirement of the accrual method under US GAAP?
Most corporations are required to use the accrual method of accounting.
How are revenues reported under the accrual method?
Revenues are reported when earned, regardless of when cash is received.
What happens to expenses under the accrual method?
Expenses are reported when they best match revenues or when they are used up.
What is double-entry bookkeeping?
Double-entry bookkeeping means every transaction involves at least two accounts.
What is the definition of a debit?
A debit is an entry on the left side of an account.
What is the definition of a credit?
A credit is an entry on the right side of an account.
What must be true for debits and credits in double-entry bookkeeping?
Total debits must equal total credits.
What is a T-account?
A T-account is a visual representation used to show the effects of debits and credits on an account.
True or False: The cash method of accounting is likely to violate the matching principle.
True.
True or False: Accounting software can detect all types of errors.
False.
Fill in the blank: The _______ method of accounting provides a more realistic reporting of revenues and expenses.
[accrual]
What are some common types of financial transactions recorded in bookkeeping?
- Purchase of supplies with cash
- Sale of merchandise on credit
- Salaries and wages earned
- Renting business office
- Borrowing money from a bank
What happens when a transaction is entered twice?
An incorrect amount was entered both as a debit and as a credit.
This may lead to confusion but does not affect the trial balance.
What is a T-account?
A visual aid used to illustrate the effects of debits and credits on general ledger accounts.
It has a left side for debits and a right side for credits.
In a T-account, where are debit amounts recorded?
On the left side of the T-account.
In a T-account, where are credit amounts recorded?
On the right side of the T-account.
What are the seven classifications of accounts in the general ledger?
- Assets
- Liabilities
- Stockholders’ equity
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
What are balance sheet accounts?
Accounts that include assets, liabilities, and stockholders’ equity, reported on the balance sheet.
What are the characteristics of balance sheet accounts?
They are permanent accounts whose balances are carried forward to the next accounting year.
What are income statement accounts?
Accounts that include operating revenues, operating expenses, non-operating revenues and gains, and non-operating expenses and losses.
What happens to income statement accounts at the end of the accounting year?
Their balances are closed and transferred to Retained Earnings.
What is the chart of accounts?
A list of all accounts available for recording transactions.
How are debits and credits used in asset accounts?
Assets have a normal debit balance; debits increase and credits decrease the account.
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ equity (for corporations) or Assets = Liabilities + Owner’s equity (for sole proprietorships).
What do debits and credits indicate in the accounting equation?
Debits increase asset accounts and decrease liability and equity accounts; credits do the opposite.
What is the effect on the accounting equation when a corporation receives cash for issuing stock?
Assets increase by cash and stockholders’ equity increases by common stock, keeping the equation balanced.
What is the impact of earning revenues on the accounting equation?
Assets increase (Accounts Receivable) and stockholders’ equity increases (Service Revenues).
What happens to stockholders’ equity when expenses are incurred?
Stockholders’ equity decreases.
When cash is received, how is it recorded?
Debit Cash.
When cash is paid out, how is it recorded?
Credit Cash.
Complete the statement: If a company pays $900 for rent, the account Rent Expense should be _______.
Debited $900.
What are asset accounts?
Accounts that represent resources owned by a company.
What is a contra-asset account?
An account that offsets the balance of another asset account.
What does the Allowance for Doubtful Accounts represent?
A contra-asset account used to estimate bad debts.
What are some examples of asset accounts?
- Cash
- Accounts Receivable
- Inventory
- Equipment
- Land
What is the role of prepaid expenses in accounting?
They represent future expenses that have been paid in advance.
What is accrued revenue?
Revenues reported when goods or services have been delivered, even if a sales invoice has not been generated.
Accrued revenues are amounts a company has a right to receive but invoices have not yet been prepared.
How are prepaid expenses defined?
Future expenses that have already been paid and appear as assets until used up or expired.
Example: Payment for vehicle insurance covering a future period.
What is inventory?
The cost of goods that have been purchased or manufactured and have not yet been sold.
What are supplies?
Items such as office supplies, manufacturing supplies, and packaging supplies that are on hand and reported as an asset.
What constitutes long-term investments?
Investments in common stock, preferred stock, bonds, real estate for sale, and restricted cash for long-term purposes.
What does the land account represent?
The cost of land used in a business, which is not depreciated.
