Bookkeeping Flashcards
1
Q
What does the term bookkeeping mean?
A
Bookkeeping refers to the recording of financial transactions and may differ in meaning among people.
2
Q
What is the common misconception about bookkeeping?
A
Many people think bookkeeping is the same as accounting, involving financial statements and tax reports.
3
Q
How has technology affected bookkeeping?
A
Computers and accounting software have blurred the distinctions between bookkeeping and accounting.
4
Q
What were journals used for in traditional bookkeeping?
A
Journals were the books of original entry where transactions were recorded in date order.
5
Q
What are special journals?
A
Special journals include sales journal, purchases journal, cash receipts journal, and cash payments journal.
6
Q
What is a trial balance?
A
A trial balance is an internal report listing each account name and balance to check for errors.
7
Q
What must be true for a trial balance to be correct?
A
The total of the debit column must equal the total of the credit column.
8
Q
What are adjusting entries?
A
Adjusting entries are made to ensure accounts reflect the accrual basis of accounting.
9
Q
What is the purpose of closing entries?
A
Closing entries reset the balances of income statement accounts to zero for the new accounting year.
10
Q
What is the difference between the accrual method and cash method of accounting?
A
Accrual method recognizes revenues and expenses when earned or incurred, while cash method recognizes them when cash is received or paid.
11
Q
What does the accrual method provide in terms of reporting?
A
A more complete reporting of assets, liabilities, and stockholders’ equity.
12
Q
What is a key requirement of the accrual method under US GAAP?
A
Most corporations are required to use the accrual method of accounting.
13
Q
How are revenues reported under the accrual method?
A
Revenues are reported when earned, regardless of when cash is received.
14
Q
What happens to expenses under the accrual method?
A
Expenses are reported when they best match revenues or when they are used up.
15
Q
What is double-entry bookkeeping?
A
Double-entry bookkeeping means every transaction involves at least two accounts.
16
Q
What is the definition of a debit?
A
A debit is an entry on the left side of an account.
17
Q
What is the definition of a credit?
A
A credit is an entry on the right side of an account.
18
Q
What must be true for debits and credits in double-entry bookkeeping?
A
Total debits must equal total credits.
19
Q
What is a T-account?
A
A T-account is a visual representation used to show the effects of debits and credits on an account.
20
Q
True or False: The cash method of accounting is likely to violate the matching principle.
A
True.
21
Q
True or False: Accounting software can detect all types of errors.
A
False.
22
Q
Fill in the blank: The _______ method of accounting provides a more realistic reporting of revenues and expenses.
A
[accrual]
23
Q
What are some common types of financial transactions recorded in bookkeeping?
A
- Purchase of supplies with cash
- Sale of merchandise on credit
- Salaries and wages earned
- Renting business office
- Borrowing money from a bank
24
Q
What happens when a transaction is entered twice?
A
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.
25
What is a T-account?
A visual aid used to illustrate the effects of debits and credits on general ledger accounts.
## Footnote
It has a left side for debits and a right side for credits.
26
In a T-account, where are debit amounts recorded?
On the left side of the T-account.
27
In a T-account, where are credit amounts recorded?
On the right side of the T-account.
28
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
29
What are balance sheet accounts?
Accounts that include assets, liabilities, and stockholders' equity, reported on the balance sheet.
30
What are the characteristics of balance sheet accounts?
They are permanent accounts whose balances are carried forward to the next accounting year.
31
What are income statement accounts?
Accounts that include operating revenues, operating expenses, non-operating revenues and gains, and non-operating expenses and losses.
32
What happens to income statement accounts at the end of the accounting year?
Their balances are closed and transferred to Retained Earnings.
33
What is the chart of accounts?
A list of all accounts available for recording transactions.
34
How are debits and credits used in asset accounts?
Assets have a normal debit balance; debits increase and credits decrease the account.
35
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ equity (for corporations) or Assets = Liabilities + Owner’s equity (for sole proprietorships).
36
What do debits and credits indicate in the accounting equation?
Debits increase asset accounts and decrease liability and equity accounts; credits do the opposite.
37
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.
38
What is the impact of earning revenues on the accounting equation?
Assets increase (Accounts Receivable) and stockholders' equity increases (Service Revenues).
39
What happens to stockholders' equity when expenses are incurred?
Stockholders' equity decreases.
40
When cash is received, how is it recorded?
Debit Cash.
41
When cash is paid out, how is it recorded?
Credit Cash.
42
Complete the statement: If a company pays $900 for rent, the account Rent Expense should be _______.
Debited $900.
43
What are asset accounts?
Accounts that represent resources owned by a company.
44
What is a contra-asset account?
An account that offsets the balance of another asset account.
45
What does the Allowance for Doubtful Accounts represent?
A contra-asset account used to estimate bad debts.
46
What are some examples of asset accounts?
* Cash
* Accounts Receivable
* Inventory
* Equipment
* Land
47
What is the role of prepaid expenses in accounting?
They represent future expenses that have been paid in advance.
48
What is accrued revenue?
Revenues reported when goods or services have been delivered, even if a sales invoice has not been generated.
## Footnote
Accrued revenues are amounts a company has a right to receive but invoices have not yet been prepared.
49
How are prepaid expenses defined?
Future expenses that have already been paid and appear as assets until used up or expired.
## Footnote
Example: Payment for vehicle insurance covering a future period.
50
What is inventory?
The cost of goods that have been purchased or manufactured and have not yet been sold.
51
What are supplies?
Items such as office supplies, manufacturing supplies, and packaging supplies that are on hand and reported as an asset.
52
What constitutes long-term investments?
Investments in common stock, preferred stock, bonds, real estate for sale, and restricted cash for long-term purposes.
53
What does the land account represent?
The cost of land used in a business, which is not depreciated.
54
How is the cost of buildings treated in accounting?
The cost of buildings is depreciated over their useful lives.
55
What does the equipment account report?
The cost of machinery and equipment used in the business, depreciated over useful life.
56
What is the treatment of vehicle costs in accounting?
The cost of vehicles is depreciated over their useful lives.
57
What does the furniture and fixtures account include?
The cost of desks, chairs, shelving, etc., which is depreciated over useful lives.
58
What is accumulated depreciation?
A contra asset account with a credit balance that accumulates the total depreciation expense over time.
59
What are liability accounts?
Accounts that represent a company’s obligations and amounts owed, typically with credit balances.
60
Give examples of liability accounts.
* Short-term Loans Payable
* Current Portion of Long-term Debt
* Accounts Payable
* Accrued Expenses
* Unearned or Deferred Revenues
* Installment Loans Payable
* Mortgage Loans Payable
61
What is the definition of accounts payable?
Amounts owed to suppliers for invoices that have been approved and entered for payment.
62
What does unearned revenues represent?
Amounts received in advance of being earned, recorded as a liability.
63
What are retained earnings?
Cumulative earnings since formation minus cumulative dividends declared.
64
What are operating revenues?
Amounts earned from the company's main activities, like sales of merchandise.
65
What is the purpose of closing income statement accounts?
To transfer balances to retained earnings and start the next accounting year with zero balances.
66
What are operating expenses?
Expenses incurred in earning operating revenues.
67
What is a non-operating revenue?
Revenues earned outside of a company’s main business activities.
68
What is the purpose of bank reconciliation?
To ensure financial statements report the correct amount of cash and related accounts.
69
What does the current portion of long-term debt report?
The principal portion of a long-term debt due within one year.
70
Fill in the blank: The cost of __________ is depreciated over their useful lives.
vehicles
71
True or False: Accrued expenses are amounts owed but not yet recorded in Accounts Payable.
True
72
What is the purpose of bank reconciliation?
To ensure financial statements report the correct amount of cash and related accounts
## Footnote
Every transaction affects a minimum of two accounts.
73
What are the two balances compared during bank reconciliation?
* Balance on the bank statement
* Balance in the company’s general ledger account
74
What are common reasons for differences between bank balance and general ledger?
* Outstanding checks
* Deposits in transit
* Bank service charges
* Check printing charges
* Errors in entering amounts
75
True or False: Outstanding checks and deposits in transit require additional entries in the general ledger.
False
76
What must a company do when bank charges and errors are found during reconciliation?
Make accounting entries before financial statements are prepared
77
What is an example of an adjusting entry for a bank service charge?
Bank Fees Expense debited and Cash - Checking Account credited
78
Why are adjusting entries needed?
To ensure financial statements reflect the accrual method of accounting
79
Fill in the blank: Adjusting entries must be processed before the financial statements are _______.
issued
80
What is an example of a situation requiring an adjusting entry?
A bill for electricity used during December arrives in January
81
What are the two accounts involved in an adjusting entry?
* A balance sheet account
* An income statement account
82
List the five categories of adjusting entries.
* Accrued revenues
* Accrued expenses
* Deferred revenues
* Deferred expenses
* Depreciation expense
83
What is accrued revenue?
Revenues earned but sales invoices not yet processed
84
What is accrued expense?
Expenses incurred but vendors' invoices not completely processed
85
What is deferred revenue?
Money received in advance of being earned
86
What is deferred expense?
Payments for future expenses that must be deferred to an asset account
87
What does depreciation expense represent?
Allocation of an asset's cost to expense over its useful life
88
What is the purpose of reversing entries?
To remove accrual-type adjusting entries once financial statements are distributed
89
What does a balance sheet report?
A company’s assets, liabilities, and stockholders’ equity at a moment in time
90
Fill in the blank: The balance sheet reflects the accounting equation: Assets = ______ + Stockholders' Equity.
Liabilities
91
What is a classified balance sheet?
A balance sheet where amounts are presented according to classifications
92
List the classifications typically found on a balance sheet.
* Current assets
* Investments (long-term)
* Property, plant and equipment
* Intangible assets
* Other assets
93
What are current assets?
Assets expected to turn to cash within one year
94
What are noncurrent liabilities?
Obligations that will not be due within one year
95
What is included in stockholders’ equity?
* Paid-in capital
* Retained earnings
96
What are noncurrent liabilities?
Obligations not due within one year of the balance sheet date, also known as long-term liabilities.
## Footnote
Examples include portions of automobile loans, mortgage loans, bonds payable, and deferred income taxes.
97
What are the major sections of stockholders’ equity on the balance sheet?
* Paid-in capital
* Retained earnings
* Treasury stock
98
What is another name for the income statement?
Statement of operations, profit and loss statement, or P&L.
99
What are the two formats for presenting an income statement?
* Multiple-step
* Single-step
100
What is the first subtraction in a multiple-step income statement?
Gross profit.
101
In a single-step income statement, how are total expenses calculated?
All expenses (operating and non-operating) are subtracted from all revenues (operating and non-operating).
102
True or False: A positive net income reported on the income statement increases stockholders’ equity.
True.
103
What accounts are considered temporary accounts?
Income statement accounts, as their balances are closed at the end of each accounting year to the Retained Earnings account.
104
What are the three main sections of the cash flow statement?
* Operating activities
* Investing activities
* Financing activities
105
What does a positive amount in the cash flow statement represent?
Cash received, having a positive effect on cash.
106
What is the recommended method for reporting cash flows from operating activities?
Direct method.
107
What is the main purpose of the indirect method in the cash flow statement?
To adjust net income for cash received and paid, starting with net income.
108
Fill in the blank: The changes in the current asset and current liability accounts are reported as adjustments to the company’s net income in the ______ section.
operating activities
109
What is reported in the investing activities section of the cash flow statement?
Cash flows involving long-term assets, including cash received from selling long-term assets and cash used to purchase long-term assets.
110
What types of transactions are reported in the financing activities section of the cash flow statement?
Changes in noncurrent liabilities, stockholders’ equity, and short-term loans.
111
What is the purpose of the statement of stockholders’ equity?
To list the changes to the stockholders’ equity section of the balance sheet during the current accounting period.
112
What is required for financial statements to be accurate?
A proper cut-off, including all business transactions in the correct accounting period.
113
What is the role of adjusting entries in the closing process?
To report a company’s revenues and expenses in the proper accounting period.
114
What should be prepared to achieve a proper cut-off in financial statements?
A timeline (or PERT chart) indicating the necessary steps in the closing process.
115
Fill in the blank: Recurring journal entries may have the same accounts each month, but the amounts will ______.
vary
116
What is the significance of having entry numbers for standard journal entries?
To make monthly closings more routine and efficient.
117
What is the link between the balance sheet and income statement?
Net income affects stockholders’ equity, increasing with positive net income and decreasing with negative net income.
118
What is a recurring entry in accounting?
An entry that involves the same accounts and amounts every month.
119
What is an example of a recurring entry with varying amounts?
Bad debts expense, which is determined as 0.002 of monthly credit sales.
120
Why is having entry numbers and standard entries important?
It helps make the monthly closings more routine and efficient.
121
What is the importance of internal controls in accounting?
They safeguard assets and help prevent fraud and misappropriation.
122
What risk is associated with fewer people handling bookkeeping tasks?
Increased potential for concealing dishonest activity.
123
What practice is recommended to separate duties and enhance internal controls?
Separate the handling of cash from the person processing accounts receivable.
124
Who should reconcile bank statements in a small organization?
Someone who does not process receipts or record amounts in the cash account.
125
What should the owner of a small company do regarding purchase orders?
Approve all purchase orders.
126
What is a responsibility of the owner concerning payments in a small company?
Review all payments and sign all checks.
127
Who should approve all credit memos to customers?
The owner of the company.
128
What do accountants refer to as practices and policies for safeguarding assets?
Internal controls.
129
What is a recommended action for small companies regarding internal controls?
Seek assistance from a professional accountant.
130
True or False: Very large corporations typically have a staff of internal auditors.
True.
131
Fill in the blank: Internal controls are important to prevent _______.
fraud and misappropriation.
132
What should you consider the provided materials to be?
An introduction to selected accounting and bookkeeping topics.
133
Why should you consult with accounting and tax professionals?
To assist with specific circumstances not covered in the materials.
