Ch 2 - Accounting Cycle Flashcards
State the basic Accounting Equation
Assets = Liabilities + Equity
State the equation for Stockholder’s Equity
Stockholder’s equity = Contributed capital + Retained Earnings
State the Equation for Retained Earnings
Retained Earnings = Beginning Retained Earnings + Net Income for the period - Dividends
State the equation for Net Income
Net Income = Revenues - Expenses + Other Income - Other Expenses + Gains - Losses
What is double entry accounting?
every journal entry must have at least one debit and one credit
How does a T-account work?
- debit on the left
- credit on the right
State the equation for debits and credits
Dividends + Expenses + Assets = Liabilities + Owner’s Equity + Revenue
DEALER
How do debits and credits affect Assets?
- debits (left) increase assets
- credits (right) decrease assets
How do debits and credits affect Liabilities?
- credits (right) increase liabilities
- debits (left) decrease liabilities
How do debits and credits affect Common Stock?
- credits (right) increase common stock
- debits (left) decrease common stock
How do debits and credits affect Retained Earnings?
- credits (right) increase R/E
- debits (left) decrease R/E
How do debits and credits affect Dividends?
Note: Dividends decrease stockholder’s equity
- debits (left) increase dividends
- credits (right) decrease dividends
How do debits and credits affect revenue?
Note: revenue increases stockholder’s equity
- credits (right) increase revenue
- debits (left) decrease revenue
How do debits and credits affect Expenses?
Note: expenses decrease stockholder’s equity
- debits (left) increase expenses
- credits (right) decrease expenses
What is the “Normal Balance” side of Assets?
debit (left)
What is the “Normal Balance” side of Expenses/Loss
debit (left)
- decreases equity
What is the “Normal Balance” side of Dividends?
debit (left)
- decreases equity
What is the “Normal Balance” side of Liabilities?
credit (right)
What is the “Normal Balance” side of capital?
credit (right)
What is the “Normal Balance” side of Retained Earnings?
credit (right)
What is the “Normal Balance” side of Revenue/Gains?
credit (right)
- increases equity
What are the Permanent Accounts?
- Assets
- Liabilities
- Owner’s Equity
carried over to future periods
What are the Temporary Accounts?
- Revenues
- Expenses
- Gains & Losses
- Dividends
closed each period to retained earnings
What occurs during the accounting period? (3)
- analyze transactions
- record journal entries
- post amounts to general ledger
What occurs at the end of the accounting period? (5)
- prepare trial balance
- record adjusting entries
- close temporary accounts (bring to 0)
- record adjusted trial balance
- prepare the financial statements
What are the temporary accounts?
What are the 3 components of Adjusting Journal Entries?
- Prepayments
- Accruals
- Estimates
What are prepayments?
Provide Examples
Cash flow occurs before expense and revenue recognition
Ex: prepaid rent; unearned revenue
What are Accruals?
Provide Examples
cash flows after expense and revenue recognition
Ex: interest expense; interest revenue
What is an exmple of an Estimate provided in an AJE?
bad debt expense
What is the traditional approach to record prepayments?
Recognize asset first; then in AJE, recognize expense and decrease asset
What is the alternative approach to record prepayments?
Recognize expense first; then in AJE, recognize asset and decrease expense
Unadjusted trial account
The account balances before the company makes any adjusting journal entries (AJE)
Making sure debits equal credits
What does a Balance Sheet Show?
balances of Assets, Liabilities, Equity
