Chapter 1: Accounting For The Basics

Question 1

Fundamental Accounting Equation

Answer 1

Assets = Liabilities + Owner’s Equity

Question 2

Net Assets

Answer 2

Assets - Liabilities = Owner’s Equity
Net Assets = Owner’s Equity

Question 3

Owner’s Equity

Answer 3

Owners’ equity is the total assets of an entity, minus its total liabilities. This represents the capital theoretically available for distribution to the owner of a sole proprietorship. From a company liquidation perspective, owners’ equity can be considered the residual claim on the assets of a business to which shareholders are entitled, after liabilities have been paid. In the balance sheet of a sole proprietorship, owners’ equity refers to the sum total of the following transactions:

+ Original owner investment in the business
+ Donated capital
+ Subsequent profits of the business
- Subsequent losses of the business
- Subsequent distributions to the owner
= Owners’ equity

Question 4

Liabilities

Answer 4

Liabilities are any debts your company has, whether it’s bank loans, mortgages, unpaid bills, IOUs (“I Owe You”), or any other sum of money that you owe someone else.

Question 5

Assets

Answer 5

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

Question 6

Capital

Answer 6

Cash and other assets used to run the business

Question 7

Journal

Answer 7

A chronological record of transactions in the order in which they occur - like a very detailed personal diary

Question 8

An Account

Answer 8

Separate record, or page, for each asset, each liability, and so on

Question 9

Trial Balance

Answer 9

A document that lists all the accounts and their balances as of a certain date

Question 10

Accounting Cycle

Answer 10

A seven-step procedure that results in the preparation and analysis of the major financial statements.

1. Prepare source documents for transactions
2. Determine financial effects of transactions
3. Make original journal entries of transactions
4. Post financial effects of transactions in accounts
5. Carry out end-of-period procedures
6. Prepare adjusted trial balance
7. Close accounts for year

Question 11

1. Prepare source documents for transactions

Answer 11

Information the bookkeeper uses to record the financial effects of the activities of the business.

Example:

When buying products, a business gets an invoice from the supplier. When borrowing money from the bank, a business signs a note payable, a copy of which the business keeps. When preparing payroll checks, a business depends on salary rosters and time cards

Question 12

2. Determine financial effects of transactions

Answer 12

The bookkeeping process begins by determining the relevant information about each transaction. The chief accountant of the business establishes the rules and methods for measuring the financial effects of transactions

Question 13

3. Make original journal entries of transactions

Answer 13

Using the source documents, the bookkeeper makes the first, or original, entry of every transaction in a journal

Question 14

4. Post financial effects of transaction in accounts

Answer 14

The financial effects are posted, or recorded in the separate accounts - one as an asset and the others as a liability. Only the official, established chart or list of accounts should be used in recording transactions.

Question 15

5. Perform end-of-period procedures

Answer 15

Accounting reports and financial statements at the end of each quarter, and many need monthly financial statements.
The bookkeeper needs to bring the accounts up to date and complete the bookkeeping process.
The accountant needs to be heavily involved in end-of-period procedures and check for errors in the business’s accounts.

Question 16

6. Prepare adjusted trial balance

Answer 16

After all the end-of-period procedures have been completed, the bookkeeper compiles a comprehensive list of all accounts, which is called the adjusted trial balance.

The accountant takes the adjusted trial balance and combines similar accounts into one summary amount that is reported in a financial report or tax return.

The accountant collapses all these accounts into one summary inventory account presented in the balance sheet of the business.in grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.

Question 17

7. Close accounts for the year

Answer 17

Close accounts for the year