Chapter 2 Flashcards
Asset Accounts: Cash
A company’s cash balance.
Example: Cash in bank account
Asset Accounts: Accounts receivable
Held by a seller, promises of payment from customers to sellers. Accounts receivable are increased by credit sales; often phrased as sales on account of on credit.
Example: Sales on credit
Asset Accounts: Notes receivable
Held by a lender, a borrower’s written promise to pay the lender a specific sum of money on a specified future date.
Example: Loan agreement
Asset Accounts: Prepaid accounts (or expenses)
Assets that arise from prepayment of future expenses. Examples are prepaid insurance and prepaid rent.
Example: Prepaid insurance premium
Liability Accounts: Accounts payable
Held by a buyer, a buyer’s promise to pay a seller later for goods or services received. More generally, payables arise from purchases of merchandise for resale, supplies, services, and other items.
Example: Payment due for inventory
Liability Accounts: Notes payable
Held by a borrower, a written promissory note to pay a future amount at a future date.
Example: Loan repayment agreement
Liability Accounts: Unearned revenue
A liability to be settled in the future when a company delivers its products or services. When a customer pays in advance for products or services, the seller records this receipt as unearned revenue.
Example: Advance payment for services
Equity Accounts: Common stock
When an owner invests in a company, the company increases both assets and equity.
Example: Shareholder investment
Equity Accounts: Dividends
When a company pays dividends, it decreases both company assets and total equity.
Example: Cash dividend payment
Equity Accounts: Revenue
Amounts received from sales of products and services to customers. Revenue increases equity.
Example: Sales revenue
Equity Accounts: Expenses
Costs of providing products and services. Expenses decrease equity.
Example: Operating expenses
Debits and Credits: Debit
Left side of an account is called the debit side, or Dr.
Debit increases assets and expenses
Debits and Credits: Credit
Right side of an account is called the credit side, or Cr.
Credit increases liabilities and revenue
Double-entry accounting transaction rules
At least two accounts are involved, with at least one debit and one credit. Total amount debited must equal total amount credited.
Double-entry principle
Recording Transactions: Receive owner investment
30,000
Initial capital infusion
Recording Transactions: Provide consulting and rental services on credit
707
Service revenue on credit
Recording Transactions: Purchase supplies for cash
11,500
Cash purchase of supplies
Recording Transactions: Receipt of cash from receivable
20,000
Collection of accounts receivable
Recording Transactions: Purchase equipment for cash
135,000
Cash acquisition of equipment
Recording Transactions: Partial payment of accounts
521
Partial settlement of accounts payable
Recording Transactions: Purchase supplies on credit
1,000
Credit purchase of supplies
Recording Transactions: Provide services for cash
3,195
Cash payment for services rendered
Recording Transactions: Payment of expenses in cash
2,400
Cash disbursement for expenses
Financial Statements
Each account on the trial balance is either an asset to balance sheet, liability in balance sheet, or equity. Net increases or decreases on one side have equal net effects on the other side.
Balancing of financial statements
