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
