Chapter 2 Flashcards
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ Equity
Define double-entry accounting.
Two accounts are effected during a transaction
What are assets?
a probable future economic benefit arising form a past transaction
What is a current asset and liability?
assets that will be used up or turned into cash with one year; a liability that will be paid off with cash or eliminated within on year
What is a liability?
a probable future sacrifice of economic benefits arising from a past transactions
What are the limits of voluntarily disclosure/how do you decide what should be recognized on the balance sheet?
What is recognized should be relevant to the company, as well as faithful.
What does it mean that a piece of economic information is recognized for accounting purposes?
When an a service has been complete or paid for.
What is the difference between an economic asset and an accounting asset?
Economic: money, something useful
Accounting: future economic benefit; arising from a past transaction
What is an example of an asset we WOULD NOT recognized on a balance sheet?
CEO brain power (it is relevant, but not reliable).
What is a journal entry?
a process in which we record and summarize transactions after they have been analyzed
_____ must equal _____
Debits must equal Credits
Summarize the steps to a journal entry:
1 - find the two accounts effected by the transaction
2- List the debited account first, and the indent the credited account below
3 - Add what element each account is, and whether it is going up or down.
TRUE OR FALSE
Does the fact that we do a journal mean that the information has been recognized?
TRUE
What does normal balance mean?
what makes an account go up
What are the normal balances for the accounts on a balance sheet?
Asset: Debit
Liabilities: Credit
Stockholders’ Equity: Credit
How are debits and credits used in journal entries?
To help indicate what account goes first (debit), and to help see what has increased or decreased.
TRUE OR FALSE
Do we ever use negative numbers in journal entries?
FALSE FALSE FALSE
What numbers go with what accounts?
1 - Assets
2 - Liabilities
3- Stockholders’ Equity
4 - Revenue
5 - Expenses
What does it mean to “post” and account?
Moving the journal entries to a general ledger where everything is listed to individual accounts.
What is a t-account?
where dollar amounts for each account are summarized
What is retained earnings?
a companies accumulative net income (profit) after dividends
aka: what the company actually made
What is the equation for retained earnings?
beginning retained earnings + current net income - this periods dividends = ending retained earnings
What are the two accounts that make up stockholders’ equity?
Common stock and retained earnings
What is a classified balance sheet?
is a more detailed balance sheet with subcategories for current assets and liabilities
How are assets and liabilities ordered on the balance sheet?
Assets - by liquidity
Liabilities - by maturity
Define liquidity
how soon they will be used up or turned to cash
Define maturity
how soon they will be paid off
Why is breaking down current vs. non-current important?
it is useful because it helps up see what can be paid off within in the year, and what will have to be paid off later
How do you calculate common ration?
divide current assets by current liabilities
Why would an investor want to know the common ration?
lets investors know if the company can pay off its current liabilities
