Chapter 2 Flashcards
Review of the Accounting Process
Economic Events
Events that directly affect the financial position of the company
External Events
Exchanges between the company and separate economic entities
(ex: borrowing cash from bank, paying employee salaries)
Internal Events
events that directly affect the financial position of the company but don’t involve an exchange transaction with another entity
(ex: depreciation of equipment)
Accounting Equation
Assets = Liabilities + Shareholders’ Equity
Paid-In Capital
Invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation
Retained Earnings
Amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends
Permanent Accounts
Represent assets, liabilities, and shareholders’ equity at a point in time
Temporary Accounts
Represent changes in the retained earnings component of shareholders’ equity for a corporation caused by revenue, expense, gain, and loss transactions
Adjusting Entries
Internal transactions recorded at the end of any period when financial statements are prepared
Necessary to record prepayments, accruals, and estimates
Prepayments
The cash flow precedes either expense or revenue recognition
Accruals
When the cash flow comes after either expense or revenue recognition
Estimates
Predictions of future events
Balance Sheet
A financial statement that presents an organized list of assets, liabilities, and equity at a particular point in time
(statement of financial position)
Statement of Cash Flows
Statement summarizing the transactions that caused cash to change during the period
Statement of Shareholders’ Equity
Discloses the source of changes in the shareholders’ equity accounts during the period
Post-Closing Trial Balance
List of all permanent accounts and their balances after closing entries have been recorded
