Chapter 2 Flashcards
Any event that directly affects the financial position of a company
Economic Events
Exchange between the company and a separate economic entity
External Events
Events that directly affect the financial position of the company but don’t involve an exchange transaction with another entity
Internal Events
Assets = Liabilities + Equity
Accounting Equation
Economic Events
Transactions
Invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation
Paid-in Capital
Amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends
Retained Earnings
Dual effect that each transaction has on the accounting equation when recorded
Double-entry System
Storage areas to keep track of increases and decreases in financial position
Accounts
Used to record any type of transaction
General Ledger
Account with space at the top for the account title and two sides for recording increases and decreases
T-account
Represents the left side of the account
Debits
Represents the right side of the account
Credits
Represents assets, liabilities, and shareholders’ equity at a point in time
Permanent Accounts
Represents changes in the retained earnings component of shareholders’ equity for a corporation caused by revenue, expenses, gain, and loss transactions
Temporary Accounts
Relay essential information about each transaction to the accountant (ie. Sales invoices, bills from suppliers)
Source Documents
Process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved
Transaction Analysis
A chronological record of all economic events affecting financial position
Journal
Record of a repetitive type of transaction (ie. A sales journal)
Special Journal
Used to record any type of transaction
General Journal
Captures the effect of a transaction on financial position in debit/credit form
Journal Entry
Transferring debits and credits recorded in individual journal entries to the specific accounts affected
Posting
A list of the general ledger accounts and their balances at a particular date
Unadjusted Trial Balance
Internal transactions recorded at the end of any period when financial statements are prepared
Adjusting Entries
The cash flow precedes either expense or revenue recognition
Prepayments/deferrals
When the cash flow comes after either expense or revenue recognition
Accruals
Represents an asset recorded when an expense is paid in advance, creating benefits beyond the current period
Prepaid Expenses
Prediction of future events
Estimates
Cash received from a customer in one period for goods or services that are to be provided in a future period
Unearned Revenue
Expenses already incurred but not yet paid
Accrued Liabilities
The recognition of revenue earned before cash is received
Accrued Receivables
Trial balance after adjusting entries have been recorded
Adjusted Trial Balance
Primary means of communicating financial information to external parties
Financial Statements
Statement of operations or statement of earnings is used to summarize the profit-generating activities that occurred during a particular reporting period
Income Statement
Traditional net income plus other non-owner changes in equity
Comprehensive Income
Certain gains and losses that are excluded from the calculation of net income, but not included in the calculation of comprehensive income
Other Comprehensive Income (OCI)
Includes assets that are cash, will be converted into cash, or will be used up within one year or the operating cycle (whichever is longer)
Current Assets
Expected to require current assets and are usually payable within one year
Current Liabilities
Change statement summarizing the transactions that caused cash to change during the period
Statement of Cash Flows
Statement disclosing the source of changes in the shareholders’ equity accounts
Statement of Shareholders’ Equity
The temporary accounts are reduced to zero balances, and these temporary account balances are closed/ transferred to retained earnings to reflect the changes that occurred in that account during the period
Closing Process
Account that is a book keeping convince used in the closing process that provides a check that all temporary accounts have been properly closed
Income Summary
Verifies that the closing entries were prepared and posted correctly and that the accounts are now ready for next years transactions
Post-closing Trial Balance
Used to organize the accounting information needed to prepare adjusting and closing entries and the financial statements
Worksheet
Optional entries that remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period
Reversing entries
Record of a group of subsidiary accounts associated with a particular general ledger control account
Subsidiary Ledger
Record of cash receipts
Cash Receipts Journal
Record of cash disbursements
Cash Disbursements Journal
Records credit sales
Sales Journal
Records the purchase of merchandise on account
Purchasing Account
