Chapter 2 - Analyzing Transactions: The Accounting Equation Flashcards
What are the Accounting Elements?
LO1 - Define the accounting elements.
- Assets
- Liability
- Equity
- Expenses
- Revenue
What is a Business Entity?
LO1 - Define the accounting elements.
- An individual, association, or organization that engages in economic activities and controls specific economic resources
- The business entity’s finances are kept separate from the owner’s nonbusiness assets and liabilities (business entity concept)
What are Assets?
LO1 - Define the accounting elements.
- Items owned by a business that will provide future benefits.
- MUST BE “OWNED” NOT RENTED
- BUT DOESN’T HAVE TO BE PAID OFF, COULD STILL BE MAKING PAYMENTS ON IT
What are Examples of Assets?
LO1 - Define the accounting elements.
- Cash
- Merchandise
- Furniture
- Fixtures
- Machinery
- Buildings
- Land
- Accounts Receivable
What is Accounts Receivable?
LO1 - Define the accounting elements.
- The amount of money owed to the business by its customers as a result of making sales “on account” or “on credit”
- Simply put, the customers have promised to pay sometime in the future.
What are Liabilities?
LO1 - Define the accounting elements.
- Something owed to another business entity
- A probable future outflow of assets as a result of a past transaction or event.
- IN OTHER WORDS, DEBTS OR OBLIGATIONS OF THE BUSINESS THAT CAN BE PAID WITH CASH, GOODS, OR SERVICES.
What are Examples of Liabilities?
LO1 - Define the accounting elements.
- Accounts Payable
- Notes Payable
What is Accounts Payable?
LO1 - Define the accounting elements.
- An unwritten promise to pay a supplier for assets purchased or services received
- Referred to as making a purchase “on account” or “on credit”
What is Notes Payable?
LO1 - Define the accounting elements.
- Formal written promises to pay suppliers or lenders specified sums of money at definite future times
What is Owner’s Equity?
LO1 - Define the accounting elements.
- Amount by which the business assets exceed the business liabilities.
- Also called:
- NET WORTH OR CAPITAL
- Also called:
Explain the concept of Business Entity
LO1 - Define the accounting elements.
- The owner of a business may have business assets and liabilities as well as nonbusiness assets and liabilities.
- Nonbusiness assets and liabilities are not included in the business entity’s accounting records.
- If the owner invests money or other assets in the business, the investment is now reclassified as a business asset.
What is the Accounting Equation?
LO2 - Construct the accounting equation.
Assets = Liabilities + Owner’s Equity
What is a Business Transaction?
LO3 - Analyze business transactions.
- An economic event that has a direct impact on the business
- Usually requires an exchange with an outside entity.
- We must be able to measure this exchange in dollars.
- All business transactions affect the accounting equation through specific accounts.
What is an Account?
LO3 - Analyze business transactions.
- A separate record used to summarize changes in each asset, liability, and owner’s equity of a business.
What are the 3 question you use when analyzing Business Transactions?
(LO3 - Analyze business transactions.)
- What happened?
- Which accounts are affected?
- How is the accounting equation affected?
ABT - What Happened?
LO3 - Analyze business transactions.
- Make certain you understand the event that has taken place.
ABT - Which accounts are affected?
LO3 - Analyze business transactions.
- Identify the accounts that are affected.
- Classify these accounts as assets, liabilities, or owner’s equity.
ABT - How is the accounting equation affected?
LO3 - Analyze business transactions.
- Determine which accounts have increased or decreased.
- Make certain that the accounting equation remains in balance after the transaction has been entered.
What are the 4 types of Owner’s Equity Transactions?
LO4 - Show the effects of business transactions on the accounting equation.
- Increase
• Revenue
• Investments - Decrease
• Expenses
• Drawing
What are Revenues?
LO4 - Show the effects of business transactions on the accounting equation.
- The amount a business charges customers for products sold or services performed
- Recognized when earned (even if cash has not yet been received)
- Increase both assets (cash or accounts receivable) and owner’s equity
What are some Examples of Revenues?
LO4 - Show the effects of business transactions on the accounting equation.
- Delivery Fees
- Consulting Fees
- Rent Revenue (if the business rents space to others)
- Interest Revenue (for interest earned on bank deposits)
- Sales (for sales of merchandise)
What are Expenses?
LO4 - Show the effects of business transactions on the accounting equation.
- Represent the decrease in assets (or increase in liabilities) as a result of efforts made to produce revenues
- Separate accounts are maintained for each type of expense.
- Either decrease assets or increase liabilities, but ALWAYS decrease owner’s equity.
What are Examples of Expenses?
LO4 - Show the effects of business transactions on the accounting equation.
- Rent
- Salaries
- Supplies consumed
- Taxes
What is Net Income?
LO4 - Show the effects of business transactions on the accounting equation.
REVENUES greater than EXPENSES = NET INCOME
Revenue - Expenses = Net Income
profit
What is Net Loss?
LO4 - Show the effects of business transactions on the accounting equation.
EXPENSES greater than REVENUES = NET LOS
Revenue - Expenses = Net Loss
loss
What is the Accounting Period Concept?
LO4 - Show the effects of business transactions on the accounting equation.
- The concept that income determination can be made on a periodic basis (month, quarter, year, etc.)
- Any accounting period of 12 months is called a fiscal year.
What is a Withdrawal?
LO4 - Show the effects of business transactions on the accounting equation.
- The owner taking (withdrawing) cash or other assets from the business for personal use
- Reduces owner’s equity and assets
- Also referred to as drawing
What are the 3 commonly Prepared Financial Statements?
LO5 - Prepare and describe the purposes of a simple income statement, statement of owner’s equity, and balance sheet.
- Income statement
- Statement of owner’s equity
- Balance sheet
What is Income Statement?
LO5 - Prepare and describe the purposes of a simple income statement, statement of owner’s equity, and balance sheet.
- Reports the profitability of business operations for a specific period of time
- Expenses are subtracted from revenues to determine net income/loss
- Also called the profit and loss statement or operating statement
What is Statement of Owner’s Equity?
LO5 - Prepare and describe the purposes of a simple income statement, statement of owner’s equity, and balance sheet.
- Reports the activities that affected owner’s equity for a specific period of time
- Uses Net Income from the income statement
What is the Balance Sheet?
LO5 - Prepare and describe the purposes of a simple income statement, statement of owner’s equity, and balance sheet.
- Reports a firm’s assets, liabilities, and owner’s equity on a specific date
- Confirms that the accounting equation has remained in balance
- Also referred to as a statement of financial position or statement of financial condition
What are the 3 Basic Phases of Accounting Process?
LO6 - Define the three basic phases of the accounting process.
- Input
- Processing
- Output
What is Input in Accounting Process?
LO6 - Define the three basic phases of the accounting process.
Transactions provide the necessary input
What is Processing in Accounting Process?
LO6 - Define the three basic phases of the accounting process.
- Identify accounts
- Classify accounts
- Determine whether increase or decrease
- Enter transaction and verify balance
What are the 3 types of Outputs in Accounting Process?
LO6 - Define the three basic phases of the accounting process.
- INCOME STATEMENT
- Revenue - Expenses = Net Income
- Statement of Owner’s Equity?
- Beginning Capital + Investments - Net Income = Ending Capital
- Balance Sheet
- Assets = Liabilities + Owner’s Equity (Ending Capital)
