Chapter 2 - Financial Statements

Question 1

The process of going from business transactions and events to financial statements includes the following steps:

Answer 1

1. Identify each transaction and event from source documents.
2. analyze each transaction and event using the accounting equation
3. record relevant transactions and events in a journal.
4. Post journal information to ledger accounts.
5. Prepare and analyze trial balance and financial statements.

Question 2

Source Documents

Answer 2

Identify and describe
transactions entering the accounting system.

Question 3

examples of source docs.

Answer 3

Bills from suppliers
* Sales receipts
* Checks
* Purchase orders
* Payroll records
* Bank statements

Question 4

Account

Answer 4

record of increases and
decreases in a specific asset,
liability, equity,
revenue, or
expense.

Question 5

ledger of general ledger

Answer 5

A record of all accounts and their balances used by a company.

Question 6

ASSETS

Answer 6

resources owned or controlled by a company. These resources have expected future benefits.

Increase with debit and
Decrease with Credit

Question 7

List the asset accounts

Answer 7

1. cash
2. accounts receivable
3. Prepaid accounts
4. land
5. buildings
6. Notes receivable
7. Supplies
8. Equipment

Question 8

Cash

Answer 8

Shows a company’s cash balance.
Records all increases and decreases in cash.

Includes any money and funds a bank can accept for deposits:
Coins check money orders & checking account balances

Question 9

Accounts Receivable

Answer 9

Held by a seller.
Promises of payment from customers to sellers.
Increased by credit sales or sales on account (on credit)
Decreased by customer payments (debits)

Question 10

Note Receivable/ Promissory note

Answer 10

A written promise of another entity to pay a specific amount of money on a specified future date to the holder of the note.

Question 11

Prepaid accounts/ Prepaid expenses

Answer 11

assets that come from prepayments of future expenses.

These expenses are expected to be incurred in future accounting periods.

When expenses are incurred they are transferred to expense accounts.

Expire with the passage of time like rent or through use.

Question 12

Examples of Prepaid accounts

Answer 12

Prepaid:
1. Insurance
2. Rent
3. Services

Question 13

What happens to expired and Used Prepaid accounts after financial statements are prepared?

Answer 13

They are recorded as expenses.

Question 14

What happens to unexpired and unused Prepaid accounts after financial statements are prepared?

Answer 14

Are recorded as assets because they reflect future benefits.

Question 15

Supplies accounts

Answer 15

Are assets until they are used.
When used up their costs are recorded as expenses.
Unused supplies are recorded in the supplies asset account.

Question 16

Equipment

Answer 16

An asset account.
When equipment is used its cost is gradually recorded as an expense. (depreciation)

Question 17

Liability

Answer 17

An obligation to transfer assets or provide products or services to others.

Records amounts owed to suppliers for goods and services that were given to you on credit.

are part of a company’s general ledger and balance sheet.

Increase with credit

Claims by creditors against assets.

Question 18

List liability accounts

Answer 18

1. Accounts payable
2. Notes payable
3. Unearned Revenue Accounts
4. Accrued liabilities

Question 19

Accounts payable

Answer 19

Are a business promises to pay later.

They come from purchasess of merchandise for resale, supplies, equipment, and servicess.

Question 20

Note payable

Answer 20

A written promissory note to pay a future amount.

Question 21

Unearned revenue account

Answer 21

A liability that is settled in the future, when a company delivers its products or services.

When a customer pays in advance for products or services, the seller will record this receipt as unearned revenue.

Question 22

EXAMPLES OF Unearned revenue

Answer 22

1. Subscriptions collected in advance.
2. Rent collected in advance by a landlord.

Question 23

What happens to Unearned revenue when products and services are delivered?

Answer 23

The earned portion of the unearned revenue is transferred to the revenue account such ass Rent revenue.

Question 24

Accrued liabilities/ Acumulado

Answer 24

Amounts owed that are not yet payed

Question 25

Examples of Accrued liabilities

Answer 25

1. Salaries payable
2. Taxes payable
3. Intrest payable

Question 26

EQUITY EQUALS =

Answer 26

OWNER’S CAPITAL -OWNER’S WITHDRAWAL + REVENUE - EXPENSES

Question 27

EQUITY

Answer 27

An owner’s claim on a company’s assets

The owner’s residual interest in the assets of a company after subtracting liabilities.

Equity= Assets- Liabilities.