Chapter 2 - Financial Statements Flashcards
The process of going from business transactions and events to financial statements includes the following steps:
- Identify each transaction and event from source documents.
- analyze each transaction and event using the accounting equation
- record relevant transactions and events in a journal.
- Post journal information to ledger accounts.
- Prepare and analyze trial balance and financial statements.
Source Documents
Identify and describe
transactions entering the accounting system.
examples of source docs.
Bills from suppliers
* Sales receipts
* Checks
* Purchase orders
* Payroll records
* Bank statements
Account
record of increases and
decreases in a specific asset,
liability, equity,
revenue, or
expense.
ledger of general ledger
A record of all accounts and their balances used by a company.
ASSETS
resources owned or controlled by a company. These resources have expected future benefits.
Increase with debit and
Decrease with Credit
List the asset accounts
- cash
- accounts receivable
- Prepaid accounts
- land
- buildings
- Notes receivable
- Supplies
- Equipment
Cash
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
Accounts Receivable
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)
Note Receivable/ Promissory note
A written promise of another entity to pay a specific amount of money on a specified future date to the holder of the note.
Prepaid accounts/ Prepaid expenses
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.
Examples of Prepaid accounts
Prepaid:
1. Insurance
2. Rent
3. Services
What happens to expired and Used Prepaid accounts after financial statements are prepared?
They are recorded as expenses.
What happens to unexpired and unused Prepaid accounts after financial statements are prepared?
Are recorded as assets because they reflect future benefits.
Supplies accounts
Are assets until they are used.
When used up their costs are recorded as expenses.
Unused supplies are recorded in the supplies asset account.
Equipment
An asset account.
When equipment is used its cost is gradually recorded as an expense. (depreciation)
Liability
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.
List liability accounts
- Accounts payable
- Notes payable
- Unearned Revenue Accounts
- Accrued liabilities
Accounts payable
Are a business promises to pay later.
They come from purchasess of merchandise for resale, supplies, equipment, and servicess.
Note payable
A written promissory note to pay a future amount.
Unearned revenue account
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.
EXAMPLES OF Unearned revenue
- Subscriptions collected in advance.
- Rent collected in advance by a landlord.
What happens to Unearned revenue when products and services are delivered?
The earned portion of the unearned revenue is transferred to the revenue account such ass Rent revenue.
Accrued liabilities/ Acumulado
Amounts owed that are not yet payed
