Chapter 2- Recording and Planning in Business Flashcards
Define an Account
a place to record transactions that occur within a business
what are the specific account categories?
- assets
- liabilities
- owner’s equity
What are liabilities?
things that a company owes.
What are assets?
things that a company owns
What are Owner’s equity?
the amount of money that company owners have invested in the business
what are current assets?
those assets that will be used up or sold within one year
what are noncurrent assets?
also called long term assets, are things that a business has that will not be used up or turned into cash within a year
What are current liabilities
bills or any other debt obligation that is due within one year
what are noncurrent liabilities?
debt obligations that will extend for longer than 12 months.
what is Owner’s capital?
direct investments made into the company
what is stockholder’s equity?
any equity that comes from the sale of stocks or bonds
What is meant by double-entry accounting?
for each transaction, at least two accounts will be affected.
What is a ledger?
a book that contains all the accounts
what is the general ledger?
contains information on all the company accounts
What is the subsidiary ledger?
contains information about specific individual accounts
What is the chart of accounts?
a listing of all accounts that a company has
what are the categories of accounts?
- asset
- liability
- owner’s equity
- revenue
- expense accounts
What are asset accounts?
accounts that show what a company owns
what are liability accounts?
accounts that show what a company owes
what are owner’s equity accounts?
accounts that show how much money company owners and stockholders have invested in the company.
what are revenue accounts?
accounts that show the cash inflows of a company due to operations
what are expense accounts?
accounts that show the cash outflows of a company due to operations
What is meant by the double-entry accounting system?
every business transaction is recorded in at least two accounts
what is a debit?
an entry that increases the assets and prepaid expense account balances and decreases a liability, expense, or equity account balance.
What is a credit?
increases the balance in a liability, expense, or equity account balance and decreases the balance in an asset or prepaid expense account.
What are T accounts?
visuals that accounting professionals use to see how accounts are affected by the debits and credits of business tranactions
Which side of the T account are debits and credits recorded?
debits on the left
credits on the right
What is meant by transaction analysis?
the act of examining a transaction to decide how it affects the accounting equation.
what is the extended accounting equation?
Assets = liabilities = (revenue - (expenses + dividends))
What are dividends
money paid to investors as a return on their investments
what is the present value?
the amount of money today that is equivalent to a single payment or a stream of payments earned in the future, invested at a certain interest rate
what is the present value equation?
PV = FV/(1+i)^n
What is future value?
the future worth of an amount of money invested today, paying a certain interest rate
what is the future value equation?
FV=PV*(1+1)^n
what is a bond?
a promise to pay an amount back in the future that’s borrowed today>
How does market interest rate affect bonds?
when market interest rate goes up, new bonds will be issued at a higher rate than existing bonds. this makes older bonds less attractive, so their present value does down.
What is the relationship between bond prices and market interest rates?
there is an inverse relationship. When interest rate goes up, bond prices goes down.
What is the present value of an annuity equation?
PV annuity = PMT * ((1-(1+i)^n)/i)
What is an annuity?
A series of regular payments made over a period of time at a certain interest rate.
