Chapter 2: Transaction Analysis Flashcards
Transaction
Is any event that has a financial impact on the business and can be measured reliably
Cash
Means money and any medium of exchange including bank account balances, paper currency, coins, certificates of deposit, and checks
Accounts Receivable
Many companies sell goods and services and receives a promise for future collections of cash
Notes Receivable
Is similar to accounts receivable but a note receivable is more binding because the customer signed the note
Inventory
Often times the most important asset. Other titles may be merchandise and merchandise inventory
Prepaid expenses
Companies pay certain expenses in advance such as insurance and rent. Is an asset because the payment provides a future benefit
Land
Shows the cost of land a company uses in its operations
Buildings
Cost of office buildings, manufacturing plants, and others
Equipment, Furniture, and Fixtures
There are separate asset accounts for each type of equipment including manufacturing equipment and office equipment
Accounts Payable
A company’s promise to pay a debt arising from a credit purchase of inventory or from a utility bill
Notes Payable
Includes amounts a company must pay because they signed notes to pay a future amount
Accrued Liabilities
Is a liability for an expense that has not yet been paid.
Examples of Accrued Liabilities
Interest payable, income tax payable, salary payable
Common Stock
Shows the owners investment in a corporation. All corporations have common stock
Retained Earnings
Shows the amount of cumulative net income earned over a company’s lifetime minus net losses and dividends
Dividends
Are optional and are declared by the board of directors. When declared it represents a decrease in retained earnings
Revenues
This increase in stockholder’s equity from delivering goods or services to customers.
Examples of Revenue
Sales revenue, service revenue, interest revenue
Expenses
The cost of operating a business. Decreases stockholder’s equity. A business records a separate account for each type of expense
T-Account
Way of keeping track of debits and credits
Debit
The left side of the account
Credit
The right side of the account
Normal Balance of Assets
Debit
Normal Balance of Liabilities
Credit
Normal Balance of Stockholder’s Equity
Credit
Normal Balance of Common Stock
Credit
Normal Balance of Retained Earnings
Credit
Normal Balance of Dividends
Debit
Normal Balance of Revenues
Credit
Normal Balance of Expenses
Debit
Journal
Accountants use a chronological record of transactions also known as the book of original entry
First Step of the Journalizing Process
Specify each account affected by the transaction and classify each account by type
Second Step of Journalizing Process
Determine whether each account is increased or decreased by the transaction. Use the rules of debit and credit to increase or decrease each account
Third Step of Journalizing Process
Record the transaction in the journal, including a brief explanation
Ledger
Is a grouping of all the t-accounts with their balances
Posting
Entering a transaction by copying data into the ledger
Trial Balance
Lists all accounts with their balances. Assets first, then liabilities, and stockholder’s equity. Shows whether total debits equal total credits
What is the purpose of the trial balance?
Facilitates the preparation of financial statements
First Step of Correcting Accounting Errors
Search the records for a missing account. Trace each account back and forth from the journal to the ledger. A transaction may have been recorded incorrectly
Second step of correcting accounting errors
Divide out the balance amount by 2. A misassigned transaction doubles the error
Third step of correcting accounting errors
Divide the balance amount by 9. If the result is an integer it may either be a slide or a transposition
Slide
Writing $400 as $40. The accounts would be out of balance by $360. Divide by 9 and scan trial balance for similar number
Transposition
Writing $1200 as $2100. The accounts would be out of balance by $900. Divide by 9 and scan the trial balance for a similar number
Chart of Accounts
A list to organize all their accounts and account numbers
What type of transaction would increase one asset and decrease another?
Buying land with cash
What type of transaction would decrease an asset and decrease owner’s equity?
Payment of dividends to owners
What type of transaction would decrease an asset and decrease a liability?
Paying a liability
What type of transaction would increase an asset and increase owner’s equity?
Issuing stock
What type of transaction would increase an asset and increase a liability?
Borrowing money
Record Journal Entry. Borrowed $31,000 from the bank signing a note payable
Debit cash for $31,000 and credit notes payable for $31,000
Record Journal Entry. Performed service for clients on account totaling $8,900.
Debit Accounts Receivable for $8,900 and credit service revenue for $8,900.
Record journal entry. Received $5,600 cash on account from clients.
Debit cash for $5,600 and credited accounts receivable for $5,600
Record journal entry. Received utility bill of $900, an account payable in April.
Debit utilities expense for $900 and credit accounts payable for $900
Record journal entry. Paid monthly salary of $2,600 to employee.
Debit salary expense for $2,600 and credit cash for $2,600
Record 2 separate journal entries. Purchased $1700 of supplies on account. Paid $425 on account
- Debit supplies for $1700 and credit accounts payable for $1700.
- Debit accounts payable for $425 and credit cash for $425.
Record 2 journal entries. Expect to collect $4700 next month. Collect $3000.
- Debit accounts receivable for $4700 and credit service revenue for $4700.
- Debit cash $3000 and credit accounts receivable for $3000
What is the impact on accounts when a company receives cash on account?
No effect because one asset is increased and another asset is decreased
What is the impact on accounts when a CEO purchases a tv using personal funds?
No effect because personal assets were used
What is the impact on accounts when a company sells land and receives cash for the sale?
No effect because one asset is increased and another one is decreased
What is the impact on accounts when cash is borrowed from the bank?
This transaction increases cash and increases notes payable
What is the impact on accounts when cash is used to purchase land?
No effect because one asset is increased and another one is decreased
What is the impact on accounts when cash is received for issuing stock?
Cash is increased and stockholder’s equity is also increased
What is the impact on accounts when cash is paid for accounts payable?
Cash is decreased and accounts payable is also decreased
What is the impact on accounts when equipment is sold?
No effect because one asset increases and another one decreases
What is the impact on accounts when inventory is purchased?
No effect because one asset is increased and another asset is decreased
What is the impact on accounts when dividends are paid?
Assets are decreased and stockholder’s equity is decreased
Record journal entry. Issued stock for $39,000
Debit cash for $39,000 and credit common stock for $39,000
Record journal entry. Purchased land for $29,000
Debit land for $29,000 and credit cash for $29,000
Record journal entry. Purchased supplies on account for $1700
Debit supplies for $1700 and credit accounts payable for $1700
Record journal entry. Earned $7600 in service revenue earning half in cash immediately
Debit cash for $3800 and accounts receivable for $3800 and credit service revenue for $7600
Record journal entry. A company incurred month end expenses of salary expense of $1300, rent expense of $700, and utilities expense of $600.
Debit salary expense, rent expense, and utilities expense for a total of $2500 and credit cash for $2500
Record journal entry. Sold supplies to another company for $700
Debit cash for $700 and credit supplies for $700
Record journal entry. Borrowed cash from bank for $12,000
Debit cash for $12,000 and credit notes payable for $12,000
Record journal entry. Paid $800 cash to pay off accounts payable
Debit accounts payable for $800 and credit cash for $800
