Chapter 2: What types of Business Activities cause changes in Financial Statement amounts Flashcards
What is a transaction in accounting?
A transaction is any event with an economic impact on an entity that is recorded as part of the accounting process.
What are the two types of events that transactions include?
Transactions include external events (exchanges of assets, goods, or services)
internal events (events with a direct and measurable effect on the accounting entity).
Can you provide examples of external events in accounting?
Examples of external events include purchasing a machine from a supplier, selling merchandise to customers, borrowing cash from a bank, and owners investing cash in the business.
What are internal events in accounting, and can you give examples?
Internal events in accounting are events that don’t involve exchanges with other parties but have a direct impact on the accounting entity.
Examples include using up insurance paid in advance and using buildings and equipment over several years.
How does accounting treat the signing of a contract?
Signing a contract is typically not considered a transaction in accounting because it involves the exchange of promises, not assets, goods, services, or property.
An exchange of promises becomes a recordable transaction in accounting when assets, goods, or services are either received or given in connection with those promises.
What is an account in accounting?
An account is a standardized record used by organizations to accumulate the monetary effects of transactions related to specific financial statement items.
The purpose of an account is to record and track the cumulative result of all transactions that affect a particular financial statement item.
What is a chart of accounts, and why is it important?
A chart of accounts is a list of accounts with unique numeric codes that a company establishes to facilitate the recording of transactions.
It’s essential for correctly grouping the monetary effects of similar transactions.
How is a typical chart of accounts organized?
A typical chart of accounts is organized by financial statement element, starting with asset accounts (by order of liquidity), followed by liabilities (by order of time to maturity), shareholders’ equity, revenue, and expense accounts.
Why is the use of appropriate account numbers important in formal recordkeeping systems?
Using appropriate account numbers is crucial in formal recordkeeping systems, including computerized accounting, to ensure that the monetary effects of similar transactions are grouped correctly.
Typical Account Titles
Why do companies name their accounts differently?
Companies name their accounts to best reflect the nature of their business activities.
The specific account names can vary widely based on the company’s operations.
Why is it not necessary to memorize a typical chart of accounts?
It’s not necessary to memorize a typical chart of accounts because every company has a different chart. Instead, it’s important to understand the nature of each typical account.
Understanding the nature of each typical account allows you to interpret financial statements even when a company uses slightly different account titles.
How should you handle account names when recording transactions?
Once a name is selected for an account, you must use that exact name to record all transactions affecting that account.
What are the accounts presented in financial statements actually representing?
The accounts presented in financial statements are actually summations (or aggregations) of specific accounts in a company’s recordkeeping system.
For example, Gildan keeps separate accounts for products it sells but combines them into the “inventories” account on the statement of financial position.
Equipment, buildings, and land may be combined into an account called “property, plant, and equipment.”
