Chapter 3 Flashcards
Debit
Left
Account
An arrangement that shows the effect of transactions on an account
Credit
Right
Normal balance of assets
Debit
Nb of expenses
Debit
NB of liabilities
Credit
NB of equity
Credit
NB of revenue
Credit
Stockholders equity =
Common stock + retained earnings + revenues - dividends - expenses
Corporation equity accounts
- Common stock
- Additional paid-in capital
- Dividends declared
- Retained earnings
What to record?
FASB states, “transactions and other events and circumstances that affect a business enterprise”
Types of events: external
Between a business and its environment
Types of events: internal
Event occurring entirely within a business
General Journal
A chronological record of transactions
Where are journal entires recorded?
In the journal
The purpose of transaction analysis
1) to identify the type of account involved.
2) to determine whether a debit or credit is required.
Trial balance
A list of each account and its balance, used to prove equality of debit and credit balances.
Adjusting entires make it possible to…
1) Report on the statement of financial position the appropriate assets, liabilities, and equity and the statement date.
2) report on the income statement the proper revenues and expenses for the period.
When are revenues recorded?
When are expenses recognized?
Revenues are recorded in the period in which they are earned
Expenses are recognized in the period in which they are incurred
Two types of adjusting entries.
- Prepayments
2. Accruals
Two types of prepayments
- Prepaid expenses
2. Unearned revenues
Prepaid expense
Expenses paid in cash and recorded as assets BEFORE they are used or consumed.
Unearned revenues
Revenues received in cash and recorded as liabilities BEFORE they are earned.
Two types of accruals
- Accrued revenues
2. Accused expenses
Accrued revenues
Revenues earned but NOT YET RECEIVED in cash or recorded
Accrued expenses
Expenses incurred but NOT YET PAID in cash or recorded
Deferrals are the same as
Prepayments
Closing entries
- The reduce the balance of the income statement (revenue and expense) accounts to zero
- To transfer net income to owners equity
- Balance sheet accounts are not closed.
- Dividends are closed directly to retained earnings account
