Chapter 5 Flashcards
Identify the two major financial statements you have learned so far.
The balance sheet and income statement.
What is the equity equation for a profit situation?
Beginning Capital + Net Income - Drawings = Ending Capital
What is the equity equation for a loss situation?
Beginning Capital - Net Loss - Drawings = Ending Capital
In which account will you find the beginning equity figure?
Capital account.
In which accounts are changes to equity recorded?
Revenue, Expenses, Drawings. Occasionally Capital if there’s a direct investment.
How do drawings affect the calculations of net income?
They don’t. They affect the ending capital on the balance sheet.
What will happen to equity if drawings are greater than net income?
Equity decreases.
Give an example of when equity would increase if there was a net loss.
Equity would increase if the owner invested money into the business.
From their normal account balances, what two conclusions can you make about equity transactions?
Two conclusions you can make about equity transactions are that revenues are normally credited and expenses and drawings are usually debited.
Why can you be reasonably certainty at revenue accounts will have a credit balance at the end of the year?
Debits to a revenue account are rare. Once a sale is recorded in the account, it usually remains there until year end.
Provide an example of when you might want to debit a revenue account.
You might want to debit a revenue account when recording a sales return.
When does the revenue recognition principle require a transaction to be recorded in the accounts of a business?
At the time the transaction is completed.
What must the seller do before sending an invoice to a customer?
The seller must fulfill its obligation to provide the promised goods or services.
Explain how a seller can record a sale without yet delivering goods.
The IFRS allows a seller to record a sale without having delivered the goods so long as it is probable that delivery will be made; the item is on hand, identified, and ready for delivery; the buyer is aware of delayed delivery; and the usual payment terms apply.
When purchasing advertising on credit, why does equity decrease from the debit to an expense account even though no assets have yet left the business?
This is due to the creditor having an increased claim on the business’s assets. The owner’s claim on the assets have less priority than the creditors’, so the owner’s claim must decrease.
