Chapter Three Flashcards
What are two characteristics of Net Income?
Net Income does not consist of any cash or any other specific assets.
Net Income is a computation of the overall effects of many business transactions on Owner’s Equity.
What happens when Income is earned?
As Income is earned, either an asset is increased or a liability is decreased.
How does Net Income relate to Owner’s Equity?
Net Income represents an increase in Owner’s Equity.
Net Income has no direct relationship to the types or amounts of assets on hand.
Where are changes in Owner’s Equity resulting from profitable or unprofitable operations reflected?
In the Retained Earnings, which is the balance of the Owner’s (or Stockholder’s) Equity account.
What is the nature of dividends?
Dividends are not expenses.
Dividends are direct reductions of Retained Earnings.
What is the relationship of Net Income to Dividends?
Earning Net Income causes the balance of the Retained Earnings account to increase.
Distributions of this Income to shareholders are called Dividends.
Dividends reduce both Total Assets and Owner’s Equity.
What are two ways to describe Net Income?
Net Income is the excess of revenues over expenses.
Net Income is equal to revenue minus expenses.
What occurs when expenses exceed revenue?
A Net Loss.
What is a Trial Balance?
A Trial Balance is a proof of equality between debit and credit balances.
How is a Trial Balance displayed?
A Trial Balance is a two-column schedule listing the names and balances of all the accounts in the order in which they appear in the ledger.
The Trial Balance includes both Balance Sheet and Income Statement accounts.
