Chapter Two: Financial Statements and the Accounting System Flashcards
Cash:
A company’s cash balance.
Asset Accounts:
Cash, accounts receivable, notes receivable, prepaid accounts (or expenses), and supplies, equipment, buildings, and land.
Accounts Receivable:
Held by a seller; promise of payment from customers to sellers. Accounts receivable are increased by credit sales; often phrased as sales on account or credit.
Notes Receivable:
Held by a lender; a borrower’s written promise to pay the lender a specific sum of money on a specified future date.
Prepaid Accounts (or expenses):
Assets that arise from prepayment of future expenses.
Ex. prepaid insurance and prepaid rent.
More Assets:
Supplies, equipment, buildings, and land.
Liability Accounts:
Accounts payable, notes payable, unearned revenue, accrued liabilities.
Accounts Payable:
Held by a borrower; a written promissory note to pay a future amount at a future date.
Unearned Revenue:
A liability to be settled in the future when a company delivers its products or services. When a customer pays in advance for products or services, the seller records this receipt as unearned revenue.
Accrued Liabilities:
Amounts owed that are not yet paid.
Ex. wages payable, taxes payable, and interest payable.
Equity Accounts:
Common stock, dividends, revenue, and expenses.
Common Stock:
When an owner invests in a company in exchange for stock, the company increases both assets and equity.
Dividends:
When a company pays dividends, it decreases both the company’s assets and total equity.
Revenue:
Amounts received from sales of products and services to customers. Revenue increases equity.
Expenses:
Costs of providing products and services. Expenses decrease equity.
Double-entry Accounting Transaction Rules:
- At least two accounts are involved, with at least one debit and one credit.
- Total amount debited must equal total amount credited.
Debit:
The left side of an account is called the debit side.
Credit:
The right side of an account is called the credit.
Debit for Increases and Normal:
-Assets
-Dividends
-Expenses
Credits for Increases and Normal:
-Liabilities
-Common Stock
-Revenues
IMPORTANT!
Net increases or decreases on one side have equal net effects on the other side.
Left side is the normal side for assets.
Right side is the normal side for liabilities and equity.
