Exam 2 Flashcards
Service revenue increases with a credit, and unearned revenue
Decreases with a debit
When adjusting a trial balance, you______if they’re both debits or credits, and____if one is a debit and one is a credit.
Add; subtract
What transfers to the adjusted trial balance?
All unadjusted trial balances, plus or minus the adjustments
What transfers to the income statement?
Total adjusted service revenue and adjusted expenses
What information transfers to the balance sheet?
All adjusted assets, liabilities, owners equity (capital), and owner withdrawals
What is the difference between debits and credits on the income statement and balance sheet?
Net income
What is step 4 in the accounting cycle?
Preparation of financial statements i.e., income statement, statement of owners equity, and the balance sheet
What is step five in the accounting cycle?
Journalization and posting the aje’s
What is step six in the accounting cycle?
Journalize and post CJE’ S
Step seven in the accounting cycle is
Preparation of a post closing trial balance
What are the common expense accounts?
Insurance, salaries, supplies, interest, rent, and depreciation of equipment/property
What are common liability accounts?
Accounts payable, salaries payable, unearned revenue, notes payable.
What type of accounts are depreciation accounts?
Contra accounts
What is a contra account?
A sub account with the opposite effect.
Depreciation
What information is recorded onto the statement of owners equity?
The beginning owners equity amount, adding the net income for the year; then subtracting owners with drawls for the year, finally giving the ending owners equity
What information is recorded on to the income statement?
Service revenue and expenses giving the total net income
What information is recorded on the classified balance sheet?
Current assets, property plant and equipment, less accumulated depreciation giving the total assets. Liabilities, current and long term, owners equity, Then adding total liabilities and owners equity.
When inputting owners equity onto the classified balance sheet, you use
The total owners equity from the statement of owners equity, not from the balance sheet
What 4 things are posted on the CJE?
Service revenue, expenses, capital, and withdrawals
When debiting service revenue on a CJE, what do you credit?
Income summary
How do you post expenses to the CJE?
By debiting income summary, and crediting all expenses
How do you post the income summary to the CJE?
By debiting income summary and crediting capital with net income
How do you post with drawls to the CJE?
By debiting capital and crediting with drawls
How do you figure the current ratio?
By dividing current assets by current liabilities
How do you determine profitability?
By dividing net income by service revenue
How is net income determined?
By subtracting total expenses from total service revenue
How do you enter capital on the post closing trial balance?
By subtracting with drawls from capital and then adding net income
In reference to the cash basis method of accounting, when do you record revenues and expenses?
Upon receipt or payment
Name two characteristics of the cash basis method of accounting
It’s simple and used for income tax reporting
Why is the cash basis method of accounting not allowed by GAAP?
Because it doesn’t satisfy the matching principle of accounting
Assume a plumbing company sells $500 in service on account on November 27, 2017 and pay his wages of $200 to employees on December 5, 2017. Customer doesn’t pay for the services until January 11, 2018. What is this an example of?
Not satisfying the matching principle of accounting
When are revenues and expenses recorded using the accrual basis method of accounting?
Revenues are recorded once earned, and expenses are recorded once incurred.
Name two characteristics of accrual basis method of accounting
Required by GAAP, and requires the use of AJE’ S
What is net book value?
The cost of property plant and equipment minus accumulated depreciation
When are AJ E’s recorded?
At the end of the accounting cycle
How many types of AJE’s are there?
4
Where are AJE‘s recorded?
Recorded in the general journal, and posted to the general ledger
AJE’s are used for what four types of transactions?
Accrued revenue, deferred revenue, accrued expense, and deferred expense
What is accrued revenue?
Revenue that is recorded before the cash is received. (Accounts receivable)
What is deferred revenue?
Revenue that is recorded after the cash is received. (Unearned revenue)
What is accrued expenses
Expense that is recorded before cash is paid or the asset is used up. (Accrued salaries)
What is deferred expense?
Expense that is recorded after the cash is paid. (Prepaid insurance)
AJ E’s are used to account for change in
Supplies, depreciation, pre-paid insurance and rent, unearned revenue, and accrued salaries payable
What are the 4 CJE’s?
Service revenue, expenses, capital, with drawls
What is a current asset?
An asset that is cash, or will be converted to cash or used up during the next 12 months
What are the two types of assets?
Current assets, and property, plant, and equipment.
What is a temporary account?
Account that relates to a particular accounting period and is closed at the end of that period
What is a permanent account
An account that is not closed at the end of the period.
What is the main difference between permanent account and temporary accounts?
Temporary accounts we make to 0 thru CJE’s, and permanent accounts we do not make to zero through CJE’s
Give examples of a permanent account
Asset, liability, owner capital
Give examples of temporary accounts
Revenues, expenses, income summary, owner with drawls
What are the two types of liabilities?
Current and long-term
What is a current liability?
A liability that must be paid with cash or services within one year.
What is a long-term liability
Liability that does not need to be paid within one year. (Notes payable)
What 3 CJE’s does income summary appear in?
Service revenue, expense, capital
A Answers the question of how the business uses its earnings.
Statement of owners equity
Owners capital accounts by
and net income, and
by and net losses.
Increases; owners contributions; decreases; owners with drawls
Ending capital =
Beginning capital + owner contribution + net income or net loss - owner withdraw
Unadjusted balance - supplies on hand=
Supplies expense
What are the seven steps in the accounting cycle?
1 = journalize 2 = posting to the ledger 3 = preparation of a worksheet 4 = preparation of financial statements 5 = journalize and posting of AJE‘s 6 = journalizing posting of CJE‘s 7 = preparation of a post closing trial balance
Once the worksheet is prepared, what two columns are used to prep the financial statements?
Income statement and balance sheet
Once the worksheet is prepared, which column do we use to journalize the AJE‘s?
Adjustments
Once the worksheet is prepared which column do we use to journalize the CJE’s?
Adjusted trial balance
What information is used to prepare a post closing trial balance?
Assets, liabilities, ending owners equity
