Financial Statement: assets, liabilities, and equity 1 Flashcards
Understanding assets, liabilities, and equity
What is the accounting equation?
Assets = Liabilities + Equity
What are assets?
Resources owned by a company that have economic value (cash, equipment, buildings, inventory)
What are liabilities?
Debts and obligations a company owes to others (loans, accounts payable, wages payable)
What is equity?
Owner’s stake in the business (what’s left after subtracting liabilities from assets)
Which accounts normally have debit balances?
Assets, Expenses, Dividends
Which accounts normally have credit balances?
Liabilities, Revenue, Common Stock, Retained Earnings
What are current assets?
Assets expected to be converted to cash within one year (cash, accounts receivable, inventory)
What are fixed assets?
Long-term assets not easily converted to cash (buildings, equipment, land)
What are current liabilities?
Debts due within one year (accounts payable, short-term loans)
What are long-term liabilities?
Debts due after one year (long-term loans, bonds payable)
What is retained earnings?
Accumulated profits that have been reinvested in the business rather than paid out as dividends
How do you calculate net income?
Revenues - Expenses = Net Income
What does accumulated depreciation represent?
Total amount of depreciation expense recorded for an asset since its purchase
What are unearned revenues?
Money received in advance for services not yet performed
What are prepaid expenses?
Expenses paid in advance that haven’t been used up yet
What’s the purpose of depreciation?
To allocate the cost of a long-term asset over its useful life
If assets are $100,000 and liabilities are $60,000, what’s the equity?
$40,000 (Assets - Liabilities = Equity)
If a company has $50,000 in common stock and $30,000 in retained earnings, what’s total equity?
$80,000 (Common Stock + Retained Earnings = Total Equity)
How do you calculate net book value of equipment?
Original Cost - Accumulated Depreciation
What is a debit balance?
When the total debits exceed total credits in an account
What is a credit balance?
When the total credits exceed total debits in an account
What does ‘normal balance’ mean?
The side (debit or credit) where an account’s balance is normally positive
How is revenue recognized?
When services are performed or goods are delivered, regardless of when cash is received
What is an accrued expense?
An expense that has been incurred but not yet paid
What is an accrued revenue?
Revenue that has been earned but not yet received
When are adjusting entries made?
At the end of the accounting period before financial statements are prepared
What’s the entry to record used supplies?
Debit Supplies Expense, Credit Supplies
What’s the entry to record earned revenue that was previously unearned?
Debit Unearned Revenue, Credit Revenue
What is working capital?
Current Assets minus Current Liabilities
What items appear on an income statement?
Revenues, Expenses, and resulting Net Income or Loss
What does the balance sheet equation prove?
That total assets equal total claims (liabilities plus equity)
What is Accounts Receivable?
Money owed to a company by customers for goods/services provided on credit
What is Accounts Payable?
Money a company owes to suppliers for goods/services received on credit
What is Prepaid Rent?
Rent that has been paid in advance but not yet used
How do you record the purchase of equipment on credit?
Debit Equipment, Credit Accounts Payable
How do you record owner’s investment in the business?
Debit Cash, Credit Common Stock
How do you record payment of salary?
Debit Salary Expense, Credit Cash
What is straight-line depreciation?
Equal depreciation expense each year over asset’s useful life
How do you calculate annual depreciation?
(Cost - Salvage Value) ÷ Useful Life
What’s the entry to record depreciation?
Debit Depreciation Expense, Credit Accumulated Depreciation
