Financial Statements Flashcards
Define income statement
reports the details of revenue and expenses to arrive at net profit or loss
Define balance sheet
Summarizes assets, liabilities and owner’s equity at a specific moment in time
Define capital statement
Reports the owner’s interest in business during the period covered
Define sources and uses statement
What our actual sources and uses of cash are for a specific period of time
Define Trial Balance
Proof of the equality of debit and credit balances
How do you construct a trial balance
Constructing a two colume schedule listing the names and balances of the accounts in the order in which they appear in the ledger
The agreement of the debit and credit totals of the trial balance gives assurance that?
Equal debits and credits have been recorded for all transactions
Each account has been correctly computed
Addition of the account balances has been correctly preformed
Typical errors of trial balances?
Entering of debits as credit or vice versa
Arithmetical mistakes in balancing accounts
Clerical errors in copying account balances into the trial balance
Addition errors
Which accounts typically have a debit balance?
Assets
Prepaid expenses
Expenses
Which accounts typically have a credit balance?
Accounts payable, credit, revenue
What is the purpose of adjusting entries?
Record revenue and expenses that are not properly measured in the course of recording daily business transactions
When are adjusting entries needed?
When a transactions goes for more than one fiscal year
Four categories of adjusting entries?
Entries to… apportion recorded cost
apportion unearned revenue
record unrecorded expenses
record unrecorded revenue
Pay for one year of fire insurance
Prepaid Insurance
Debit | Credit
600
Cash
Debit | Credit
600
Insurance Expense
Debit | Credit
50
Prepaid Insurance
Debit | Credit
50
Define Nominal Accounts
Income Statement Accounts
Accumulate data for a set period of time then the balance is removed and reset to zero
- Revenue, expense and owner’s withdrawals
Where do they go after the year?
The money is transferred to Owner’s Capital
Define closing entries
The journal entries that transfer the balances of nominal accounts to owner’s capital
Purpose of closing entries?
Close the nominal account to zero balance so they are ready for the new year
Transfer the net income or loss for the current period and owner’s withdrawals to the Owner’s capital accounts
Sales is what kind of balance and how do you offset it?
Credit balance so offset it by taking a debit and then credit it to the income summary sheet
Once you move everything to income summary what should the account =
Net income after taxes
So how do you get net income via this process?
Sales and beginning inventory are offset by a credit and then debited to the income summary (but with BI you only have EI left so you credit EI to the income summary)
All expenses are debits so you take a credit to reset them to zero (add them all together)
That total is now debited to the income summary to offset the credits you took
Next you bring subtract the credit from the debit to get the net income (debit if profit, credit if loss)
To finished up and get rid of the income summary account what do you do with the net income debit?
You then Credit that to the income summary to get zero
Debit it to the Capital account and either add to the capital in the account or take away if it started as a net income credit
How do you close the Owner’s withdrawal account?
It shows as a debit (loss of money) to the account so you credit it
Then you debit it to the Capital account (removing that “money” from the account)
