Introduction Flashcards
What is the Basic Accounting Equation?
Assets = Liabilities + Stockholder’s Equity
What is the breakdown of Stockholder’s Equity?
Common Stock + Retained Earnings: Revenue - Expenses - Dividends
What is Common Stock?
new shares of stock issued in exchange for cash
What are Retained Earnings?
What category does it belong to?
- recognized revenue as a result of the principle activity of the company
- expenses incurred in an effort to generate income
- dividends distributed to stockholders
considered Stockholder’s Equity
Can retained earnings be recorded if the cash has not been received?
Yes, retained earnings are recorded when the service has been performed, whether or not the cash has been received
What comprises the calculation of net income?
- recognized revenue
- incurred expenses
What is revenue?
income generated from principle activity of the company
What are expenses?
money spent in an effort to generate revenue
What are dividends?
distribution of company’s assets to its stockholders
How is cash received in advanced recorded?
Explain
Liability (unearned service revenue), until the obligation has been fulfilled, then it is recorded as Revenue
What category does Cash belong to?
Think of how this affects the accounting equation
Assets
What category does Accounts Receivable belong to?
Think of how this affects the accounting equation
Assets
What category does Prepaid Expenses belong to?
Think of how this affects the accounting equation
Assets
What are examples of Prepaid Expenses?
What stipulates a prepaid expense?
- Rent
- Insurance
Prepaid expenses must benefit more than one accounting period
What category do Supplies belong to?
Think of how this affects the accounting equation
Assets
What category does Equipment belong to?
Think of how this affects the accounting equation
Assets
What category does Notes Payable belong to?
Think of how this affects the accounting equation
Liabilities
What category do Accounts Payable belong to?
Think of how this affects the accounting equation
Liabilities
What category does Unearned Service Revenue belong to?
Think of how this affects the accounting equation
Liabilities
What category does Common Stock belong to?
Think of how this affects the accounting equation
Stockholder’s Equity
What category does Retained Earnings belong to?
Think of how this affects the accounting equation
Stockholder’s Equity
What category does Revenue belong to?
Think of how this affects the accounting equation
Retained Earnings -> Stockholder’s Equity
What category do Expenses belong to?
Think of how this affects the accounting equation
Provide Examples
Retained Earnings -> Stockholder’s Equity
Only if affects current accounting period only
Ex: Rent; Salaries/Wages
What category do Dividends belong to?
Think of how this affects the accounting equation
Retained Earnings -> Stockholder’s Equity
What are the 3 parts of the T-account?
- Title of the account
- Left side (debit)
- Right side (credit)
How are debits and credits portrayed for Asset accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Debits (Left)
- Decrease in Credits (Right)
It is normal for debit balance to be shown
How are debits and credits portrayed for Liability accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Credits (Right)
- Decrease in Debits (Left)
It is normal for credit balance to be shown
How are debits and credits portrayed for Common Stock accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Credit (Right)
- Decrease in Debit (Left)
It is normal for credit balance to be shown
How are debits and credits portrayed for Retained Earning accounts
What is a normal balance for this account? Why? (if applicable)
- Increase in Credit (Right)
- Decrease in Debit (Left)
It is normal for credit balance to be shown
How are debits and credits portrayed for Dividend accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Debit (Left)
- Decrease in Credit (Right)
It is normal for debit balance to be shown b/c Dividends decrease Retained Earnings, thus decreasing Stockholder’s Equity
How are debits and credits portrayed for Revenue accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Credit (Right)
- Decrease in Debit (Left)
It is normal for credit balance to be shown b/c Revenue increases Retained Earnings, thus increasing Stockholder’s Equity
How are debits and credits portrayed for Expense accounts?
What is a normal balance for this account? Why? (if applicable)
- Increase in Debits (Left)
- Decrease in Credits (Right)
It is normal for debit balance to be shown b/c Expenses decrease Retained Earnings, thus decreasing Stockholder’s Equity
What is the order of the recording process?
Source document -> Journal entry -> Ledger
What are the 3 components of a Journal Entry?
- Date of transaction
- Accounts and amounts to be debited and credited
- Brief explanation of the transaction
Use specific accoount titles: “cash”, “equipment”, “notes payable”
What is the Periodicity Assumption?
Accounting principle that states accounting time periods are generally a month, quarter, or year
What is the Revenue Recognition Principle?
requires that companies recognize revenue in the accounting period the performance obligation is satisfied
Not necessarily when the cash is received
Waht is the Expense Recognition Principle?
- Match expenses with revenues in the period that the performance obligation is satisfied
- Let expenses follow the revenues
Even if cash has not been exchanged
Accrual-basis Accounting
Transactions are recorded in the period in which the events occur, even if cash hasn’t been exchanged
