Introduction

Question 1

What is the Basic Accounting Equation?

Answer 1

Assets = Liabilities + Stockholder’s Equity

Question 2

What is the breakdown of Stockholder’s Equity?

Answer 2

Common Stock + Retained Earnings: Revenue - Expenses - Dividends

Question 3

What is Common Stock?

Answer 3

new shares of stock issued in exchange for cash

Question 4

What are Retained Earnings?

What category does it belong to?

Answer 4

• 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

Question 5

Can retained earnings be recorded if the cash has not been received?

Answer 5

Yes, retained earnings are recorded when the service has been performed, whether or not the cash has been received

Question 6

What comprises the calculation of net income?

Answer 6

• recognized revenue
• incurred expenses

Question 7

What is revenue?

Answer 7

income generated from principle activity of the company

Question 8

What are expenses?

Answer 8

money spent in an effort to generate revenue

Question 9

What are dividends?

Answer 9

distribution of company’s assets to its stockholders

Question 10

How is cash received in advanced recorded?

Explain

Answer 10

Liability (unearned service revenue), until the obligation has been fulfilled, then it is recorded as Revenue

Question 11

What category does Cash belong to?

Think of how this affects the accounting equation

Answer 11

Assets

Question 12

What category does Accounts Receivable belong to?

Think of how this affects the accounting equation

Answer 12

Assets

Question 13

What category does Prepaid Expenses belong to?

Think of how this affects the accounting equation

Answer 13

Assets

Question 14

What are examples of Prepaid Expenses?

What stipulates a prepaid expense?

Answer 14

• Rent
• Insurance

Prepaid expenses must benefit more than one accounting period

Question 15

What category do Supplies belong to?

Think of how this affects the accounting equation

Answer 15

Assets

Question 16

What category does Equipment belong to?

Think of how this affects the accounting equation

Answer 16

Assets

Question 17

What category does Notes Payable belong to?

Think of how this affects the accounting equation

Answer 17

Liabilities

Question 18

What category do Accounts Payable belong to?

Think of how this affects the accounting equation

Answer 18

Liabilities

Question 19

What category does Unearned Service Revenue belong to?

Think of how this affects the accounting equation

Answer 19

Liabilities

Question 20

What category does Common Stock belong to?

Think of how this affects the accounting equation

Answer 20

Stockholder’s Equity

Question 21

What category does Retained Earnings belong to?

Think of how this affects the accounting equation

Answer 21

Stockholder’s Equity

Question 22

What category does Revenue belong to?

Think of how this affects the accounting equation

Answer 22

Retained Earnings -> Stockholder’s Equity

Question 23

What category do Expenses belong to?

Think of how this affects the accounting equation
Provide Examples

Answer 23

Retained Earnings -> Stockholder’s Equity

Only if affects current accounting period only
Ex: Rent; Salaries/Wages

Question 24

What category do Dividends belong to?

Think of how this affects the accounting equation

Answer 24

Retained Earnings -> Stockholder’s Equity

Question 25

What are the 3 parts of the T-account?

Answer 25

- Title of the account - Left side (debit) - Right side (credit)

Question 26

How are debits and credits portrayed for Asset accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 26

- Increase in Debits (Left) - Decrease in Credits (Right) ## Footnote It is normal for debit balance to be shown

Question 27

How are debits and credits portrayed for Liability accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 27

- Increase in Credits (Right) - Decrease in Debits (Left) ## Footnote It is normal for credit balance to be shown

Question 28

How are debits and credits portrayed for Common Stock accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 28

- Increase in Credit (Right) - Decrease in Debit (Left) ## Footnote It is normal for credit balance to be shown

Question 29

How are debits and credits portrayed for Retained Earning accounts ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 29

- Increase in Credit (Right) - Decrease in Debit (Left) ## Footnote It is normal for credit balance to be shown

Question 30

How are debits and credits portrayed for Dividend accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 30

- Increase in Debit (Left) - Decrease in Credit (Right) ## Footnote It is normal for debit balance to be shown b/c Dividends decrease Retained Earnings, thus decreasing Stockholder's Equity

Question 31

How are debits and credits portrayed for Revenue accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 31

- Increase in Credit (Right) - Decrease in Debit (Left) ## Footnote It is normal for credit balance to be shown b/c Revenue increases Retained Earnings, thus increasing Stockholder's Equity

Question 32

How are debits and credits portrayed for Expense accounts? ## Footnote What is a normal balance for this account? Why? (if applicable)

Answer 32

- Increase in Debits (Left) - Decrease in Credits (Right) ## Footnote It is normal for debit balance to be shown b/c Expenses decrease Retained Earnings, thus decreasing Stockholder's Equity

Question 33

What is the order of the recording process?

Answer 33

Source document -> Journal entry -> Ledger

Question 34

What are the 3 components of a Journal Entry?

Answer 34

- Date of transaction - Accounts and amounts to be debited and credited - Brief explanation of the transaction ## Footnote Use specific accoount titles: "cash", "equipment", "notes payable"

Question 35

What is the Periodicity Assumption?

Answer 35

Accounting principle that states accounting time periods are generally a month, quarter, or year

Question 36

What is the Revenue Recognition Principle?

Answer 36

requires that companies recognize revenue in the accounting period the performance obligation is satisfied ## Footnote Not necessarily when the cash is received

Question 37

Waht is the Expense Recognition Principle?

Answer 37

- Match expenses with revenues in the period that the performance obligation is satisfied - Let expenses follow the revenues ## Footnote Even if cash has not been exchanged

Question 38

Accrual-basis Accounting

Answer 38

Transactions are recorded in the period in which the events occur, even if cash hasn't been exchanged