Module 3 - Basic Accounting

Question 1

Accounting

Answer 1

A language used to communicate business information to users that need that information to make decisions

Question 2

What are the 5 types of accounts?

Answer 2

assets, liabilities, equity, revenue, expenses

Question 3

Define Assets

Answer 3

things a company owns or has the right to use (pre-paid gift cards, accounts receivable, stuff, trademarks, etc.)

Question 4

Define Liabilities

Answer 4

Obligations (debts, issuing gift cards, warranties, obligations)

Question 5

Define Equity

Answer 5

Shareholders stake in a company, owner’s contributtions, retained earnings, all profit a company has kept (draws decrease equity)

Question 6

Define Revenue

Answer 6

things coming in

Question 7

Define Expenses

Answer 7

cost of generating revenue (wages, supplies, utilities, cost of goods sold)

Question 8

Which accounts increase with debits?

Answer 8

Assets & Expenses

Question 9

Which accounts increase with credits?

Answer 9

Liabilities, Equity, Revenue

Question 10

Write the following journal entry: The owner of a sole proprietorship pays for his Staples order with a personal debit card because he forgot his business card. The order was $134.56 and consisted of various office supplies

Answer 10

1/2/23 Office Supplies Debit: 134.56

Owner’s Contributions Credit: 134.56

Question 11

Name 3 Money Inflows

Answer 11

Revenue, Owners Investments, Loans

Question 12

Name 3 Money Outflows

Answer 12

Expenses, Owner Distributions or Dividends, Loan Repayments

Question 13

Name 3 things about Revenue

Answer 13

*Money from providing good or service
*Sales
*Included in calculation of profit and taxable (set aside 15% for taxes)

Question 14

Name 2 things about loans

Answer 14

*Money received from banks or others
*Not included in profit and not taxable

Question 15

Nam 2 things about Owner Investments

Answer 15

*Money contributed by owner
*not included in profit and not taxable

Question 16

Name 2 things about Owner Distributions or Dividends

Answer 16

*Payments to owners that are not wages or guaranteed payments
*Do not lower profit and are not tax deductible

Question 17

Name 3 things about Expenses

Answer 17

*Costs associated with making money
*Can include wages and guaranteed payments
*Lowers profit and tax deductible

Question 18

Name 2 things about Loan Repayments

Answer 18

*Money used to decrease balance or loan
*Do not lower profit and are not tax deductible (the car gets written off, not the payments)

Question 19

Name 2 common mistakes bookkeepers make?

Answer 19

1. Classifying Owner Investments as Income
2. People try to deduct loan payments (you can deduct what you took the loan for and the interest)
   *The charges on the credit card get deducted, not paying it off

Question 20

What are the six parts of Cash Flow? Which have to do with profit?

Answer 20

Cash Flow:
+ Revenue
+ Owner Investment
+Loan Proceeds
- Expenses
-Owner Distributions / Dividends
- Loan Repayments

Profit:
+Revenue
-Expenses

Question 21

What is an account?

Answer 21

a bucket we assign money to

Question 22

What is the most common mistake with accounts?

Answer 22

Having way too many

Question 23

What are two keys when setting up accounts?

Answer 23

make sure each bucket is set to the right type. Be consistent in naming.

Question 24

What are example asset accounts?

Answer 24

Main Checking - Connexus
Payroll - Name of Bank
Savings - Name of Bank
Accounts Receivable (Money customers owe (Invoices))
Security Deposits Paid
Prepaid Items (Insurance, Website, etc.)
Fixed or Longterm Assets (computers, etc.)

Question 25

What are examples of Liability Accounts?

Answer 25

Accounts Payable Credit Card - Name of Bank Car Loans Bank Loans Unearned Revenue (Deposits a customer has made for work not yet done... software doesn't handle this well)

Question 26

What are some sample Equity Accounts in a Sole Proprietorship / SMLLC (single-member LLC)?

Answer 26

Owner's Capital Owner's Contributions Owner's Draw - Taxes Owner's Draw - Health Insurance Owner's Draw - Personal Expenses (help client not do this)

Question 27

What should you always check with regard to equity accounts when working with a new business?

Answer 27

Check that equity accounts are set up properly for the type of business.

Question 28

What are some sample Equity Accounts in a Partnership / MMLLC (Multi-member LLC)

Answer 28

Partner A Capital Partner A Contributions Partner A - Draws - Taxes Partner A - Draws - Health Insurance (etc. for each partner) Retained Earnings (only 1 of these)

Question 29

What are some sample Equity Accounts in a Corporation (S & C very similar)?

Answer 29

Common Stock Additional Paid-In Capital Last Name - Distributions (S-Corp) Dividends (C-Corp) Retained Earnings (does not get closed out)

Question 30

What are some sample Revenue Accounts?

Answer 30

Sales (Products) Services Revenue or Fees Earned Interest Income Dividend Income (rare - if company owns stock) Sales Returns and Allowance (contra-revenue) Sales Discounts (decrease revenue) *Make sure to keep buckets simple.

Question 31

What are some sample Expense Accounts?

Answer 31

Cost of Goods Sold (Product) Software Fees Insurance Expense (don't need to separate each one when have multiple types for employees) Office Expense Dues and Subscriptions Meals Expense Education Subcontractors Advertising Expense Payroll Expense Payroll Taxes Employee Benefits Business Txes Telephone Expense Depreciation Expense Travel Expense **Too many buckets makes things more complicated for bookkeeping and makes interpreting finances of business more complicated for owners

Question 32

Business keeping their own books have a....

Answer 32

"Ask My Accountant" account. Put it there with a memo and bookkeeper can figure it out.

Question 33

What do you do with expenses you don't know what to do with?

Answer 33

1. Ask in Group 2. Use "Uncategorized Expenses" and put them in a report for the client to go through together or give notes, etc.

Question 34

Most tax payers are cash basis tax payers, but they like to look @ financial statements on ______________.

Answer 34

accrual basis

Question 35

What does Cash Basis mean?

Answer 35

tracks Cash In and Cash Out. Revenue is not recorded until money is received. Expenses are recorded when paid (to vendor - using credit card is considered paid)

Question 36

What does Accrual Basis mean?

Answer 36

Tracks Revenue and expenses as recorded, not when cash is received. Revenue is recorded when the invoice is created. Expenses are recorded when incurred and entered into bills. (Uses Earned & Incurred rather than Cash In Cash Out)

Question 37

What is an Income Statement?

Answer 37

An income statement is like a movie. Revenue - Expenses = Income Often called Profit and Loss Statement It is run for a period of time (typically a year or less) 2 types of accounts show up on this report

Question 38

What is Level 1 and Level 2 bookkeeping when it comes to an Income Statement?

Answer 38

Level 1: Generating Reports Level 2: Noticing changews over time and helping client evaluate ("Would you like me to look into some insurance quotes for you?")

Question 39

What is a balance sheet?

Answer 39

A balance sheet is like a snapshot. It is run as of a day. Assets = Liabilities + Equity liquidity = closeness to cash depreciation = expensing of asset over time (tax accountant calculates) Assets / Total Assets Liabilities Equity / Total Liabilities & Equity

Question 40

Which types of accounts increase when debited? Which decrease?

Answer 40

Increase: Assets and Expenses Decrease: Liability, Equity, Revenue

Question 41

Which types of accounts increase when credited? Which decrease?

Answer 41

Increase: Liability, Equity, Revenue Decrease: Assets and Expenses

Question 42

Write a journal entry: You start your business by putting $200 of your own money into your business checking account. You are a sole proprietorship.

Answer 42

Checking Account Debit $200 Owner's Contributions Credit $200

Question 43

Write a journal entry: You spend $25 on business cards using your debit card.

Answer 43

Checking Account Credit $25 Office Expense Debit $25

Question 44

Write a journal entry: You do some work for a local client who pays you as soon as you finish the work, $300.

Answer 44

Cash Debit $300 Service Revenue Credit $300