Double-Entry Accounting and Merchandising Transactions

Comprehensive practice flashcards covering the double-entry accounting system, journal entries, ledger posting, trial balances, closing procedures, and accounting for merchandising operations.

Debit

An entry recorded on the left side of a $T$-account that increases asset, dividend, and expense accounts, or decreases liability, stockholders' equity, and revenue accounts.

Credit

An entry recorded on the right side of a $T$-account that decreases asset, dividend, and expense accounts, or increases liability, stockholders' equity, and revenue accounts.

T-Account

A visual representation of an account formatted in the shape of the letter $T$, where increases and decreases are tracked with debits on the left and credits on the right.

Double-Entry Accounting

A recording system requiring that every transaction contains at least one debit and at least one credit, such that total debits must equal total credits.

ADE Acronym

A mnemonic device standing for Assets, Dividends, and Expenses, representing the accounts increased by a debit entry and decreased by a credit entry.

DEALER Acronym

A memory framework dividing accounts into those that increase with a debit (Dividends, Expenses, Assets) and those that increase with a credit (Liabilities, Equity, Revenues).

Normal Balance

The side of a $T$-account (debit or credit) where increases are recorded; assets, expenses, and dividends carry normal debit balances, while liabilities, equity, and revenues carry normal credit balances.

Asset Source Transaction

A transaction that increases an asset account and simultaneously increases a corresponding liability or stockholders' equity account, obtained from creditors, investors, or operational earnings.

Asset Exchange Transaction

A transaction that involves trading one asset for another asset, where one asset increases and another decreases while total assets remain unchanged.

Asset Use Transaction

A transaction that decreases an asset account and decreases a liability or stockholders' equity account, resulting from paying expenses, settling obligations, or distributing dividends.

Claims Exchange Transaction

A transaction involving the trade of one claims account for another claims account, debiting the decreasing claim and crediting the increasing claim while total claims remain unchanged.

Source Documents

Original business documents—including cash register tapes, invoices, time cards, check registers, and deposit tickets—that furnish evidence and data for entering transactions.

Journals

Books of original entry that provide a chronological record of an entity's business transactions prior to posting into ledger accounts.

General Journal

A comprehensive book of original entry where any accounting transaction can be recorded, commonly utilized for adjusting entries, closing entries, and nonrecurring transactions.

Special Journals

Specialized books of original entry structured to enhance recording efficiency for routine, high-volume transactions such as credit sales, cash receipts, and cash disbursements.

Posting

The procedural step of copying or transferring debit and credit dollar amounts from journal entries into their corresponding general ledger accounts.

General Ledger

The master collection of all individual asset, liability, stockholders' equity, revenue, expense, and dividend accounts utilized by a specific business entity.

Chart of Accounts

A formal index listing all general ledger account titles along with their assigned numerical identifiers.

Trial Balance

An internal schedule that enumerates every general ledger account alongside its ending debit or credit balance to confirm mathematical equality between total debits and total credits.

Adjusting Entry

An end-of-period entry required to update account balances for accrued expenses, unearned revenues, and deferred costs prior to financial statement preparation.

Closing Entries

Journal entries executed at year-end to transfer the accumulated balances of all temporary accounts into Retained Earnings, resetting temporary accounts to a beginning balance of zero.

Temporary Accounts (Nominal Accounts)

Accounts that track activity for a single accounting period and are closed to Retained Earnings at the end of the year, consisting of revenue, expense, and dividend accounts.

Permanent Accounts (Real Accounts)

Balance sheet accounts (assets, liabilities, and stockholders' equity) whose balances are not closed at period end but carry forward continuously as beginning balances in the subsequent period.

Post-Closing Trial Balance

A trial balance prepared immediately after closing entries are posted to verify the equality of debits and credits among permanent accounts before the start of the next accounting cycle.

Natural Business Year

An annual accounting period ending on a date when business operating activity and inventory volumes reach their lowest point in the annual operating cycle.

Merchandising Business

An enterprise that acquires finished goods from suppliers and resells them to consumers or other companies at a higher price to earn a profit.

Merchandise Inventory

An asset account on the balance sheet that reflects the total capitalized acquisition costs of goods purchased and held for resale.

Product Costs

All expenditures necessary to acquire merchandise and ready it for sale—including purchase price, freight-in, transit insurance, storage, and sales taxes—capitalized as inventory until sold.

Period Costs (Selling and Administrative Costs)

Non-inventory expenditures—such as advertising, administrative salaries, sales commissions, and freight-out—expensed directly on the income statement during the period incurred.

Cost of Goods Available for Sale

The total cost of inventory on hand for sale during a period, calculated as Beginning Inventory balance plus purchases made during that period.

Cost of Goods Sold (COGS)

An income statement expense account representing the product cost of inventory that was sold to customers during the accounting period.

Gross Margin (Gross Profit)

The difference between net sales revenue and cost of goods sold ($\text{Net Sales} - \text{COGS}$), measuring profitability before deducting selling and administrative operating expenses.

Perpetual Inventory System

An inventory recording method that updates inventory and cost of goods sold balances continuously upon every purchase, return, and sale transaction.

Periodic Inventory System

An inventory tracking method that accumulates purchases in a temporary account and computes cost of goods sold only at period end following a physical count.

Purchase Returns and Allowances

Reductions in the cost of inventory and obligations to suppliers resulting from returning merchandise (returns) or receiving price adjustments for defective goods kept by the buyer (allowances).

Purchase Discount

A price reduction offered by a supplier that a buyer secures by paying cash within a specified discount window, recorded by debiting Accounts Payable and crediting Merchandise Inventory.

Sales Discount

A cash discount provided by a seller to prompt quick payment from credit customers, recorded as a reduction of sales revenue upon collection within the discount period.

Credit Terms

Contractual payment arrangements (such as $2/10, n/30$) specifying the discount percentage available for early remittance ($2\%$ within $10$ days) and the final full payment due date ($30$ days).

Annual Financing Rate Formula (Forgone Discount)

The formula used to assess the annual interest cost of passing up an early payment discount: $\text{Annual rate} = \text{Discount rate} \times \left(\frac{365}{\text{Term of the loan}}\right)$.

FOB Shipping Point

Shipping terms establishing that title passes to the buyer at the shipping point, obligating the buyer to incur freight charges (transportation-in) as part of inventory cost.

FOB Destination

Shipping terms establishing that title passes to the buyer at destination, obligating the seller to incur freight charges (transportation-out) as a period operating expense.

Transportation-In

Freight costs paid by the buyer under FOB shipping point terms, categorized as product costs and added directly to the Merchandise Inventory asset account.

Transportation-Out

Freight costs paid by the seller under FOB destination terms, recognized as a period operating expense positioned below gross margin on the income statement.

Inventory Shrinkage

The loss of inventory due to shoplifting, employee theft, damage, or spoilage, calculated by subtracting the physical count from the ledger balance and expensed to Cost of Goods Sold.

Multistep Income Statement

A formatted income statement that isolates Cost of Goods Sold, calculates Gross Margin, and clearly segregates operating income from non-operating items like gains, losses, and interest.

Gain

The excess of cash or receivables received over the book value/cost when disposing of non-inventory assets (such as land) in peripheral or nonrecurring transactions.

Loss

The deficit resulting when proceeds from the sale of peripheral, non-inventory assets fall below their capitalized book value, reported separately from operating expenses.