Accounting chap 3

What is the accounting cycle?

The accounting cycle is the process companies use to record transactions and prepare financial statements.

What are the 9 steps of the accounting cycle?

• Analyze transactions

• Journalize

• Post

• Prepare a trial balance

• Prepare adjusting entries

• Prepare an adjusted trial balance

• Prepare financial statements

• Prepare closing entries

• Prepare a post-closing trial balance

What is an accounting transaction? (the first step of the cycle)

An economic event that causes a measurable change in a company's financial position, including assets, liabilities, and/or shareholders' equity.

How can you determine whether an accounting transaction has occurred?

Ask whether the company's assets, liabilities, or shareholders' equity have changed in a measurable way.

Does simply hiring a new employee create an accounting transaction?

No, its when the employee starts working and earns a salary that it creates a transaction

Is purchasing a computer an accounting transaction?

Yes. It changes the company's financial position

What is the basic accounting equation?

Assets = Liabilities + Shareholders' Equity.

What makes up shareholders' equity?

Common Shares + Retained Earnings

What is the expanded accounting equation?

Assets = Liabilities + Common Shares + Revenues − Expenses − Dividends.

What is the relationship between revenues and retained earnings?

Revenues increase retained earnings.

and expenses decrease retained earnings as well as dividends

Sierra receives $10,000 cash from shareholders for common shares. What is the effect?

Cash +$10,000 and Common Shares +$10,000.

What happens when a company receives a bank loan?

Cash increases and Bank Loan Payable increases.

Sierra purchases $5,000 of equipment for cash. What is the effect?

Equipment +$5,000 and Cash −$5,000.

Does purchasing equipment for cash change total assets?

No. One asset increases while another asset decreases by the same amount.

What happens when a company pays rent for the current month?

Cash decreases and Rent Expense increases.

Why is prepaid insurance recorded as an asset instead of an expense immediately?

The insurance provides benefits beyond the current accounting period

What does purchasing something "on account" mean?

The company receives the goods or services now and agrees to pay later

When is revenue normally recognized?

When the services are performed.

What is Deferred Revenue?

A liability created when a company receives payment before providing goods or services.

What is an account?

An account is an individual accounting record of increases and decreases in a specific asset, liability, or shareholders’ equity item, along with its opening and ending balances.

What are the the three parts of an account?

The three parts are the title of the account, the left or debit side, and the right or credit side.

What is a T account?

A T account is an account with a left debit side and a right credit side.

A T account is also known as a general ledger account.

What is a ledger?

A ledger is the entire group of accounts maintained by a company.

What is the debit and credit rule for assets?

Assets: Debit increases; Credit decreases.

What is the debit and credit rule for liabilities?

Liabilities: Credit increases; Debit decreases.

What is the debit and credit rule for Common Shares?

Common Shares: Credit increases; Debit decreases.

What is the debit and credit rule for Retained Earnings?

Retained Earnings: Credit increases; Debit decreases.

What is the debit and credit rule for revenues?

Revenues: Credit increases; Debit decreases.

What is the debit and credit rule for expenses?

Expenses: Debit increases; Credit decreases.

What is the debit and credit rule for Dividends Declared?

Dividends Declared: Debit increases; Credit decreases.

Which accounts normally have debit balances?

Assets, Expenses, and Dividends Declared normally have debit balances.

Why are T accounts useful?

T accounts help reduce recording errors by putting increases on one side and decreases on the other, and they help determine the totals and balance of an account.