Accounting1

service business

a business that performs an activity for a fee

(sole) proprietorship

a business owned by one person

ease of formation, total control by the owner, profits that are not shared

limited resource, unlimited liability, limited expertise, limited life

(must be dissolved when the owner dies or decides to stop doing business)

Business Entity

a business’s financial information is recorded and reported separately from the owner’s personal financial information

asset

anything of value that is owned

equity

financial rights to the assets of a business

liability

an amount owed by a business

owner’s equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets

accounting equation

Assets = Liabilities + Owner’s Equity

transaction

a business activity that changes assets, liabilities, or owner’s equity

account

a record summarizing all the information pertaining to a single item in the accounting equation

account title

the name given to an account

account balance

the amount in an account

capital

the account used to summarize the owner’s equity in a business

revenue

an increase in owner’s equity resulting from the operation of a business

sale on account /charge sale

a sale for which cash will be received at a later date

realization of revenue

revenue is recorded at the time goods or services are sold

expense

a decrease in owner’s equity resulting from the operation of a business

withdrawls

assets taken out of a business for the owner’s personal use

is not considered an expense

GAAP

General accepted accounting principles

debit / credit

an amount recorded on the left / right side

dr. for debit

cr. for credit

the side of the account that is increase

normal balance

chart of accounts

a list of account titles and numbers showing the location of each account in a ledger

taxes for proprietorship

the Internal Revenue Service does not require the proprietorship to ay taxes

the owner of the proprietorship must include the net income of the proprietorship in his/her own taxable income

journal

a form for recording transactions in chronological order

journalizing

recording transactions in a journal

business usually record transactions in their journals every day

entry

information for each transaction recorded in a journal

general journal

a journal with two amount columns in which all kinds of entries can be recorded

all amounts recorded in the general journal must have an account tile written in the Account Title column

double-entry accounting

the recording of debit and credit parts of a transaction

source document

a business paper from which information is obtained for a journal entry

objective evidence

a source document is prepared for each transaction

check

a business for ordering a bank to pay cash from a bank account

invoice

a form describing the goods or services sold, the quantity, an the price

sales invoice / sales ticket / sales slip

an invoice used as a source document for recording a sale

receipt

a business form giving written acknowledgement for cash received

source document for cash received from transactions other than sales

memorandum

a form on which a brief message is written describing a transaction

an entry consists of…

date

debit

credit

source document

(dollars and cents signs and decimal points are not sued)

starting a new journal page

when there is insufficient space to record any more entries

started by writing the page number in the space provided in the journal heading

standard accounting practice ( p76)

ledger

a group of accounts

general ledger

a ledger that contains all accounts needed to prepare financial statements

account number

the number assigned o an account

five general ledger divisions

(1) assets

(2) liabilities

(3) owner’s equity

(4) revenue

(5) expenses

file maintenance

the procedure for arranging accounts in a general ledger, assigning accounts numbers, and keeping records current

assigning account number

the number selected for the new account should leave some unused numbers on either side of it for other accounts that might need to be added

when a new account is added at the end of a ledger division, the next number in a sequence of 10s is used

opening an account

writing an account title and number on the heading of an account

posting

transferring information from a journal entry to a ledger account

purposes of the Post. Ref columns

steps of posting

(1) date

(2) write the journal page number in the Post. Ref column of the account

(3) write the debit / credit amount

(4) write the new account balance

(5) return to the journal and write the account number in the Post. Ref. column of the journal

proving cash

determining that the amount of cash agrees with the balance of the cash account in the accounting records

how: compares the cash balances as shown in the checkbook with the cash balance in the cash account

correcting entry

a journal entry made to correct an error in the ledger

when an error in a journal entry has already been posted, the incorrect journal entry should be corrected with an additional journal entry

source document: memorandum

checking account

a bank account from which payments can be ordered by a depositor

endorsement

a signature or stamp on the back of a check transferring ownership

blank endorsement

an endorsement consisting only of the endorser’s signature

indicates that the subsequent owner is whoever has the check

the check can be cashed by anyone who has the possession

should be used when a person is at the bank ready to cash or deposit a check

special endorsement / endorsements in full

an endorsement indicating a new owner of a check

restrictive endorsement

an endorsement restricting further transfer of a check’s ownership

limits use of the check to whatever purpose is stated in the endorsement

steps to prepare check stubs

(1) write the amount of the check in the space after the dollar sign at the top of the stub

(2) write the date of the check on the date line at the top of the stub

(3) write to whom the check is to be paid on the To line at the top

(4) record the purpose on the For line

(5)write the amount of the check in the amount column at the button on the line with the words “Amt. This Check”

(6) calculate the new checking account balance and record the new balance in the amount column on the last line of the stub

steps to prepare checks

(1) write the date (month, day, year)

(2) write to whom the check is to be paid following the words “Pay to the order of”

(3) write the amount in figures following the dollar sign

(4) write the amount in words

(5) write the purpose of the check on the line labeled “For”

(6) sign the check

postdated check

a check with a future date on it

void a check

write the word VOID in large letters across both the check and the stub

recording the voided check in the general journal:

date,

write VOID in the Account Title column,

write the check number in the Doc. No. column,

place a check mark in the Post. Ref. column,

place a dash in both the Debit and Credit column

bank statement

a report of deposits, withdrawals, and bank balances sent to a depositor by a bank

outstanding checks

outstanding deposits

checks issued by a depositor but not yet recorded on a bank statement

deposits made at a bank but not yet shown on a bank statement

steps for reconciling a bank statement

1. write the date

2. list the balance brought forward on the Check Stub No. X in the left amount column

3. list any charges in the space for bank charges

   1. bank service charge = SC

4. write the adjusted check stub balance in the space provided at the bottom of the left amount column

5. write the ending balance shown on the bank statement in the right amount column

6. write the date and the amount of any outstanding deposit. Add the outstanding deposits. Write the total outstanding deposits in the right amount column

7. add the ending bank statement balance to the total outstanding deposits in the space for the subtotal

8. list the outstanding check Nos and their amounts in the space provided. Add the amounts and the write the total in the right amount column

9. calculate the adjusted bank balance and write the amount in the space provided at the bottom of the right amount column

10. compare adjusted balances

dishonored check

a check that a bank refuses to pay

1. appears to be altered

2. signature of the person who signed the check does not match the one on the signature card at the bank

3. the amounts written in figures and in words do not agree

4. the check is postdated

5. the person who wrote the check has stopped payment on the check

most bank charge a fee for handling dishonored checks that have been previously accepted for deposit

electronic funds transfer

a computerized cash payments system that transfers fund without the use of the checks, currency, or other paper document

source document: memorandum

debit card

a bank card that automatically deducts the amount of a purchase from the checking account of the cardholder

(cash)

petty cash

an amount of cash kept on hand and used for making small payments

petty cash slip

a form showing proof of a petty cash payment

petty cash slip number, date, to whom, reason, amount, account in which amount is to be recorded, signature

the slips are kept in the petty cash box until the fund is replenished. No entries are made in the journal for the individual petty cash payment

entries for petty cash payment

debit the expenses

credit cash

*unless the petty cash fund is permanently increased or decreased, the balance of the account is always the original amount of the fund

consistent reporting

the same accounting procedures are followed in the same way in each accounting period

fiscal period / accounting period

the length of time for which a business summarize and reports financial information

accounting period cycle

changes in financial information are reported for a specific period of time in the form of financial statement

work sheet

a columnar accounting form used to summarize the general ledger information needed to prepare financial statement

1. general ledger account balances to prove debits = credits

2. to plan needed changes to general ledger accounts to bring account balances up to date

3. to separate general ledger account balances according to the financial statements to be prepared

4. to calculate the amount of net income or net lose for a discal period

trial balance

a proof of the equality of debits and credits in a general ledger

list general ledger account titles on a trial balance in the same order as they are listed on the chart of accounts

matching expenses with revenue

revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period

adjustments

changes recorded on a work sheet to update general ledger accounts at the end of a fiscal period

steps of recording the adjustment on a work sheet

balance sheet

a financial statement that reports assets, liabilities, and owner’s equity on a specific date

income statement

a financial statement showing the revenue and expenses for a discal period

net income

the difference between total revenue and total expenses when total revenue is greater

net loss

the difference between total revenue and total expenses when total expenses are greater

checking for typical calculation errors (p167)

adequate disclosure

financial statements contain all information necessary to understand a businese’s financial condition

going concern

financial statement are prepared with the expectation that a business will remain in operation indefinitely

stakeholders

any person or groups who will be affected by an action

income statement (p183)

component percentage

the percentage relationship between one financial statement item and the total that includes that item

sections on a balance sheet

1. Heading

2. Assets

3. Liabilities

4. Owner’s equity

Adjusting entries

journal entries recorded to update general ledger accounts at the end of a fiscal period

Permanent account / real accounts

Accounts used to accumulated information from one fiscal period to the next

Temporary accounts / nominal accounts

Accounts used to accumulate information until it is transferred to the owner’s capital account

Closing entries

Journal entries sued to prepare temporary accounts for a new fiscal period

The temporary account balances must be reduced to a zero at the end of each fiscal period

Income Summary

A temporary account used to summarize the closing entries for the revenue and expense accounts

Does not have a normal balance side

Post-closing trial balance

A trial balance prepared after the closing entries are posted.

Only general ledger accounts with balances are included on a post-closing trial balance

Accounting cycle

The series fo accounting actives included in recording financial information for a fiscal period

1. Source document

2. Transactions

3. Journal entires

4. Work sheet

5. Financial statement

6. Adjusting and closing entries are journalized

7. Adjusting and closing entries and posted

8. Post-closing trial balance

merchandise

goods that a business purchases to sell

merchandising business

a business that purchases and sells goods

retail merchandising business

a merchandising business that sells to those who use or consume the goods

wholesale merchandising business

a business that buys and resells merchandise to retail merchandising business

corporation

an organization with the legal rights of a person and which many persons may own