ACC 231 Exam 1 Study Guide

Accrual Basis of Accounting

the method of accounting that recognizes and records revenues when earned

Closing costs accomplish...

1) Transfer revenues, expenses, and dividends to retained earnings. 2) Zero out the revenues, expenses, and dividends to prepare these accounts for the next accounting period. 3) Bring the retained earnings account to its correct ending balance.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Income Statement

a financial statement that gives operating results for a specific period

Increase with credits

Revenues, equity, and liabilities

Increase with debits

Assets, dividends, and expenses

Net Income (loss) equals

Revenues minus Expenses

Assets equal

Liabilities + Stockholders equity

Transaction

A business activity that changes assets, liabilities, or owner's equity

Partnership

A business organization owned by two or more people

Sole Proprietorship

A business owned by one person

Dividends

Payments of cash from a corporation to its stockholders

Corporation

Organization form that can have an unlimited life

Assets

Economic resources owned by a business

Liabilities

Amounts owed to creditors

Reliability Principle

Data must be verifiable

GAAP (Generally Accepted Accounting Principles)

The standards and rules developed by FASB

What type of accounting is required by GAAP?

Accrual

Business Entity Principle

A business is accounted for separately from other business entities, including its owner.

Cost Principle

A principle that states that acquired assets and services should be recorded at their actual cost.

The left side of an account is

used to record DEBITS

The right side of an account is

used to record CREDITS

What are utilities expense?

Expenses

What are accounts receivable?

Assets

What is common stock?

Stockholder's Equity

What are office supplies?

Assets (Increase=Debit, Decrease=Credit)

What are lease expenses?

Expenses

What are salaries expense?

Expenses

What is Cash?

Asset (Increase=Debit, Decrease=Credit)

What is Rent expense, office?

Expense (Increase=Debit, Decrease=Credit)

What is service revenue?

Revenues (Increase=Credit, Decrease=Debit)

What are accounts payable?

Liabilities (Increase=Credit, Decrease=Debit)

What is Land?

Asset

What are dividends?

Stockholder's Equity (Increase=Debit, Decrease=Credit)

examples of temporary accounts

depreciation expense, stockholder's equity, sales revenue

examples of permanent accounts

supplies, building, cash, unearned service revenue, prepaid rent

Examples on a Income Statement

Advertising Expense, Service Revenue

Examples on a Balance Sheet

Accounts receivable, Notes payable, Retained earnings, Office supplies

Steps for Transactions

1. The transaction occurs.

2. Record the transaction in the journal.

3. Post the transactions from the journal to the ledger.

4. Prepare the trial balance.

5. Prepare the financial statements.

What must equal in the trial balance?

Debits must equal credits

Liability accounts are increased by

credits

A company's retained earnings balance would decrease by

The declaration and payment of dividends

Christopher Company purchased $20,000 of equipment for cash. The correct entry to record the purchase of equipment is

Equipment 20,000

Cash 20,000

Owners' equity accounts are decreased with

Debit entries

Revenues

Increase owners' equity

A system of accounting in which revenues and expenses are recorded as they are earned and incurred, is called

Accrual-basis accounting

A system of accounting in which revenues and expenses are recorded only when cash is received or paid, is called

Cash-basis accounting

Adjusting entries

1) are posted at the end of an accounting period

2) do not affect the cash account

Bay Graphics pays its employees each Friday for a five-day total workweek. The payroll is $9,000 per week. If the end of the accounting period occurs on a Wednesday, the adjusting entry to record wages payable would include a:

Debit to Salary Expense of $5,400

Wages payable: $9,000 x 3/5 = $5,400

Which of the following types of accounts will always be credited when a prepaid expense account is adjusted?

Assets

On August 1, 2009, Base Line Realty purchased a two-year insurance policy for $15,000. On that date, the company debited Prepaid Insurance for $15,000. The adjusting entry on December 31, 2009, would include a debit to

Insurance Expense for $3,125

If a company receives rent for January 2009 from a tenant in December 2008, that rent would be

A liability in 2008

Closing entries are

Required to bring all nominal accounts to a zero balance prior to starting a new accounting cycle

The entry to close the revenue accounts normally includes a

Debit to each revenue account

The entry to close the expense accounts normally includes a

Credit to each expense account

What will cause a trial balance to be out of balance?

1. The balance for an account is incorrectly computed.

2. A debit entry is posted as a credit.

3. An account is accidentally omitted form the trial balance.

If the business has an ____ from a customer, then the customer has an ____ to the business.

Accounts receivable; accounts payable

Hanna's Swim Club sells season memberships for $200 each. During January of 2008, 60 season memberships were sold. As of March 31, 2008, only $3,000 of season membership fees had been collected from customers. The swim season runs for 4 months starting May 15, 2008. Which one of the following is an amount reported on the financial statements for the period ending March 31, 2008?

Unearned swim membership revenue of $3,000

($200 x 60)- $9,000= $3,000

Advantage Auto sold merchandise to a customer for $3,000 on credit on July 10, 2008. The customer paid Advantage Auto the amount due on July 31. Under the accrual basis of accounting, which of the following statements is true?

The July 31st transaction has no effect on total assets under the accrual basis.

Food To Go is a local catering service. Conceptually, when should Food To Go recognize revenue from its catering service?

At the date the meals are served.

Cray Corp. purchased supplies at a cost of $12,000 during 2008. At January 1, 2008, supplies on hand were $2,000. At December 31, 2008, supplies on hand are $1,000. Determine the amount of supplies expense for 2008.

$13,000

($2,000 + $12,000 - $1,000 = $13,000)

Balance sheet accounts are also known as which of the following?

Real accounts

Income statement accounts are also known as which of the following?

Nominal accounts

Forney Industries' plant operates five days per week with a daily payroll of $4,000. Employees are paid every Saturday for the work week just completed (Monday through Friday). The last day of the month is Wednesday, March 31. The correct adjusting entry at March 31 is

Wages Expense 12,000

Wages Payable 12,000

CPA's

Expresses "opinion" on financial statements

FASB

Establishes rules and regulations for accounting

SEC

Monitors and enforces accounting and reporting regulations

Matching

Recognize expenses that match the revenues in the same period

Reporting period

Usually one year

Consistency

Same rules for all companies for all accounting periods

Going concern

Ability to remain in business for the foreseeable future without becoming bankrupt

Conservatism

1. Recognize losses if they are probable

2. Recognize gains only when they actually happen

Conservatism Example

Cost of phone= $50; can be sold at $70- must not record gain of $20 until sold

Monetary Unit

Same reporting currency based on country of operations

Historical cost

the actual amount paid for merchandise or other items bought is recorded

Economic entity

Company is different from owners

Revenue Recognition

Recognize revenue only when earned not when received

revenue recognition example

sells good to customer on credit Jan 1, cash received Feb 15, record sale on Jan 1 NOT Feb 15

Full disclosure

Disclose all significant items that could impact the decision of an informed reader

Materiality

Omission of a material item can have an impact on the decision.

Journal entry

Chronological record of all transactions

Debit balance

Assets and Expenses

Credit balance

Revenues, Liabilities, and Shareholders equity

Real accounts

-Balance sheet accounts

-Not closed at end of period

-Balances carried over to next period

Nominal account

-Income and expense accounts

-Closed at end of the period into retained earnings

-Start with zero balance at beginning of each year