ACC 305- Accounting cycle quiz

Closing entries

Process that transfers temporary account balances to retained earnings and reduces temporary account balances to zero

Temporary accounts

Represent the changes in the retained earnings component of shareholders' equity for a corporation

Permanent accounts

Represent assets, liabilities, and shareholders' equity at a point in time

Post-closing trial balance

A list of all the permanent accounts and their balances after closing entries have been recorded

COGS formula

Beginning Inventory + Purchases - Ending Inventory

Interest formula

Principal x Rate x Time

Adjusting entries

Internal transactions recorded at the end of any period when financial statements are prepared; required for accrual basis accounting; include prepayments, accruals, and estimates

Prepayments

The cash payment precedes either revenue or expense recognition (counted as an asset)

Accruals

When the cash flow comes after either expense or revenue recognition (counted as a liability)

Estimates

Predictions of the future; include depreciation and bad debt

Depreciation expense formula

(Cost - Salvage Value) / Useful Life

Bad debt

The portion of accounts receivable or credit sales not collected

Bad debt expense formula

Total Credit Sales x Historical Bad Debt Rate

Prepaid expenses

Cost of an asset acquired in one period then expensed in a future period; treated as an asset until used, then expensed

Accumulated depreciation

A contra-asset account with the opposite normal balance effect (credit increases it, debit decreases it)

Deferred revenue

Cash received from a customer for goods and services to be provided in a future period; treated as a liability

Accrued revenues

Recognition of revenue for goods/services transferred to customers before cash is received

Statement of comprehensive income

Extends the income statement by reporting all changes in shareholders' equity during the period that were not the result of transactions with owners

Other comprehensive income (OCI)

Changes in shareholders' equity other than transactions with owners and items that affect net income

Balance sheet

A financial statement that presents an organized list of assets, liabilities, and equity at a point in time

Operating cycle

Provides a meaningful way to group assets and liabilities as either current or long-term (operating cycle less than 1 year)

Current assets

Assets that are cash, will be converted into cash, or will be used up within 1 year from the balance sheet date

Long-term assets

Assets expected to be converted or consumed into cash in more than 1 year

Current liabilities

Obligations due within 1 year of the balance sheet date

Long-term liabilities

Liabilities due more than 1 year from the balance sheet date

Temporary accounts (closing context)

Reduced to zero balances so they are ready to measure activity in the upcoming accounting period

Closing temp accounts to retained earnings

temp account balances are closed to retained earnings to reflect the changes that occurred during the period

Cash basis accounting

Produces a measurement called net operating cash flow, calculated as cash receipts minus cash disbursements

Accrual basis accounting

Measures an entity's accomplishments and resource sacrifices during the period, regardless of when cash is received or paid

Economic events

Events that directly affect the financial position of the company

External events

Exchanges between the company and separate economic entities

Internal events

Events that directly affect the financial position of the company but do not involve an exchange transaction with another entity

Accounting equation

Summarizes the effects of transactions on the financial position of the company: Assets = Liabilities + Shareholders' Equity

Paid-in capital

Amounts paid by shareholders of the corporation

Retained earnings

Amount earned by the corporation on behalf of shareholders and retained in its business

Revenues/gains

Transactions that increase net income; an increase in revenues/gains increases shareholders' equity

Expenses/losses

Transactions that decrease net income; an increase in expenses/losses decreases shareholders' equity

Dividends

Distributions to owners that do not affect net income but decrease retained earnings, thus decreasing shareholders' equity

Debit/credit rule

All debits must equal credits (opposite but equal effect) Assets, expenses/losses, dividends - Increase with a debit, decrease with a credit Liabilities, paid-in capital, revenues/gains - Increase with a credit, decrease with a debit

Source documents

Relay essential information about each transaction to the accountant

Transaction analysis

Process of reviewing source documents to determine the dual effect on the accounting equation

Journal

Chronological record of all economic events affecting the financial position of a company

Journal entry

Captures the effect of a transaction on financial position in debit/credit form

General journal

Used to record any type of transaction

Special journal

Record of repetitive types of transactions