Accounting Transactions, Financial Statements, and Key Concepts for Students

Which transactions result in increased revenue?

Selling goods or services, whether on account or in exchange for cash.

Which transactions result in increased accounts receivable?

Selling goods or services on account

What results in increased deferred revenue?

When a customer pays for a good or service with cash before it is provided.

Where can debits and credits be found?

Journal Entries, T-Accounts, and on the Trial Balance.

Where aren't debits and credits found?

They are not found on any of the four financial statements.

What is an adjusting entry?

Any revenue or expense that hasn't yet been recorded at the end of the reporting period.

What does an adjusting entry do to financial statements?

It accrues revenue or expense and adjusts the related balance sheet accounts.

What are the financial characteristics of a cash transaction?

They impact the cash balance and may or may not increase equity.

Does a cash transaction increase equity?

Yes, if it is a revenue transaction.

Is cash a permanent or temporary account?

Permanent account.

Is revenue a permanent or temporary account?

Temporary account.

What is an accrual transaction?

Records revenue or expense when they are earned or used.

When is expense accrued?

When an asset or service is used.

When is revenue accrued?

When a good or service is provided to a customer.

What are operating cash flows?

In or out from customers or suppliers.

What are investing cash flows?

In or out when long-term assets are purchased or sold.

What are financing cash flows?

In or out from creditors or shareholders.

What are deferred revenues?

Cash received before goods or services are provided.

When are deferred revenues recorded in the financials?

Recorded when cash is received before the service is performed.

What is the Sarbanes Oxley (SOX) Act?

It was created in 2002 to tighten rules on financial reporting after corporate scandals.

What is the purpose of the Statement of Stockholders Equity?

It shows changes in equity accounts over the accounting period.

What is the purpose of the Statement of Cash Flows?

It details all cash inflows and outflows organized into Operating, Investing, and Financing activities.

What is the purpose of the Balance Sheet?

It provides a snapshot of the company's financial position at a specific date.

What is the purpose of the Income Statement?

It shows the company's revenues and expenses over the accounting period.

What is the purpose of a trial balance?

It lists all accounts to prove that debits equal credits.

What is used to record transactions in accounting?

A Journal Entry.

Which accounts are income statement accounts?

All revenue and expense accounts.

Which accounts are balance sheet accounts?

All asset and liability accounts, common stock, and retained earnings.

Which accounts appear only on the statement of stockholders equity?

Dividends.

Which accounts appear on more than one financial statement?

Common Stock and Retained Earnings.

What is the Accounting Equation?

Assets = Liabilities + Equity.

What are assets?

Resources of a company; what a company owns.

What are the main components of an income statement?

All revenue accounts and all expense accounts.

What does a balance sheet include?

All asset accounts, all liability accounts, common stock, and retained earnings.

What is included in the statement of stockholders' equity?

Dividends, Net Income, Common Stock.

What are liabilities?

Obligations (debts) of a company; what a company owes.

What are retained earnings?

All net income minus all dividends from the beginning of the company.

What is equity?

What is left over if the company were to pay off all its liabilities.

How is annual straight-line depreciation calculated?

SL Annual Depreciation = (Cost - Residual Value) / Years of Service Life.

What happens to depreciation expense each year on financial statements?

Goes up (net income goes down); Accumulated Depreciation goes up (assets go down).

How do you calculate gain or loss on the sale of an asset?

Gain/Loss = Sales Proceeds - Book Value.

What is the formula for Book Value at the time of sale?

Book Value = Cost - Accumulated Depreciation on date of sale.

What is the formula for Net Accounts Receivable?

Accounts Receivable - Allowance for Uncollectible Accounts.

What is GAAP?

Generally Accepted Accounting Principles; the standard for public companies to report financial results.

What type of account are Expenses, Dividends, and Treasury Stock in Equity?

Contra Accounts.

What is Deferred Revenue classified as?

A liability.

What do closing entries do?

They zero out temporary accounts and move their balances into Retained Earnings.

What are the temporary accounts?

Revenues, Expenses, Dividends.

What happens to permanent accounts during closing entries?

Nothing, except for Retained Earnings which gets updated.

What items are withheld from an employee's paycheck?

Federal income taxes, FICA taxes, employee portion of insurance, retirement savings plans.

What does FICA tax cover?

Social Security and Medicare benefits.

What is the difference between Authorized, Issued, and Outstanding shares?

Authorized stock: total shares a company can sell; Issued stock: total shares sold; Outstanding shares: issued shares still owned by shareholders.

What is the impact of issuing common stock on total equity?

It increases total equity.

What is the effect of dividends on retained earnings?

Decrease retained earnings.

What is the impact of purchasing treasury stock on equity?

It decreases equity.

What happens to temporary accounts during closing entries?

They get reduced to zero.

How is interest expense calculated for a note payable?

Interest Expense = Principal x Rate x Time.

What are the main sections of a balance sheet?

Assets, Liabilities, Equity.

What is the purpose of adjusting journal entries?

To update account balances before financial statements are prepared.

What is the effect of selling treasury stock at a gain?

It increases equity.