accounting 1 exam

What is the accounting equation?

Assets = Liabilities + Stockholders’ Equity

What financial statement reports Retained Earnings?

Balance Sheet (under the Equity section)

What causes Retained Earnings to increase?

Net Income

What causes Retained Earnings to decrease?

Net Losses and Dividends

What is the normal balance of the Retained Earnings account?

Credit

What type of account is Retained Earnings?

Permanent Equity Account

What does the balance in Retained Earnings represent?

Total earned income retained by the company minus dividends over its life

What is an adjusting entry?

A journal entry made at the end of the period to update accounts for accuracy

When are adjusting entries made?

At the end of the accounting period

Why are adjusting entries necessary?

To ensure revenues and expenses are recorded in the correct period

What is the matching principle?

Revenues must be matched with the expenses used to generate them

How do adjusting entries help follow the matching principle?

They ensure expenses and revenues are reported in the same period

Example of an adjusting entry for supplies

Debit Supplies Expense; Credit Supplies

What happens to revenue, expense, and dividends accounts at period end?

They are closed to Retained Earnings

What is the fraud triangle?

Opportunity, Motivation (Pressure), Rationalization

How do companies reduce opportunity for fraud?

Strong internal controls like safes, cameras, limited access

How do companies reduce motivation for fraud?

Fair pay, good benefits, loyalty, credit checks

How do companies reduce rationalization for fraud?

Ethical work culture and background checks

What is the normal balance of revenue accounts?

Credit

What is the normal balance of expense accounts?

Debit

What is a temporary account?

An account closed at the end of the period (Revenue, Expense, Dividends)

What is a permanent account?

An account that carries its balance into the next period (Assets, Liabilities, Equity)

Unearned revenue is classified as what type of account?

Liability

What is the purpose of financial accounting?

To provide financial info to external users (investors, creditors)

What are the four financial statements?

Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows