Accounting 2

Accounting Cycle

The following steps repeated each time financial statements are prepared.

Account

A detailed record of increases and decreases in a specific asset, liability, or equity item.

General Ledger

A record containing all individual accounts used by a business.

General Ledger Maintenance

Typically maintained electronically.

Unique Set of Accounts

Each company has its own unique set of accounts.

Asset Accounts

Assets are resources owned by a business with three key attributes: 1. The transaction to acquire the asset has occurred. 2. The company has control over the asset. 3. A future benefit exists for the company as it is used in operations.

Role of Assets

Assets are used in the operations of the business to create revenue.

Debits and Credits

Define debits and credits and explain their role in double-entry accounting.

Chart of Accounts

Describe a chart of accounts and its relationship to the ledger.

Transaction Impact Analysis

Analyze the impact of transactions on accounts, record transactions in a journal and post entries to a ledger.

Trial Balance Preparation

Prepare and explain the use of a trial balance.

Birch Bark Coffee

An enterprise owned by Mark Marsolais-Nahwegahbow that offers fair trade coffee produced by farmers of Indigenous descent.

Social Enterprise

An innovative business model where sales contribute to social causes, such as water purification systems in the case of Birch Bark Coffee.

Ojibwe

A Native American tribe to which Mark Marsolais-Nahwegahbow belongs.

Fair Trade Coffee

Coffee produced under fair trade practices, ensuring equitable trade conditions for farmers.

Indigenous Communities

Communities represented by Birch Bark Coffee, including Inuit, Métis, and First Nations.

Financial Management for Entrepreneurs

Importance for entrepreneurs to keep on top of their company's financials.

Accounts Receivable

An asset created when services are performed for or goods are sold to customers on credit.

Notes Receivable

Also called Promissory Notes; a formal contract signed by a customer that specifies a sum of money owed to the company.

Prepaid Expenses

Payments made in advance for services or goods that benefit beyond the current accounting period, such as Office Supplies, Prepaid Rent, and Prepaid Insurance.

Liability Accounts

Obligations of the business that are present obligations resulting from past events, requiring future payment or service provision.

Accounts Payable

Liabilities that occur with the purchase of merchandise, supplies, equipment, or services made with a commitment to pay later.

Notes Payable

Liabilities that occur when an organization formally recognizes a promise to pay by signing a promissory note.

Receivables

Key word indicating assets that are owed to the company.

Prepaids

Key word indicating assets that have been paid for in advance.

Payable

Indicates a liability that must be paid.

Unearned

Indicates a liability that must be fulfilled through execution of the terms of a contract.

Debit Balance

The balance type associated with asset accounts.

Credit Balance

The balance type associated with liability accounts.

Formal Contract

A legally binding agreement that specifies the terms of a financial obligation.

Total Dollar Value

The complete amount specified in a contract regarding a financial obligation.

Payment Due

The specific time when a payment must be made according to a contract.

Interest

The additional amount that may be required to be paid on top of the principal sum owed.

Used Assets

Assets that have been consumed or utilized, resulting in costs becoming expenses.

Expense Recognition

The process of recording costs as expenses when assets are used up.

Current Accounting Period

The time frame in which financial transactions are recorded and reported.

Merchandise Purchase

Acquisition of goods for resale, which can lead to accounts payable.

Service Provision

The act of delivering services that may create accounts receivable.

Commitment to Pay

An obligation to settle a debt in the future.

Promise to Pay

A formal acknowledgment of a financial obligation.

Unearned Revenues

Result when customers pay in advance for products or services that will be provided in the future.

Unearned Revenue

A liability because a service or product is owed to a customer.

Examples of unearned revenue

Include magazine subscriptions collected in advance by a publisher, sales of gift certificates by stores, airline or event tickets sold in advance, and rent collected in advance by a landlord.

Equity Accounts

Four types of transactions that affect equity: Investments by the owner, Withdrawals by the owner, Revenues, Expenses.

Appendix IV

A Chart of Accounts representing common accounts used in Fundamental Accounting Principles 18ce.

Assets

Resources owned by a business that have economic value.

Liabilities

Obligations or debts that a business owes to others.

Equity

The owner's claim on the assets of the business after all liabilities have been deducted.

Prepaid Rent

An asset representing rent paid in advance.

Rent Expense

A liability representing the cost incurred for using property.

Unearned Rent

A liability representing rent received before it is earned.

Rent Revenue

Income earned from renting out property.

Buildings

Physical structures owned by a business used for operations.

Owner Capital

The amount of money the owner has invested in the business.

Wages Payable

A liability representing wages owed to employees.

Wages Expense

The cost incurred by a business for employee salaries.

Office Supplies

Consumable items used in the office for operations.

Owner Withdrawals

The amount of money taken out of the business by the owner.

T-Accounts

Represent an account in the ledger and show the effects of individual transactions on a specific account.

Debit Side

The left side of a T-account.

Credit Side

The right side of a T-account.

Account Balance Calculation

1. Calculate the total increases shown on one side (including the beginning balance), 2. Calculate the total decreases shown on the other side, 3. Subtract the sum of decreases from the sum of the increases, and 4. Calculate the account balance.

Double-entry Accounting

A system that helps to prevent errors by ensuring that debits and credits for each transaction are equal.

Accounting Equation

Increases or decreases on one side have equal effects on the other side.

Increases in assets

Are debited to asset accounts.

Decreases in assets

Are credited to asset accounts.

Increases in liabilities

Are credited to liability accounts.

Decreases in liabilities

Are debited to liability accounts.

Increases in equity

Are credited to equity accounts.

Decreases in equity

Are debited to equity accounts.

Debit for asset accounts

Means increase.

Credit for asset accounts

Means decrease.

Debit for liability and equity accounts

Means decrease.

Credit for liability and equity accounts

Means increase.

Debit and Credit Summary

Debits Record and Credits Record.

Debits

Decrease existing liabilities and existing assets.

Normal Account Balances

Assets have a normal debit balance; liabilities have a normal credit balance.

Withdrawals

Have a normal debit balance.

Owner's Capital

Has a normal credit balance.

Expenses

Have a normal debit balance.

Revenue

Has a normal credit balance.

Investments in the company

Are credited to owner's capital because they increase equity.

Revenues

Are credited to revenue accounts because they increase equity, as they increase profit.

Withdrawals made by the owner

Are debited to owner's withdrawals because they decrease equity.

Profit (loss) booking

Is done by a journal entry to the Owner's Capital account only after financial statements have been prepared.

Statement of changes in equity

Reflects the profit for the current year.

Income Statement

The financial statement that summarizes revenues and expenses to show the profit for the current year.

Balance Sheet

A financial statement that presents the company's assets, liabilities, and equity at a specific point in time.

Owner Capital and Withdrawals Accounts

Accounts numbered from 301-399 that track the owner's investments and withdrawals.

Revenue Accounts

Accounts numbered from 401-499 that record income earned by the company.

Cost of Sales Expense Accounts

Accounts numbered from 501-599 that track the costs directly associated with the production of goods sold.

Operating Expense Accounts

Accounts numbered from 601-699 that capture the costs of running the business excluding the cost of sales.

Journal

A record where journal entries are posted in chronological order; shows each transaction entered in the accounting information system.

Journal Entry

An individual transaction that has been entered in the journal.

Journalizing

The process of recording transactions in the journal.

Posting Journal Entries

The process of transferring journal entries to the ledger accounts.

Compound Journal Entry

An entry that involves more than one account being debited or credited.

Posting Reference Numbers

Numbers entered in the journal when entries are posted to accounts to facilitate tracking.

Financial Statement Impact

The effect of a transaction on the financial statements, specifically on Assets, Liabilities, and Equity.

Investment Journal Entry

The journal entry to record an owner's investment in a business, including cash and equipment values.