ACCT 2101 Chapter 2 Vocabulary Flashcards

Course Information and Important Deadlines

  • Course Title and Code: ACCT 2101 Accounting for Business Transactions

  • Textbook Reference: Chapter 2, Wild and Shaw Financial and Managerial Accounting, 9th Edition, Copyright ©2022 McGraw-Hill Education

  • Key Deadlines and Schedule:

    • Topic 1 Homework Smartbook #1: Due Wednesday, 9/2

    • Topic 1 Homework Smartbook #2: Due Wednesday, 9/2

    • Homework #1: Due Wednesday, 9/9

    • Quiz #1: Due Thursday, 9/10

Chapter Learning Objectives

  • Conceptual Objectives:

    • C1: Describe an account and its use in recording transactions.

    • C2: Define debits and credits and explain double-entry accounting.

  • Analytical Objectives:

    • A1: Analyze and record transactions and their impact on financial statements.

    • A2: Compute the debt ratio and describe its use in analyzing financial condition.

  • Procedural Objectives:

    • P1: Prepare financial statements from a trial balance.

Conceptual Foundation: Accounts, Source Documents, and General Ledger

  • Basis of Financial Statements:

    • Business transactions and events serve as the fundamental starting points of financial statements.

    • The continuous sequence from transaction identification to financial statement preparation follows five distinct steps:

    1. Identify transaction and event from source documents.

    2. Analyze transaction and event using the accounting equation.

    3. Record relevant transactions and events in a journal.

    4. Post journal information to ledger accounts.

    5. Prepare and analyze trial balance and financial statements.

  • Source Documents:

    • Definition: Source documents identify and describe transactions as they enter the accounting system.

    • Standard Examples:

    • Bills from suppliers

    • Sales receipts

    • Checks

    • Purchase orders

    • Payroll records

    • Bank statements

  • Accounts Underlying Financial Statements:

    • An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense.

    • The general ledger is a record containing all accounts and their corresponding balances.

Financial Statement Classification and Account Types

  • Asset Accounts: Resources owned or controlled by a business that bring future economic benefits.

    • Cash

    • Accounts Receivable

    • Notes Receivable

    • Supplies

    • Prepaid Accounts

    • Equipment

    • Buildings

    • Land

  • Liability Accounts: Claims by creditors against company assets, representing obligations to transfer assets or provide services.

    • Accounts Payable

    • Notes Payable

    • Unearned Revenue

    • Accrued Liabilities

  • Equity Accounts: The owner's residual claim on company assets.

    • Components of Equity:

    • Common Stock (increases equity)

    • Dividends (decreases equity)

    • Revenues (increases equity)

    • Expenses (decreases equity)

  • Expanded Equity Principles:

    • Revenues and common stock increase overall equity.

    • Expenses and dividends decrease overall equity.

Chart of Accounts and Ledger Mechanics

  • General Ledger:

    • A ledger is a collection of all accounts and their balances for an accounting system.

    • A company's overall size and the diversity of its business operations directly determine the total number of accounts needed.

  • Chart of Accounts:

    • A chart of accounts is a structured list of all accounts used by a business, incorporating a unique identifying number for each account.

Double-Entry Accounting, T-Accounts, and Balances

  • Debits and Credits Mechanics:

    • A T-account visually represents a ledger account and is utilized to demonstrate the effects of transactions.

    • Debits are entered on the left side of a T-account, while credits are entered on the right side.

  • Double-Entry Accounting Equations:

    • Basic Accounting Equation:     Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}

    • Expanded Accounting Equation:     Assets=Liabilities+Common Stock−Dividends+Revenues−Expenses\text{Assets} = \text{Liabilities} + \text{Common Stock} - \text{Dividends} + \text{Revenues} - \text{Expenses}

  • Account Balance Calculation:

    • An account balance is defined as the net difference between total increases and total decreases recorded in an account.

The Four-Step Transaction Processing Cycle

  • Core Transaction Analysis Steps:

    • Step 1: Identify transactions and source documents.

    • Step 2: Analyze the transaction using the accounting equation.

    • Step 3: Record the journal entry.

    • Step 4: Post the entry to ledger accounts (using T-accounts for simplified representation).

Journalizing, Posting, and Balance Column Accounts

  • Journalizing Transactions:

    • A standard journal entry must contain:

    • a. Transaction Date

    • b. Title of account(s) debited and exact amount entered in Debit column

    • c. Title of account(s) credited and exact amount entered in Credit column

    • d. Brief transaction explanation

  • Balance Column Accounts:

    • T-accounts are convenient pedagogical visual models, but balance column accounts are the standard accounting records used in real-world practice.

  • Posting Process:

    • Posting refers to the systematic transfer of debit and credit detail from journal entries into their respective general ledger accounts.

Transaction Processing Walkthroughs

  • Summary of Processed Business Transactions:

    1. Receive Investment by Owner in exchange for Common Stock.

    2. Purchase Supplies for Cash.

    3. Purchase Equipment for Cash.

    4. Purchase Supplies on Credit (Accounts Payable).

    5. Provide Services for Cash.

    6. Payment of Expense in Cash.

    7. Payment of Expense in Cash.

    8. Provide Consulting and Rental Services on Credit (Accounts Receivable).

    9. Receipt of Cash from Credit Customers.

    10. Payment of Accounts Payable in Cash.

    11. Payment of Cash Dividend to Shareholders.

    12. Receipt of Cash for Future Services (Unearned Revenue).

    13. Pay Cash for Future Insurance Coverage (Prepaid Insurance).

    14. Purchase Supplies for Cash.

    15. Payment of Expense in Cash.

    16. Payment of Expense in Cash.

  • Ledger Summarization:

    • All processed transactions are posted and accumulated across individual ledger accounts to generate final account balances.

Preparation and Verification of the Trial Balance

  • Trial Balance Overview:

    • FastForward's trial balance presents a complete listing of all general ledger accounts and their respective balances at a specific point in time.

    • If accounting records are properly maintained in balance, total debit balances must equal total credit balances.

  • Steps to Prepare a Trial Balance:

    1. List each account title and its net balance amount from the general ledger.

    2. Compute the total sum of all debit balances and the total sum of all credit balances.

    3. Verify (prove) that the total debit balances equal the total credit balances.

Systematic Error Investigation Protocol

  • Six-Step Error Search Procedure (When Trial Balance Fails to Balance):

    1. Verify that the trial balance columns are correctly added.

    2. Verify that account balances are correctly entered from the ledger.

    3. See if debit or credit accounts are mistakenly placed on the trial balance.

    4. Recompute each account balance in the general ledger.

    5. Verify that each individual journal entry is posted correctly.

    6. Verify that each original journal entry contains equal debits and credits.

Financial Statements Preparation and Presentation Rules

  • Four Core Financial Statements Prepared from Trial Balance:

    1. Income Statement: Reports revenues less expenses incurred by a business over a specified period of time.

    2. Statement of Retained Earnings: Reports changes in equity over the reporting period resulting from net income (or loss) and any dividends paid over a period of time.

    3. Balance Sheet: Reports the financial position (types and amounts of assets, liabilities, and equity) at a specific point in time.

    4. Statement of Cash Flows: Lists all cash inflows and cash outflows during a given reporting period (excluded from FastForward's chapter examples for simplicity, but reintroduced in Chapter 3).

  • Presentation Rules for Formatting Currency:

    1. Dollar signs ($) are not used in journal entries or ledger account records.

    2. Dollar signs ($) appear on formal financial statements and summary reports, such as trial balances.

    3. Place dollar signs ($) only beside the first and last numbers listed within a column of figures.