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ACC Ch 2

Abnormal balance
Refers to balance on the side where decreases are recorded. Identified by circling it or by entering it in red or some other unusual color
Account balance (p 55)
The difference between total debits and credits for an account, including any beginning balance
Account (p 51)
Is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item
Accounting process
Identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements
Accused liabilities
Are amounts owed that are not yet paid Examples include wages payable, taxes payable, and interest payable
Asset account
Includes asset, cash, accounts receivable, notes receivable, prepaid accounts, supplies accounts, equipment accounts, building accounts, and land
Balance column account (p 58)
Actual accounting systems need more structure. Has a column with the balance of the account after each entry is recorded. The heading of the balance column does not show whether it is a debit or a credit balance. Instead, an account is assumed to have a normal balance.
Calendar year companies
Businesses whose accounting year begins Jan 1 and ends Dec 31
Chart of accounts (p 54)
Is a list of all ledger accounts and includes an identification number assigned to each account
Compound journal entry (p 61)
Correcting entry
Corrects an error by removing an amount from the wrong account and recording it in the correct
Credit (p 55)
Credit balance
When the sum of credits exceeds the sum of debits
Creditors (p 52)
Are individuals and organizations that have rights to receive payments from a company. If a company fails to pay its obligations, the law gives creditors a right to force the sale of that company’s assets to obtain the money to meet creditor’s claims. Any remaining money goes to the owners of the company. A loan is less risky if the borrower’s liabilities are smaller in comparison to assets because this means there are more resources than claims on resources
Debt ratio
Total liabilities divided by total assets
Debit (p 55)
Debit balance
Is when the sum of debit exceeds the sum of credits
Double-entry accounting (p 55)
Requires that for each transaction at least 2 accounts are involved, with at least one debit and one credit; that the total amount debited must equal the total amount credited; the accounting equation must not be violated. Some transactions affect only one side of the equation, meaning that 2 or more accounts on one side are affected, nit their net effect on this side is zero
Equity accounts
Equity is affected by owner’s capital, owner’s withdrawals, revenues, and expenses
Financial leverage
A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage
Financial statements
Report on financial performance and condition of an organization
Fiscal accounting year
One-year reporting period
General journal (p 56)
Includes date of transaction, title of affected accounts, $ amount of each debit and credit, and an explanation of the transaction
General ledger (p 51)
Is a record containing all accounts used by a company and is often in electronic form. The collection of all accounts and their balances for an information system. If accounts are in files on a hard drive, the sum of those files is the ledger. If the accounts are pages in a file, the file is a ledger
Journal (p 56)
Gives a complete record of each transaction in on place. Shows debits and credits for each transaction
Journalizing (p 56)
The process of recording transactions in a journal
Liability accounts
Liabilities, creditors, accounts payable, and notes payable
Normal balance
Side for assets is the left side Side for liabilities and equity is the right side. Equity increases from revenues and owner investments and it decreases from expenses and other withdrawals
Posting (p 56)
The process of transferring journal entry information to the ledger. While companies can use various journals, every company uses a general journal
Posting reference (PR) column (p 58)
Source documents (p 50)
Identify and describe transactions and events entering the accounting process. They are the sources of the accounting information and can be in either hard copy or electronic form. If obtained from outside the organization, provide objective and reliable evidence about transactions and events and their amounts
Statement of owner’s equity
Reports information about how equity changes over the reporting period. Dollar signs are not used in journals and ledgers. Visual practice is to put dollar signs below only the first and last numbers in a column
Trial balance (p 65)
IS a list of accounts and their balances at a point in time. Account balances are reported in their appropriate debit or credit columns of a trial balance. Can be sued to confirm and follow up on any abnormal or unusual balances. 1) List each account title and its amount from ledger in the trial balance. If an account has a zero balance, list it with a zero in its normal balance column or omit it entirely. 2) Compute the total of debit balances and total of credit balances. 3) Verify total debit banks equal total credit balances
T-accounts (p 54)
Represents a ledger account and is a tool used to understand the effects of one or more transactions. The left side of the account is debit (DR), and the right side of the account is credit (CR). For an account where the debit is an increase, the credit is a decrease; where the debit is a decrease, the credit is an increase
Unadjusted statement
Will need further adjustments. Balance sheet is the financial position at a point in time. The income statement is the financial position in a period of time
Unearned revenue (p 53)
Unearned revenue accounts refer to a liability that is settled in the future when a company declines its products or services
Zero balance
When the sum of debits equals the sum of credits. For an account is usually shown by writing zeros or a dash in the balance column to avoid confusion between a zero balance and one omitted in error
1. Identify examples of accounting source documents
1. Examples of source documents are sales tickets, checks, purchase orders, charges to customers, bills from suppliers, employee earnings records, and bank statements
2. Explain the importance of source documents
2. Source documents serve many purposes, including record-keeping and internal control. Source documents, especially if obtained from outside the organization, provide objective and reliable evidence about transactions and their amounts
3. Identify each of the following as either an asset, a liability, or equity: a) prepaid rent, b) unearned fees, c) building, d) wages, e) office supplies
3. Assets= ace; Liabilities= bd; Equity=
4. What is an account? What is a ledger
4. An account is a record in an accounting system that records and stores the increases and decreases in a specific asset, liability, equity, revenue, or expense. The ledger is collection of all the accounts of a company
5. What determines the number and types of accounts a company uses
5. A company’s size and diversity affect the number of accounts in its accounting system. the types of accounts depend on information the company needs to both effectively operate and report its activities in financial statements
6. Does debit always mean increase and credit always mean decrease
6. No. Debit and credit both can mean increase or decrease. The particular meaning in a circumstance depends on the type of account. For example, a debit increases the balance of an asset, wzhitdrawals, and expense accounts, but it decreases the balance of liability, capital, and revenue accounts
7. Describe a chart of accounts
7. A chart of accounts is a list of all of a company’s accounts and their identification numbers
8. What types of transactions increase equity and which decrease it
8. Equity is increased by revenues and by owner investments. Equity is decreased by expenses and owner withdrawals
9. Why are accounting systems double-entry
9. The name double-entry is used because all transactions affect at least two accounts. There must be at least one debit in one account and at least on credit in another accounts
10. For each transaction, double-entry accounting requires which of the following? a) debits to asset accounts must create credits to liability or equity accounts, b) a debit to a liability account must create a credit to an asset account, or c) total debits must equal total credits
10. C
12. Explain what a compound journal entry is
12. A compound journal entry affects three or more accounts
13. Why are posting reference numbers entered in the journal when entries are posted to ledger accounts
13. Posting reference numbers are entered in the journal when posting to the ledger as a cross-reference that allows the record-keeper or auditor to trace debits and credits from one record to another
14. Where are dollar signs typically entered in financial statements
14. At a minimum, dollar signs are placed beside the first and last numbers in a column. It is also common to place dollar signs beside any amount that appears after a ruled line to indicate that an addition or subtraction has occurred
15. If a $4,000 debit to Equipment in a journal entry is incorrectly posted to the ledger as a $4,000 credit, and the ledger account has a resulting debit balance of $20,000, what is the effect of this error on the Trial Balance column totals
15. The equipment account balance is incorrectly reported at 20k- it should be 28k. The effect of this error understates the trial balance’s debit column total by 8k. This results in an 8k difference between the column totals
16. Describe the link between the income statement and the statement of owner’s equity
16. An income statement reports a company’s revenues and expenses along with the resulting net income or loss. A statement of owner’s equity reports changes in equity, including that from net income or loss. Both statements report transactions occurring over a period of time
17. Explain the link between the balance sheet and statement of owner’s equity
17. The balance sheet describes a company’s financial position (assets, liability, and equity) at a point in time. The capital amount in the balance sheet is obtained from the statement of owner’s equity.
19. Define and describe assets, liabilities, and equity
19. Assets are the resources a business owns or controls that carry expected future benefits. Liabilities are obligations of a business, representing the claims of others against the assets of a business. Equity reflects the owner’s claims on the assets of the business after deducting liabilities
18. Define and describe revenues and expenses
18. Revenues are inflows of assets in exchange for products or services provided to customers as part of the main operations of a business. Expenses are outflows or the using up of assets that result from providing products or services to customers
C1 Explain the steps in processing transactions and the role of source documents
C1 The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and prepares information useful in making decisions. Transactions and events are the starting points in the accounting process. Source documents identify and describe transactions and events. Examples are sales tickets, checks, purchasing orders, bills, and bank statements. Source documents provide objective and reliable evidence, making information more useful. The effects of transactions and events are recorded in journals. Posting along with a trial balance helps summarize and classify these effects
C2 Describe an account and its use in recording transactions
C2 An account is a detailed record of increases and decreases in a specific asset, liability, equity, revenue, or expense. Information from accounts is analyzed, summarized, and presented in reports and financial statements for decision makers
C3 Describe a ledger and a chart of accounts
C3 The ledger or general ledger is a record containing all accounts used by a company and their balances. It is referred to as the books. The chart of accounts is a list of all accounts and usually includes an identification number assigned to each account
C4 Define debits and credits and explain double-entry accounting
C4 Debit refers to left, and credit refers to right. Debits increase assets, expenses, and withdrawals who credits decrease them. Credits increase liabilities, owner capital, and revenues; debits decrease them. Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows the accounting equation. The left side of the account is the normal balance for assets, withdrawals, and expenses, and the right side is the normal balance for liabilities, capital, and revenues
A1 Analyze the impact of transactions on accounts and financial statements
We analyze transactions using concepts of double-entry accounting. This analysis is performed by determining a transaction’s effects on accounts. Theses effects are recorded in journals to ledgers
A2 Compute the debt ratio and describe its use in analyzing financial condition
A2 A company’s debt ratio is computed as total liabilities divided by total assets. It reveals how much of the assets are financed by creditor (non-owner) financing. The higher this ratio, the more risk a company faces because liabilities must be repaid at specific dates
P1 Record transactions in a journal and post entries to a ledger
P1 Transactions are recorded in a journal. Each entry in a journal is posted to the accounts in the ledger. This provides information that is used to produce financial statements. Balance column accounts are widely used and include column for debits, credits, and the account balance
P2 Prepare and explain the use of a trial balance
P2 A trial balance is a list of accounts from the ledger showing their debits or credit balances in separate columns. The trial balance is a summary of the ledger’s contents and is useful in preparing financial statements and is revealing record-keeping errors.
P3 Prepare financial statements from business transactions
The balance sheet, the statement of owner’s equity, the income statement, and the statement of cash flows use data from the trial balance and other financial statements for their preparation

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