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131 terms

Accounting Exam Review Terms

STUDY
PLAY
Business Entity Principle
each business is considered a separate entity from the individual owners
financials kept separate
Cost Principle
assets shown on the balance sheet at the cost of acquisition/construction
Time Period Principle
Use the same period of time or consistency
Matching Principle
expenses should be recorded in the same time as the revenue they helped earn
Principle of Objectivity
all accounting records have to be based on objective evidence
Principle of Materiality
information that could affect the decision making of users of financial information must be included in reports
Principle of Conservatism
accountants should chose accounting methods that result in lower net income and net assets
Assets
items owned of value
Liabilities
debts of a business
Equity
a person's net worth
Creditors
a person or business that has extended credit or loaned money
Double Entry Accounting
each transaction in the debits must equal credits
Profit
money earned after expenses paid (OE up)
Revenue
Amount earned from sales of goods/services (OE up)
Expenses
cost of items/ services used in operation of business (OE down)
Accrual Basis
recording revenue when it's earned and expenses when incurred
Cash Basis
recording revenue and expenses when cash is paid or received
Journal
record of transactions in chronological order "book of original entry" (organized, reduces errors)
easier to keep track of, easier to follow
Posting
transfer of information from the journal to the ledger
Chart of Accounts
list of account names and numbers
Assets- 100
Liabilities- 200
Owner's Equity- 300
Revenue- 400
Cost of Goods Sold- 500
Expenses- 600
Source Documents
business form that serves as the original source of information that a transaction has occured
Trial Balance
working paper, not official financial statement (formal, list form, machine tape form)
lists all ledger account balances
ensures DR=CR
checks for mathematical accuracy
Worksheet
multi-column form used in preparing financial statements, not official
Liquidity Order
order/speed that something can be converted to cash
Prepaid expenses
expenses paid in advance
Current Assets
converted into cash or used up within a year (cash, A/R, supplies)
Fixed Assets
asset with a life longer than 1 year (land, building, equipment, vehicle)
Current Liabilities
to be paid within 1 year (A/P, Salaries Payable..)
Long-Term Liabilities
to be paid within 1 year (bank loan, mortgage payable)
Adjustments
accounting changes recorded to ensure that account balances are correct
Depreciation
allocation of a cost to fixed assets as they are used
Contra Asset
offset the value of another account
Book Value
initial value of asset minus depreciation, amount remaining after accumulated depreciation
Straight Line Depreciation
same amount each period
Declining Balance Depreciation
greater amount in the early years (% on value)
Closing the Books
process where temporary accounts are closed and reduced to zero (updates OE and prepares revenue and expenses for next accounting period)
Income Summary
owner's equity account (300)
Post-Closing Trial Balance
prepared after the closing entries have been posted to the ledger
Merchandise Inventory
dollar value of goods on hand for sale (Profit=Revenue-COGS)
Supporting Schedules
provides details of an item on a statement (Net Income=profit-expenses)
Operating Expenses
expenses incurred for the general operation of the business
Perpetual Inventory Method
continuous record of inventory
Periodic Inventory Method
physical count
HST Tax Credit
amount of tax the government gives back
HST Payable
a liability
HST Receivable
contra liability
Subsidiary Ledger
a group of accounts of one type
Direct Posting
record of information from source document directly into subsidiary ledger
Indirect Posting
recording information from source documents into the general journal, then ledger
Accounting Controls
protects assets from waste, theft and fraud
ensures reliable accounting
Administration Controls
ensures accurate and consistent application of firm policy
evaluates the performance of departments and personnelv
Petty Cash Funds
amount of cash used to make small payments quickly (staples, supplies)
Bad Debts
uncollectible amounts owed by customers
Bad Debts Expense
loss due to uncollectible amounts
Income Statement Method
% of net sales
Balance Sheet Method
% of AR
Accrued Expenses/Revenue
expenses/revenue that have been incurred but not yet recorded
Unearned Revenue
Money received
Trend Analysis
used to forecast future results
Comparative Financial Statement
provides 2 or more years of financial data with changes
Condensed Statement Analysis
single totals for key items to highlight figures
Common-Sized Statements
using % to make statements common-sized each year
Horizontal Analysis
compare % from year to year
Vertical Analysis
Presenting data as %
Budget
financial plan for an accounting period
Sales/Revenue Budget
estimate of goals/services sold as well as revenue
Expense budget
estimate of cost and expenses to be incurred
Capital Budget
estimate purchase of capital building, equipment
Accounting Period
period of time covered by a financial statement
Business transaction
an exchange of things of value
Ledger
a group of accounts
T-Accounts
a form where transactions are recorded
Recording transactions
1. Determine the accounts
2. What type of account (A,L,OE)
3. Increasing/decreasing
4. Is it DR/CR
Working Capital
Current Assets-Current Liabilities
Current Ratio
Current Assets/Current Liabilities : 1
2:1 is acceptable
Quick Ratio
Current Easy Assets/ Current Liabilities : 1
1:1 acceptable
Turnover Ratio
COGS / Average Inventory
A/R Collection Period
Average AR/ Net sales on credit
45 < acceptable
Equity Ratio
Owners Equity / Total Assets x 100%
Debt Ratio
Total debt / Total Assets x 100%
Rate of Return on Net Sales
% of net income in term of net sales
Rate of Return on Average OE
Net Income/ Average OE x 100%
Financial Position of an Individual
Total value of items owned - Total value owed = Personal net worth
Financial Position of a business
The purpose of accounting is to provide financial information for decision making
Steps to preparing a balance sheet
1. Prepare the heading (who, what, when)
2. List assets
3. List liabilities
4. Do Owner's Equity
Limitations of the trail balance
the TB can only indicate mathematical results, but there could be mistakes in the transaction analysis
Net Income/ Loss
Revenue - Expenses
Income Statement
shows revenue, expenses, and the net income/ loss over a given period of time
Preparing the Income Statement
1. Statement heading
2. Revenue section
3. Expenses section
4. Determine Net Income/Loss
Drawings
withdrawing cash, products, and equipment for personal use
Debit vs. Credit
debits increase OE and credits decrease OE
4 steps to journalizing
1. the date (year, month, day)
2. record the debit (name + amount)
3. record the credit (name + amount)
4. explanation
Balance Column Ledger Account
a form of a ledger that has all the debit and credit values for a certain accounting period for one account and the balances of these values
Different that T-Accounts because it shows it for more than one transaction and has the balances
Dr/CR column refers to the balance
6 Steps to journal posting
1. Account name
2. The date
3. The amount
4. Calculate new balance (DR/CR)
5. Complete P.R. (Posting Reference) in ledger
6. Complete P.R. in Journal
Possible errors
- didn't complete a transaction
- didn't post the debit or credit
- Posted to wrong account
- Posted to the wrong side
- Calculated balances incorrectly
- Transposition mistake (i.e. you wrote 65, when it's supposed to be 56)
Steps to locate the errors
1. Find the difference (how much out of balance)
2. If difference is a multiple of 10, its a calculation error
3. Look for difference in ledger/journal (ensure its correct)
4. Divide difference by 2 then look in ledger/ journal again
5. Check if difference is divisible by 9 (means a transposition error)
6. Go back over all work (transaction, journal, ledger, trial balance)
7. Skip, go back to later
Source Documents
Why are they used- (see principle of objectivity) source documents provide this evidence to support the transactions
Pre-numbering
All source documents are numbered for record keeping. This helps to prevent FRAUD (i.e.so that cashiers don't take money from the register. If a # is missing, then they will know something is up)
Cash Sales Slip
prepared for all cash sales for a business
Sales Invoice
Bill completed by seller and given to the buyer for a CREDIT sale (on account)
Purchase Invoice
Bill received by the other purchaser as proof of purchase. ON ACCOUNT
Cheques issued
To make a cash purchase and to pay bills on what is owed
Cheques Received
Payment for amount owed
Bank Credit Memo
giving notice of an increase in a customer's back account
Bank Debit Memo
giving notice of a decrease (its decrease for banks, which is why its a debit)
7 Steps in Preparing
1. Write heading
2. Enter TB accounts
3. Transfer amounts to BS section
4. Transfer amounts to IS section
5. Complete IS section (net income/ loss)
6. Complete BS section
7. Rule underlines
Suuporting schedules
provide detail on specific items of the financial statements
Book Value
Cost of the asset - the accumulated depreciation
Service companies
provide and sell services
Merchandising companies
sell products (wholesale, retailers)
Manufacturing companies
make products and convert raw materials into sellable products
Purchases
the account used to record the cost of merchandise for resale
Purchase Returns and Allowances
Returned items (decrease purchases)
Purchase Discounts
discounted items (decrease purchases)
Transportation-in
Transportation on merchandise in (not out, because that's delivery expense). It increases the cost of goods sold
Sales Returns and Allowances
records merchandise returned by the customer
Sales Discounts
encourages early payment
Terms of Sale
COD- cash on delivery
Receipt of invoice- payment when invoice is received
Net 30- full payment in 30 days
EOM- End of Month
10th following- due on the 10th day after the month
2/10, n/30- 2% discount within 10 days or full payment within 30 days
1/10, n/30- 1% discount within 10 days, net 30 after End of month
Goods and Services (GST)
Federal (5%)
Provincial Sales Tax (PST)
specific to province. Paid on tangible goods, on final sellers. (8%)
Harmonized Sales Tax (HST)
combination of PST and GST (13%)
HST Payable
The amount of HST that a business collects from their customers
HST Refundable
The amount of HST that the company owes to the suppliers (which is then owed to the government)
Bank Credit Cards
Why use them as a consumer- dont have to carry money with you, international, don't have any money
Why use them as a business- they get the money right away, allows consumers the option to buy. Credit card companies can also charge a lot of interest
Subsidiary Ledgers
a group of accounts of one type
Three-Ledger System
General, Accounts Receivable, Accounts Payable
Advantages
Division of Labour and Accounting controls
DOL- can split jobs, more efficient, can specialize
AC- simplify, organized, individual responsibilities
Accounts Payable Clerk
Processes and Records purchase invoices, pay creditors , update creditor accounts, and prepares a schedule of accounts receivable
Accounts Receivable Clerk
Processes and records sales invoices, process cash received from customers, and prepares a schedule of accounts receivable
Accounting Supervisor
Supervise work of accounting clerks, prepare journal entries, post entries, create TB, records total amount of souce documents of one kind in a single entry (journalizing batch totals)
Merchandise Inventory
dollar value of goods on hand for sale (asset) Old Inventory- IS Debit column, New Inventory- IS credit column, BS debit column