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Accounting Final Exam
Terms in this set (56)
Asset = Liability + Equity
is an economic resource that is expected to benefit the business in the future. Assets are something of value that the business owns or has control over.
the result of operations that occur when total revenues are greater than total expenses
How to calculate ending capital/equity balance
Net income = rev-exp
ending capital = beginning + net income - drawing
How capital contributions affect the accounting equation?
Increase Cash (asset)
Increase Capital (equity)
How withdrawals affect the accounting equation?
Decrease Cash (asset)
Decrease Capital (equity)
provides information about profitability for a particular period for the company
Revenue-Expenses = Net income or Net Loss
Statement of Owner's Equity
Shows the changes in the owner's capital account for a particular period
Owner, Capital, Beg
+Net Income or -Net Loss
Owner, Capital, Ending
provides valuable information to financial statement users about economic resources the company owes (liabilities) and allows decision makers to determine their option about the financial position of the company.
Assets=Liabilities + Owner's Equity
Statement of Cash Flows
reports on a business's cash receipts and cash payments for a period of time.
-equipment, furniture, and fixtures
a shortened form of an account in the ledger
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Normal Balance for each Account
-Assets - Debit NORM
-Liability - Credit NORM
-Capital - Credit NORM
-Withdrawal - Debit NORM
-Revenue - Credit NORM
-Expense - Debit NORM
How to record a journal entry?
Step 1: identifying the accounts and the account type (asset, liability, or equity)
Step 2: Decide whether each account increases or decreases, then apply the rules of debits and credits
Step 3: Record the transaction in the journal
Step 4: Post the journal entry to the ledger
Step 5: Determine whether the accounting equation is in balance.
a payment of an expense in advance. It is considered an asset because the prepayment provides a benefit in the future
EX) prepaid Rent, Prepaid Insurance, Office Supplies
Expense Recognition Principle
-all expenses are recorded when they are incurred during the period
-expenses are matched against the revenues of the period
is completed at the end of the accounting period and records revenue to the period in which they are earned and expenses to the period in which they occur
will be converted to cash, sold, or used up during the next 12 months or within the business's operating cycle if the cycle is longer than a year.
must be paid with cash, or with goods and services, within one year or within the entity's operating cycle if the cycle is longer than a year.
an account that relates to a particular accounting period and is closed at the end of that period-the revenues, expenses, income summary, and owner, withdrawal accounts
an account that is not closed at the end of the period-the asset, liability, and owner, capital accounts
the process by which companies produce their financial statements for a specific period
is a business that sells merchandise goods, to customers
-the merchandise that this type of business sells is called merchandise inventory
buys goods from a manufacturer and sells them to retailers
buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers.
How to calculate the amount of the discount earned?
using credit terms will determine the amount of discount a client will get.
28,000 x 3% = 840 (discount)
will deduct 3% from the total bill if the company pays within 15 days of the invoice date. Otherwise, the full amount is due in 30 days
How to journalize Payment when the discount is earned by the buyer
Accounts Payable (DR)-total
a business should report the least favorable figures in the financial statements when two or more possible options are presented
Lower of Cost or Market
(LCM) Rule that merchandise inventory should be reported in the financial statements at whichever is lower-its historical cost or its market value
the business computes a new weighted-average cost per unit after each purchase. ending inventory and cost of goods sold are then based on the same weighted-average cost per unit.
Weighted Average=Cost of goods available for sale/number of units available
First-In, First-Out (FIFO)
the cost of goods sold is based on the oldest purchases-that is, the first units purchased are assumed to be the first units sold
Last-in, First-Out (LIFO)
the cost of goods sold is based on the most recent purchases (newest cost)-that is, the last units purchased are assumed to be the first units sold.
How to record the adjusting entry for the lower of cost or market value?
Cost of Goods Sold (DR)
Merch Invent (CR)
an account used to record the balances on a number of subsidiary accounts and to provide a cross check on them.
is the organizational plan and all the related measures designed to accomplish the following:
2. Encourage emplpyees to follow company policies
3.Promote operational efficiency
4.Ensure accurate, reliable accounting records
Internal Controls over Receivables
the purpose of accounts receivable internal controls is to ensure that sales invoices are properly recored and that customers pay promptly in accordance with the agreed terms of business
Allowance of Bad Debt Accounts
-based on the matching principle
-it records bad debts in the same period as the sales revenue
*Reducrs the accounts receivable to the net realization value
Days' Sales in Receivables
indicates how many days it takes to collect the average level of accounts receivable
-it is also called the collection period
Items included with the cost when purchasing land.
-survey and legal fees
-delinquent property taxes
-taxes assessed to transfer the ownership (title) on the land
-cost of clearing the land and removing unwanted buildings
allocates an equal amount of depreciation each year and is calculated as follows:
=(cost-Residual val)/Useful Life
allocates a varying amount of depreciation each year based on an asset's usage.
Dep per unit = (cost-Resid Val)/useful life in units
STEP 2: UoP Dep =
Depreciation per unit x current year usage
An accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset's decreasing book value by a constant percent that is two times the straight-line depreciation rate.
= (cost-Accum Deprec) x 2 x (1/useful life)
a depreciable asset's cost minus accumulated depreciation
Partial Year Depreciation Expense using Straight-Line
[(cost-res value)/useful life] x (#of months/12)
are liabilities that do not need to be paid within one year or within the entity's operating cycle, whichever is longer.
also called deferred revenue
-arises when a business has received cash in advance of providing goods or performing work and, therefore, has an obligation to provide goods or services to the customer in the future.
-unearned revenues are current liabilities until they are earned
is the total amount of salary, wages, commissions, and other compensation earned by the employees
is the amount that each employee gets to keep (take-home pay)
Characteristics of a Partnership
-Co-Ownership of Property
-No partnership income tax
-partners' capital accounts
Versus Sole Proprietorship
1. partnership can raise more capital
2.Partnership brings together the abilities of more than one person
3. partners working well together can add more value than by working alone
1. partnership is less expensive to organize than a corporation, which requires a charter from the state.
2. There's no double taxation, partnership income is taxed only to be parents as individual.
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Chapter 6-Merchandise Inventory
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