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Accounting Chapter 1 Study Guide
From Century 21 Accounting: General Journal textbook
Terms in this set (62)
A planned process designed to compile financial data and summarize the results in accounting records and reports.
Net Worth Statement
A formal report that shows what an individual owns, what an individual owes, and the difference between the two.
Anything of value that is owned
Financial reports that summarize the financial condition and operations of a business
The process of planning, recording, analyzing, and interpreting financial information.
Personal Net Worth
The difference between personal assets and personal liabilities
The use of ethics in making business decisions
the principles of right and wrong that guide an individual in making decisions
the difference between assets and liabilities
an amount owed
Why is accounting called the language of business?
The financial information accounting provides to users is communicated to everyone who needs it to make good business decisions.
Describe a scenario in which you, as a nonaccountant, might use accounting
When buying a car, one of the first steps in a car loan process is completing a net worth statement, allowing the person extending the loan to see the financial position of the borrower on a specific date and make a lending decision.
a business that performs an activity for a fee
Financial rights to the assets of a business
the amount remaining after the value of all liabilities is subtracted from the value of all assets
A business owned by one person
a formal written document that describes the nature of a business and how it will operate
Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities.
Accounting Equation Definition
An equation showing the relationship among assets, liabilities, and owner's equity
the name given to an account
An account used to summarize the owner's equity in a business.
Any business activity that changes assets, liabilities, or owner's equity.
A record that summarizes all the transactions pertaining to a single item in the accounting equation
the difference between the increases and decreases in an account
A person or business to whom a liability is owed
Give two examples of service businesses in your area
Babysitters or dry cleaners
What must be done if a transaction increases the left side of the equation?
The right side of the equation will also have to equal the amount the left side was raised to.
How can a transaction affect only one side of the equation?
A transaction can raise and lower two different asset accounts, affecting only the left side of the equation.
What does the term on account mean?
On account means using credit to buy something and paying for it at a later date.
Assets = Liabilities + Owner's Equity
the cost of goods or services used to operate a business
an increase in equity resulting from the sale of goods or services
Sale on account
a sale for which payment will be received at a later date
Assets taken from the business for the owner's personal use.
Assets such as cash and supplies have value because they can be used to acquire other assets or be used to operate a business
A withdrawal decreases owner's equity
The accounting concept Realization of Revenue is applied when revenue is recorded at the time goods or services are sold.
When cash is paid on account, a liability is increased
When items are bought and paid for later, this is referred to as buying on account
The principles of right and wrong the guide an individual into making personal decisions is called business ethics
When a company receives cash from a customer for a prior sale, the transaction increases the cash account balance and increases the accounts receivable balance.
A creditor would favor a positive net worth
If two amounts are recorded on the same side of the accounting equation, the equation will no longer be in balance
Generally Accepted Accounting Principles, GAAP, allows for flexibility in reporting
The accounting equation does not have to be in balance to be correct
Accounting is the language of business
When cash is received from a sale, the total amount of both assets and owner's equity is increased.
Recording business costs in terms of hours required to complete projects is an application of the unit of measurement concept
The relationship among assets, liabilities, and owner's equity can be written as an equation.
Keeping personal and business records separate is an application of the business entity concept
When a company pays insurance premiums in advance to an insurer, it records the payment as a liability because the insurer owes future coverage
When cash is paid for expenses, the business has more equity
Received cash investment from owner
+ cash, + owner's equity
Paid cash for supplies
+ supplies and - cash
Paid cash for insurance
+ prepaid insurance and - cash
Bought supplies on account
+ supplies and + accounts payable
Paid cash on account
+ accounts payable and - cash
Received cash from sales
+ cash and + owner's equity
Sold services on account
+ accounts receivable, + owner's equity
Paid cash for expense (rent, utilities, miscellaneous)
+ expense, - cash
Received cash on account
+ cash, - accounts receivable
Paid cash to owner for personal use
- cash, - owner's equity
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