Formulas
Assets=Liabilities + Equity
Accounting equation
A business purchases an acre of land for $5,000. The current market value is $5,500, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and
which accounting principle supports your answer?
The land should be recorded at $5,000. The cost principle states that assets should be recorded at their historical cost.
When are debits increases? When are debits decreased?
Debits are increases for assets, dividends, and expenses. Debits are decreases for liabilities, common stock, and revenue.
What is the difference between cash basis accounting and accrual basis accounting?
Cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned and expenses when incurred.
What does the balance sheet report?
The balance sheet reports assets, liabilities, and stockholders’ equity as of the last day of the period.
What is the calculation for ROA? Explain what ROA measures.
Return on Assets = Net income / Average total assets. ROA measures how profitably a company uses its assets.
Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards.
The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule book and is currently created and governed by the FASB. Investors and lenders must have information that is relevant and has faithful representation in order to make decisions and GAAP provides the framework for this financial reporting.
What is a T-account? On which side is the debit? On which side is the credit? Where does the account name go on a T-account?
A T-account is a shortened form of each account in the ledger. The debit is on the left side, credit on the right side, and the account name is shown on top.
What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?
A fiscal year is an accounting year of any 12 consecutive months. A company might choose to use a fiscal year that is not a calendar year, if the low point in business activity is other than December 31.
What does liquidity mean?
Liquidity measures how quickly and easily an account can be converted to cash because cash is the most liquid asset.
Total liabilities / Total assets
Debt Ratio
What is the accounting equation? Briefly explain each of the three parts.
Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the business in the future. They are things of value that a business owns or has control of. Liabilities are debts that are owed to creditors. They are one source of claims against assets. Equity is the other source of claims against assets. Equity is the stockholders’ claims against assets and is the amount of assets that is left over after the company has paid its liabilities. It represents the net worth of the corporation.
Identify the three categories of the accounting equation, and list at least four accounts associated with each category.
The three categories of the accounting equation are assets, liabilities, and equity. Assets include Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses, Land, Building, Equipment,
Furniture, and Fixtures.
Liabilities include Accounts Payable, Notes Payable, Accrued Liability, and Unearned Revenue.
Equity includes Common Stock, Dividends, Revenue, and Expenses.
What is the process of allocating the cost of a plant asset over its useful life called?
The process of allocating the cost of a plant asset over its useful life is called depreciation.
What are temporary accounts? Are temporary accounts closed in the closing process?
Temporary accounts (also known as nominal accounts) are accounts that relate to a particular accounting period and are closed at the end of that period. All temporary accounts (dividends, revenues, Income Summary and expenses) are closed (zeroed).
( cost - Residual value)/ Useful life
Straight-line depreciation
Explain the role of the International Accounting Standards Board (IASB) in relation to International Financial Reporting Standards (IFRS).
The IASB is the organization that develops and creates IFRS which are a set of global accounting standards that would be used around the world.
What is the difference between the trial balance and the balance sheet?
A trial balance verifies the equality of total debits and total credits of all accounts on the trial balance and is an internal document used only by employees of the company. The balance sheet, on the other
hand presents the business’s accounting equation and is a financial statement that can be used by both internal and external users.
What are the two rules to remember about adjusting entries?
The two rules to remember about adjusting entries are:
1. Adjusting entries never involve the Cash account.
2. Adjusting entries either
a. Increase a revenue account (credit revenue) or
b. Increase an expense account (debit expense).
identify two asset categories on the classified balance sheet, and give examples of each category
Current: Accounts Payable, Salaries Payable, Interest Payable.
Long-term: Mortgage Payable,Notes Payable
Beginning
+ Net income or − Net loss for the
period
− Dividends for the period
=
= Retained Earnings
List the four financial statements. Briefly describe each statement.
Income Statement – Shows the difference between an entity’s revenues and expenses and reports the
net income or net loss for a specific period.
Statement of Retained Earnings – Shows the changes in retained earnings for a specific period
including net income (loss) and dividends.
Balance Sheet – Shows the assets, liabilities, and stockholders’ equity of the business as of a specific
date.
Statement of Cash Flows – shows a business’s cash receipts and cash payments for a specific period.
Explain the five steps in journalizing and posting transactions.
Step 1: Identify the accounts and the account type. You need this information before you can complete the next step.
Step 2: Decide if each account increases or decreases, then apply the rules of debits and credits. Reviewing the rules of debits and credits, we use the accounting equation to help determine debits and credits for each account.
Step 3: Record transactions in the journal using
journal entries.
Step 4: Post the journal entry to the ledger. When journal entries are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date on the journal entry should also be transferred to the accounts in the ledger.
Step 5: Determine whether the accounting equation is in balance. After each entry the accounting equation should always be in balance.
What is a worksheet, and how is it used to help prepare an adjusted trial balance?
A worksheet is an internal document that helps summarize data for the preparation of the financial statements. As a summary device, it helps identify the accounts that need adjustments. On a worksheet, accounts are listed, the unadjusted balances in the accounts are copied directly from the ledger (the unadjusted trial balance), adjustments are entered, and the adjusted trial balance is completed (from which the financial statements can be prepared).
Why are financial statements prepared in a specific order? What is that order?
The financial statements are prepared in a specific order because net income from the income statement is used on the statement of retained earnings to determine ending retained earnings. Ending retained earnings is then transferred to the balance sheet to determine total stockholders’ equity. The income statement is prepared first, then the statement of retained earnings, and then the balance sheet.