Concepts
What is the purpose of financial accounting?
To report to external users about the status of our company (creditors, investors, SEC)
Name the four financial statements
balance sheet, income statement, statement of stockholder's equity, statement of cash flows
Explain how debits and credits increase/decrease each of the 3 components of the balance sheet
assets: debits increase, credits decrease
liabilities and equity: credits increase, debits decrease
True or false: unearned revenue is a revenue.
False- it is a liability
What is the purpose of adjusting entries, and when do we typically make them?
Reflect updated amounts on the balance sheet, typically make them at the end of the month/period
What is the name of the rules that we use to create financial statements?
The GAAP (generally accepted accounting principles)
Give a basic description of each of the financial statements
balance sheet- how much in assets, liabilities and equity we have right now
income statement- reports revenues and expenses
sse- reports how much equity we have, shares outstanding
cash flows- what we used cash on
Write the journal entry for issuing 5,000 shares. Market price is $5, par value is $1.
Dr cash for $25,000
Cr common stock for $5,000
Cr apic for $20,000
Record the journal entry: sold $75,000 on account. cost of goods sold was $34,000
Dr accounts receivable $75,000
Cr sales revenue $75,000
Dr cost of goods sold $34,000
Cr inventory $34,000
Beginning supplies on hand: $4,000
Supplies purchases: $13,000
Supplies on hand at the end of the month: $2,000
Record the adjusting entry for the month.
Dr supplies expense $15,000
Cr supplies $15,000
What is the separate entity assumption?
business transactions are separate from owner's transactions
Which financial statement is also called the statement of financial position?
balance sheet
Dr retained earnings for $8,000
Cr dividends payable for $8,000
Dr wage expense $46,000
Cr wages payable $46,000
Equipment is purchased for $50,000, expected life is 10 years with no salvage value. Record the adjusting entry two months after purchase.
Dr depreciation expense $833
Cr accumulated depreciation $833
Define an asset and a liability
Asset is a probable future economic benefit, liability is probable future sacrifice of economic benefit
Name two things that affect retained earnings (either increase or decrease it)
Declaring dividends and earning net income
Write the journal entry if we prepay insurance for the full year for $23,000
Dr prepaid insurance $23,000
Cr cash $23,000
Explain why revenues are (debited/credited) and why expenses are (debited/credited)
They affect the retained earnings section of stockholder's equity. Revenues are credited because they increase SE, expenses debited because they decrease SE.
Took out one year bank loan for $30,000. Annual interest is 6%. Record the adjusting entry after one month.
Dr interest expense $150
Cr interest payable $150
This summarizes the effect of a period's transactions on an individual account
T-account
Name one way the financial statements are connected (ie the balance of one showing up on another)
Net income from IS increases RE on SSE, ending cash balance of cash flows=cash on BS, ending SE same on BS as SSE
Explain how debits and credits work for a contra-account, such as accumulated depreciation
The opposite of a regular asset, in that credits increase the contra-account balance and debits decrease it.
Record the journal entry for receiving a $5,000 deposit from a customer (half the purchase price), both at time of receiving the deposit and when the customer receives the goods and pays the other half of the purchase.
Dr cash $5,000
Cr unearned revenue $5,000
Dr unearned revenue $5,000
Dr cash $5,000
Cr sales revenue $10,000
Record closing entry given the following:
revenues of $120,000, wage expense of $5,000, repairs expense of $12,000, accounts receivable of $30,000, interest expense of $4,000, depreciation expense of $18,000, supplies expense of $3,500
Dr revenue $120,000
Cr wage expense $5,000
Cr repairs expense $12,000
Cr interest expense $4,000
Cr depreciation expense $18,000
Cr supplies expense $3,500
Cr retained earnings $77,500