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Financial Accounting Key Concepts and Practices ch1 2 3 9/29

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Termini in questo insieme (20)

  • Double-entry accounting system

    The system records each transaction in at least two accounts, ensuring debits equal credits. It overcomes the template approach's limitations by providing detailed, balanced financial data.

  • Normal balance concept

    Each account has a normal balance (debit or credit) used to increase it. To decrease, the opposite entry is made, ensuring the accounting equation stays balanced.

  • Steps in the accounting cycle

    1) Opening balances, 2) Transaction analysis, 3) Journal recording, 4) Posting to ledger, 5) Trial balance, 6) Adjustments, 7) Adjusted trial balance, 8) Financial statements, 9) Closing entries.

  • Significance of chart of accounts decisions

    Chart of accounts must reflect needed info for management, external users, and compliance. Changes mid-year can disrupt reporting; deactivation at year-end preserves data consistency.

  • Permanent vs temporary accounts

    Permanent accounts (assets, liabilities, retained earnings) carry balances year to year. Temporary accounts (revenues, expenses, dividends) reset to zero each period.

  • General journal recording format

    Transactions are recorded chronologically with debited accounts listed first and credited accounts indented below, showing date, account names, and amounts debited/credited.

  • General ledger purpose

    The ledger contains all accounts and their transactions, updated frequently to provide current balances for each account.

  • Why adjusting entries are necessary

    Adjusting entries recognize revenues and expenses in the correct period, following revenue recognition and matching principles, without involving cash.

  • Types of adjusting entries

    Accruals: recognize revenue/expense before cash changes hands. Deferrals: recognize revenue/expense after cash is received or paid.

  • Contra account

    An account with a balance opposite to its normal balance, e.g., a contra asset has a credit balance instead of a debit.

  • Purpose of closing entries

    Closing entries reset temporary accounts to zero and transfer their balances to retained earnings to prepare for the next accounting period.

  • Four closing entries

    1) Close revenues to Income Summary, 2) Close expenses to Income Summary, 3) Close Income Summary to Retained Earnings, 4) Close Dividends to Retained Earnings.

  • When are closing entries made?

    Closing entries are made at the end of each accounting year to reset temporary accounts and update retained earnings.

  • Effect of closing entries on temporary accounts

    They transfer balances to retained earnings and reset temporary accounts to zero for the new period.

  • Accounting equation balance in double-entry system

    Every transaction affects at least two accounts so that total debits equal total credits, keeping the equation balanced.

  • Transaction analysis in accounting cycle

    Evaluating source documents to determine which accounts to debit and credit for each transaction.

  • Trial balance purpose

    To verify that total debits equal total credits before preparing financial statements.

  • Adjusted trial balance

    Prepared after adjustments to confirm accounts remain balanced before financial statements are made.

  • Financial statements prepared in accounting cycle

    Includes Income Statement, Statement of Financial Position (Balance Sheet), and others summarizing financial performance and position.

  • Impact of changing chart of accounts mid-year

    Can cause gaps and inconsistencies in reporting, making year-to-year comparisons difficult.