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Financial Accounting
Financial Accounting Unit 2
| Question | Answer |
|---|---|
| What is the accounting equation? | Assets = Liabilities + Equity |
| Why must the accounting equation stay balanced? | It ensures structural integrity and accuracy in financial records. |
| What are assets in the accounting equation? | Resources owned by the business expected to provide future benefits. |
| What are liabilities in the accounting equation? | Obligations the company owes to outsiders. |
| What is equity in the accounting equation? | The owner’s residual interest in the business after liabilities are paid. |
| What is transaction analysis? | The process of determining how each business activity affects the accounting equation. |
| What are the 4 key steps in the accounting cycle? | Analyze transactions Record transactions Summarize transactions Prepare reports |
| What is Step 1 of the accounting cycle? | Analyze transactions to identify economic impact using source documents. |
| What is Step 2 of the accounting cycle? | Record transactions using the double-entry system (debits and credits). |
| What is Step 3 of the accounting cycle? | Summarize transactions by posting to accounts and preparing a trial balance. |
| What is Step 4 of the accounting cycle? | Prepare formal financial statements and close the books. |
| Why is automation important in accounting? | It improves efficiency, especially in large firms, but human judgment is still needed. |
| What does accounting allow businesses and individuals to do? | Track, categorize, summarize financial data, and make informed decisions. |
| Why are systems important in accounting? | They allow for accurate tracking and analysis of financial activity. |
| What is the final takeaway about accounting? | Accounting transforms data into a clear financial story to support decisions and control. |
| What does a debit entry to an asset account represent? | An increase |
| How are dividends typically recorded with debits and credits? | A debit, representing a reduction in equity |
| A company issued capital stock to new investors in exchange for $100,000 cash. What is the effect of this transaction on the accounting equation? | Total assets and owners' equity increase. |
| What does a debit entry to a liability account represent? | A decrease |
| What is a T-account? | A visual tool that shows debits on the left and credits on the right for a specific account. |
| What are debits and credits used for in accounting? | To record changes in accounts and ensure the accounting equation stays balanced. |
| What does a debit to an asset account represent? | An increase in assets. |
| What does a credit to a liability account represent? | An increase in liabilities. |
| What is the normal balance of an expense account? | Debit |
| What is the normal balance of a revenue account? | Credit |
| What does the acronym DEAD CLIC stand for? | Debit to increase: Expenses, Assets, Dividends Credit to increase: Liabilities, Income, Capital |
| What is the accounting equation? | Assets = Liabilities + Owner’s Equity |
| What effect does issuing stock for $100,000 cash have on the equation? | Increases both assets and equity |
| How are dividends recorded in debits and credits? | Debit, as they reduce retained earnings (equity). |
| What does a debit to a liability account represent? | A decrease in liabilities. |
| What transactions are recorded in accounting? | Only those that are monetary and based on completed transactions. |
| What are examples of non-recordable events? | Hiring staff, signing future contracts, media coverage—unless money is involved. |
| What is retained earnings affected by? | Increased by revenues Decreased by expenses and dividends |
| What is the purpose of debits and credits in a transaction? | Every transaction must include at least one debit and one credit and they must be equal. |
| What is the core equation behind transaction analysis in accounting? | Assets = Liabilities + Owner’s Equity |
| What is the purpose of transaction analysis? | To ensure that all transactions are recorded and that the accounting equation remains balanced. |
| Why is hiring employees or signing a lease not recorded? | They are executory contracts—no transaction is recorded until work is performed or service begins. |
| Buying $90,000 of inventory by paying $10,000 cash and $80,000 on credit affects what? | Inventory ↑ $90,000 Cash ↓ $10,000 Accounts Payable ↑ $80,000 |
| Borrowing $300,000 from a bank affects which accounts? | Cash (Asset) ↑ $300,000 Loan Payable (Liability) ↑ $300,000 |
| Buying land and building for $500,000, with $100,000 cash and $350,000 mortgage affects what? | Cash ↓ $100,000 Land ↑ $50,000 Building ↑ $400,000 Mortgage Payable ↑ $350,000 |
| Buying equipment for $650,000 in cash impacts which accounts? | Equipment ↑ $650,000 Cash ↓ $650,000 (No net change in total assets) |
| Buying $90,000 of inventory by paying $10,000 cash and $80,000 on credit affects what? | Inventory ↑ $90,000 Cash ↓ $10,000 Accounts Payable ↑ $80,000 |
| What does paying $15,000 for one year of insurance create? | Prepaid Insurance (Asset) ↑ $15,000 Cash ↓ $15,000 |
| What does the balance sheet reflect? | What the business owns (assets) What it owes (liabilities) What owners have invested (equity) |
| How are assets acquired? | Through owner investment, borrowing, exchanging assets, or operations. |
| Why is the balance sheet important? | It provides a structured and complete financial snapshot built from real transactions. |
| What ensures the accuracy of financial statements? | The constant application of the accounting equation during transaction analysis. |
| What is the purpose of the income statement? | To report revenues, expenses, and net income over a period, showing how much value the business created or lost. |
| What is the expanded accounting equation? | Assets = Liabilities + Paid-in Capital + (Revenues – Expenses – Dividends) |
| When is revenue recognized in accrual accounting? | When it is earned, not necessarily when cash is received. |
| When are expenses recognized in accrual accounting? | When they are incurred, not necessarily when paid. |
| Do dividends appear on the income statement? | No. Dividends reduce retained earnings but are not considered expenses. |
| What kind of expense is depreciation, and how does it affect cash? | A non-cash expense Reduces net income but does not reduce cash |
| What are examples of SG&A (Selling, General & Administrative) expenses? | Rent, insurance, admin salaries, marketing, utilities, lease payments |
| What does the income statement help stakeholders understand? | How much profit the company generated from its operations and what it spent to earn that profit. |
| What is the key benefit of accrual accounting? | It matches revenues and expenses to the correct period for a more accurate financial picture. |
| What is the general journal? | The chronological record of all business transactions in debit-and-credit format. |
| What is the general ledger? | A collection of all accounts that tracks transactions and running balances by account type. |
| What is the process of moving transactions from the journal to the ledger called? | Posting |
| What are the two key pieces of information each journal entry must include? | Date of the transaction Accounts and amounts affected (debits and credits) |
| What’s another name for the general journal? | Book of original entry |
| Why is the general ledger important? | It organizes transactions by account and supports the preparation of financial statements. |
| What is a common error that occurs when posting to the ledger? | Transposition error (e.g., 1346 instead of 1436) |
| How can you detect a transposition error? | The difference is often divisible by 9. |
| What is the main difference between a journal and a ledger? | Journal = What happened and when (chronological) Ledger = What happened to each account (categorized) |
| What increases with a debit? | Assets and Expenses |
| What increases with a credit? | Liabilities, Equity, and Revenue |
| What is the purpose of posting references in journals and ledgers? | To provide an audit trail between entries and accounts. |
| What tool is used by large businesses to separate transaction types? | Special journals (e.g., cash receipts journal) |
| Which accounting document is the foundation for financial statement preparation? | The general ledger |
| What is a general journal? | A chronological record of all transactions of a business |
| What is the meaning of the term “debit”? | Recorded on the left side |
| In what setting might a company use special journals as well as a general journal? | A large company with many transactions |
| When does an accountant perform transaction analysis? | When recording items in the journal |
| What is a journal entry? | A record of a financial transaction showing debits and credits in chronological order. |
| What are the 3 steps in creating a journal entry? | Identify the accounts involved Determine increases or decreases Apply debit/credit rules with correct amounts |
| What is the format of a journal entry? | Date Debit account (aligned left) Credit account (indented) Amounts Optional description |
| What does a debit to an asset account represent? | An increase in assets. |
| What does a credit to a liability or equity account represent? | An increase in liabilities or equity. |
| What must every journal entry maintain? | Balance — total debits must equal total credits. |
| Why are inventory sales recorded in two parts? | To separately show revenue and cost of goods sold. |
| What type of account is Sales Revenue and how does it increase? | It's an equity account; it increases with a credit. |
| What is the effect of an expense on equity? | It decreases equity — recorded as a debit. |
| What does “debit = left, credit = right” help you remember? | The standard layout of T-accounts and journal entries. |
| What is one step in the process of preparing a journal entry? | For each account, determine if it has increased or decreased. |
| In the context of accounting, what is the meaning of the word “journalizing”? | Recording a transaction in a journal entry |
| How are the items arranged in a journal entry? | Debit first, credit second |
| In making a journal entry, why is it important to know whether an account increased or decreased? | To determine whether the account should be debited or credited |
| What are the five steps to create a journal entry? | Find the cash – Did it increase or decrease? Identify other assets – Track changes Review liabilities and equity – Note any updates Check for operations – Recognize revenue or expenses Verify balance – Ensure total debits = total credits |
| What does a debit to the Dividends account represent? | A reduction in equity (specifically retained earnings); dividends are not expenses. |
| What is a trial balance? | A report that lists all account balances to verify that total debits = total credits. |
| What kind of accounts normally have debit balances? | Assets, Expenses, and Dividends |
| What kind of accounts normally have credit balances? | Liabilities, Revenues, and Equity |
| What is a chart of accounts? | A list of accounts used by a company to classify transactions |
| What is the normal order of a chart of accounts? | Assets, liabilities, owners’ equity, sales, and expenses |
| What is a chart of accounts? | A complete list of account names and numbers used by a company to classify and record financial transactions. |
| What is the normal order of accounts in a chart of accounts? | Assets Liabilities Owners’ Equity Revenues Expenses |
| What account number range is typically used for Assets? | 100–199 |
| What are examples of Current Asset accounts? | 101 Cash 103 Notes Receivable 105 Accounts Receivable 107 Inventory 108 Supplies |
| What are examples of Long-Term Asset accounts? | 151 Land 152 Buildings 154 Office Furniture or Equipment |
| What account number range is typically used for Liabilities? | 200–299 |
| What are examples of Current Liability accounts? | 201 Notes Payable 202 Accounts Payable 203 Salaries Payable 204 Interest Payable 206 Income Taxes Payable |
| What is an example of a Long-Term Liability account? | 251 Mortgage Payable |
| What account numbers are used for Owners' Equity? | 300–399 301 Capital Stock 330 Retained Earnings |
| What account number is typically assigned to Sales Revenue? | 400 |
| What account number range is typically used for Expenses? | 500–599 |
| What are some examples of Expense accounts? | 500 Cost of Goods Sold 501 Sales Salaries and Commissions 523 Rent Expense 528 Advertising Expense 551 Officers’ Salaries 570 Payroll Taxes 573 Utilities Expense |
| Why is the chart of accounts important? | It provides structure and consistency for classifying and recording all financial transactions. |
Created by:
heavenlypure
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