Questions and Answers
What is a T-account?
A device or convention for organizing and accumulating the accounting of entries of transactions that affect an individual account.
The formula to calculate retained earnings is: Retained Earnings (beginning) + Net Income - _____ = Retained Earnings (ending).
Dividends
What is an account?
A device for representing the amount (balance) for any line in the balance sheet or income statement.
What are permanent accounts?
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What are temporary accounts?
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What is the balance sheet equation?
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What are the dual effects of transactions in accounting?
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What does a debit represent in accounting?
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What does a credit represent in accounting?
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What is a journal entry?
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What is the posting process in accounting?
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What are adjusting entries?
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What is a contra account?
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What is the closing process in accounting?
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The relation between a T-account and a journal entry is that journal entries provide a record of transactions, and T-accounts _____ the effects of transactions on specific accounts.
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Current assets are expected to be converted to cash within a year, while noncurrent assets are expected to be converted to cash over _____ periods.
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What is the purpose of the income statement?
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What is the purpose of contra accounts?
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The balance sheet equation is expressed as: Assets = _____ + Shareholders' Equity.
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Study Notes
Key Accounting Concepts
- T-account: A fundamental tool used to visualize the effects of transactions on individual accounts within the accounting system.
- Income Statement and Balance Sheet Connection: The relationship between these two financial statements is articulated through Retained Earnings, calculated as: Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending).
- Account Representation: An account is a record representing the balance for a specific element in the financial statements, such as assets or liabilities.
Types of Accounts
- Permanent Accounts: Accounts that persist in the balance sheet, tracking ongoing financial positions.
- Temporary Accounts: Accounts that do not appear on the balance sheet, which include revenues and expenses, and are reset at the end of each accounting period.
Core Accounting Principles
- Balance Sheet Equation: Essential formula: Assets = Liabilities + Owners' Equity; emphasizes the equilibrium between what a company owns and owes, including funding sources.
- Dual Effects of Transactions: Each recorded transaction impacts multiple accounts equally, ensuring that debits and credits balance out.
Debit and Credit Entries
- Debit: An entry on the left side of an account, reflecting increases in assets and expenses, and decreases in liabilities and equity.
- Credit: An entry on the right side of an account, indicating increases in liabilities, equity, revenues, and gains, while reducing assets and expenses.
Journal and Ledger Processes
- Journal Entry: A dated record detailing the accounts impacted by a transaction, indicating equal debits and credits.
- Posting Process: The action of transferring journal entry details into individual accounts within the ledger system.
Adjustments and Closing Entries
- Adjusting Entries: Made at accounting period end to capture unrecorded transactions or updates needed for accurate financial representation.
- Closing Process: Transfers balances from temporary accounts to permanent accounts, effectively resetting those temporary accounts for the next period.
Contra and Adjunct Accounts
- Contra Account: Optional accounts like accumulated depreciation that offset associated accounts to illustrate true asset values.
- Purpose of Contra Accounts: Offer detailed insights into net amounts, distinguishing the acquisition costs from depreciation impacts.
Understanding Assets
- Noncurrent vs. Current Assets: Differentiation based on conversion to cash timeframe; current assets convert within a year (e.g., Accounts Receivable), while noncurrent assets take longer.
Income Statement Purpose
- Purpose: To deliver insights on net income components and their drivers, aiding users in understanding the specific factors influencing overall profitability.
Balance Sheet Equation Recap
- Formula: Affirms the foundational relationship of accounting, reiterated through: Assets = Liabilities + Shareholders' Equity.
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Description
Test your knowledge with flashcards covering key concepts from Chapter 2 of Financial Accounting. Topics include T-accounts, the Income Statement, and Retained Earnings. Perfect for students looking to reinforce their understanding of financial statements.