Financial Accounting

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?

An account that appears on the balance sheet. Signup and view all the answers

What are temporary accounts?

An account that does not appear on the balance sheet. Signup and view all the answers

What is the balance sheet equation?

Assets = Liabilities + Owners' Equity. Signup and view all the answers

What are the dual effects of transactions in accounting?

Equal amounts are debited to various accounts and credited to other various accounts. Signup and view all the answers

What does a debit represent in accounting?

An entry on the LEFT side of an account that records increases in assets and expenses. Signup and view all the answers

What does a credit represent in accounting?

An entry on the RIGHT side of an account that records increases in liabilities, owners' equity, revenues, and gains. Signup and view all the answers

What is a journal entry?

A dated journal recording showing the accounts affected, with equal debits and credits. Signup and view all the answers

What is the posting process in accounting?

To record entries in an account to a ledger, usually as transfers from a journal. Signup and view all the answers

What are adjusting entries?

Entries made at the end of an accounting period to update accounts. Signup and view all the answers

What is a contra account?

An account that accumulates subtractions from another account, such as accumulated depreciation. Signup and view all the answers

What is the closing process in accounting?

The entries that accomplish the transfer of balances in temporary accounts to related balance sheet accounts. Signup and view all the answers

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.

summarize Signup and view all the answers

Current assets are expected to be converted to cash within a year, while noncurrent assets are expected to be converted to cash over _____ periods.

longer Signup and view all the answers

What is the purpose of the income statement?

To show the components of net income and the causes of net income. Signup and view all the answers

What is the purpose of contra accounts?

To provide disaggregated information concerning the net amount of an asset, liability, or shareholders' equity item. Signup and view all the answers

The balance sheet equation is expressed as: Assets = _____ + Shareholders' Equity.

Liabilities Signup and view all the answers

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.