Accounting Lecture Notes

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Questions and Answers

What characterizes a contra account?

It can exist without a companion account.

It always has a companion account and opposite normal balance. (correct)

Its normal balance is the same as its companion account.

It is used for recording revenue transactions.

What is the purpose of adjusting entries?

To prepare bank reconciliation statements.

To measure income and update the balance sheet. (correct)

To close all permanent accounts.

To alter the cash flow statement.

Which of the following best describes accrued expenses?

Expenses that arise and are recorded at the end of the period when unpaid. (correct)

Expenses that have been paid and recorded daily.

Expenses recorded before the service has been performed.

Expenses that do not affect the income statement.

In the income statement, which of the following is not classified as an expense?

Service revenue Signup and view all the answers

What adjustment is made for accrued revenue when services are performed but not yet paid?

Recognizing revenue earned despite not being paid yet. Signup and view all the answers

What is included in the adjusted trial balance?

All accounts after adjusting entries are posted. Signup and view all the answers

Which of the following is not a component of liabilities on the balance sheet?

Accrued income Signup and view all the answers

What happens to temporary accounts at the end of the accounting period?

They are closed to retained earnings. Signup and view all the answers

Which types of accounts remain open after closing the books?

Permanent accounts Signup and view all the answers

What is the first step in closing the books?

Close income accounts into retained earnings Signup and view all the answers

Which financial statement is NOT part of the financial statements as per IAS 1?

Statement of Input Costs Signup and view all the answers

What does the going concern principle require management to assess?

The ability to continue operating Signup and view all the answers

Materiality and aggregation concepts state that:

Significant items must be presented separately Signup and view all the answers

What is defined as an intentional misrepresentation of facts?

Fraud Signup and view all the answers

Which component of the fraud triangle refers to the mindset justifying fraud?

Rationalization Signup and view all the answers

What term describes the situation that allows fraud to occur?

Opportunity Signup and view all the answers

What is retained earnings primarily composed of?

Cumulative net income minus cumulative dividends Signup and view all the answers

What defines a dividend in a business context?

A return of a portion of profits to shareholders Signup and view all the answers

Which account type is NOT included in shareholders' equity?

Accounts Payable Signup and view all the answers

Which of the following is classified as an expense?

Rent Expense Signup and view all the answers

What account would be decreased as a result of paying dividends?

Retained Earnings Signup and view all the answers

Which type of account reflects an inflow of resources due to delivering goods or services?

Income Signup and view all the answers

In what type of transaction does equity increase when shares are issued?

Investment transaction Signup and view all the answers

Which of the following is classified as a liability?

Accounts Payable Signup and view all the answers

Which of the following is an example of an increase in shareholders' equity?

Service Revenue Earned Signup and view all the answers

What type of account is 'Office Furniture' classified under?

Asset Signup and view all the answers

What was one of the key reasons for Wirecard's bankruptcy declaration in June 2020?

Discrepancies in accounting regarding €1.9 billion Signup and view all the answers

Which of the following is NOT one of the five objectives of internal controls?

Increase product sales Signup and view all the answers

What legislative act mandates internal control reports for publicly traded companies?

Sarbanes-Oxley Act Signup and view all the answers

Which procedure is aimed at preventing fraud by segregating duties among employees?

Separation of duties Signup and view all the answers

What is a common reconciling item found on the bank side during a bank reconciliation?

Outstanding checks Signup and view all the answers

Which limitation of internal control can allow employees to bypass established controls?

Collusion among employees Signup and view all the answers

Which of the following items would typically appear on the book side of a bank reconciliation?

Non-sufficient funds (NSF) checks Signup and view all the answers

What role does the Public Company Accounting Oversight Board (PCAOB) play in corporate governance?

Regulates auditors to ensure accurate financial reporting Signup and view all the answers

What is the normal balance of the Share Capital account?

Credit Signup and view all the answers

Which of the following statements about a Trial Balance is true?

It lists all accounts with their ending balances. Signup and view all the answers

Which process is NOT involved in correcting accounting errors?

Ignore transactions that don't balance. Signup and view all the answers

In the cash account example, how much cash was received during May?

$8,000 Signup and view all the answers

Which account shows a debit balance in normal accounting practice?

Expenses Signup and view all the answers

What is the purpose of a Trial Balance?

To verify that total debits equal total credits. Signup and view all the answers

Which of the following errors can a Trial Balance NOT detect?

Missing entries. Signup and view all the answers

If the cash account began with $33,000 and ended with $35,000, what were the cash payments during May?

$3,000 Signup and view all the answers

Which method estimates bad debts in advance and creates a contra-account?

Allowance Method Signup and view all the answers

What is considered a current asset from selling goods or services on credit?

Accounts Receivable Signup and view all the answers

When specific accounts are deemed uncollectible, which account is directly affected?

Accounts Receivable Signup and view all the answers

The method that recognizes bad debts only when receivables are uncollectible is known as?

Direct Write-Off Method Signup and view all the answers

What is the responsibility of the creditor in a notes receivable arrangement?

To lend money to the debtor Signup and view all the answers

What is the purpose of the Allowance for Doubtful Accounts?

To reflect the amount expected to be collected Signup and view all the answers

Which one of the following is NOT a characteristic of notes receivable?

Always considered current assets Signup and view all the answers

What is the significance of the maturity value in a notes receivable?

It is the total amount due at the note's maturity Signup and view all the answers

Study Notes

Contra Accounts

Definition: A contra account offsets the balance of another account.
Example: Allowance for Doubtful Accounts (offsetting Accounts Receivable)

Purpose of Adjusting Entries

Objective: To ensure financial statements accurately reflect the company's financial position and performance.
Timing: Adjusting entries are made at the end of an accounting period to update accounts for transactions that have occurred but haven't been recorded.

Accrued Expenses

Definition: Expenses incurred but not yet paid for.
Example: Salaries earned by employees but not yet paid at the end of the period.

Non-Expense in Income Statement

Non-expense: Dividends paid to shareholders.

Accrued Revenue Adjustment

Purpose: To recognize revenue earned even though payment has not yet been received.
Adjustment: Increase both revenue and a corresponding asset (typically Accounts Receivable).

Adjusted Trial Balance

Contents: All accounts listed with their debit or credit balances after adjusting entries have been made.

Non-Liability Component on Balance Sheet

Non-liability: Share Capital.

Temporary Account Behavior at Period End

Temporary accounts: Revenue, expense, and dividend accounts.
Closing: Temporary accounts are closed to zero at the end of each accounting period to prepare for the next period's transactions.

Open Accounts After Closing

Remaining open: Permanent accounts (assets, liabilities, and equity).

First Step in Closing

Step 1: Close revenue accounts to a temporary account called "Income Summary."

Financial Statement Excluded in IAS 1

Excluded: Statement of Changes in Equity (IAS 1 doesn't require the statement of changes in equity to be part of the set of financial statements).

Going Concern Assessment

Requirement: Management must assess whether there is a substantial doubt about the company's ability to continue as a going concern.

Materiality and Aggregation Concepts

Statement: Information that is material (meaning it could influence the decisions of users) should be presented separately. Non-material items can be aggregated.

Intentional Misrepresentation of Facts

Definition: Fraud, involving deliberate deceit to gain an advantage.

Mindset Justifying Fraud

Fraud Triangle Component: Rationalization - individuals find justifications or excuses for their actions.

Opportunity Allowing Fraud

Term: Control environment - weak or absent internal controls create opportunities for fraud.

Retained Earnings Composition

Primary components: Accumulated profits and losses.

Dividend Definition

Business context: Distribution of a company's profits to shareholders.

Non-Shareholders' Equity Account

Account type: Accounts Payable (liability).

Classification of Expense

Expense: Rent expense, salaries expense, utilities expense, etc.

Account Reduced by Dividends

Account: Retained Earnings (credit balance).

Inflow of Resources Account

Type: Revenue.

Transaction: Issue of shares to investors (issuing shares brings in cash and increases equity).

Liability Classification

Liability: Accounts Payable, notes payable, bonds payable, accrued expenses.

Shareholders' Equity Increase

Increase: Net income for the period.

Office Furniture Classification

Account type: Asset.

Key Reason for Wirecard Bankruptcy

Reason: Accounting fraud involving billions of euros in missing assets.

Internal Control Objective

Not an objective: To ensure that all accounting records are free from error.

Internal Control Report Mandate

Act: Sarbanes-Oxley Act of 2002 (SOX).

Fraud Prevention Procedure

Procedure: Segregation of duties.

Bank Side Reconciling item

Item: Deposits in transit (deposits made by the company but not yet reflected in the bank statement).

Limitation Allowing Control Bypass

Limitation: Collusion between employees.

Book Side Item in Bank Reconciliation

Item: Outstanding checks (checks written by the company but not yet cashed by the recipient).

PCAOB Role in Corporate Governance

Role: Oversees the audits of public companies.

Normal balance: Credit.

Trial Balance Statement

True statement: A Trial Balance is used to confirm the equality of debits and credits.

Process NOT Involved in Error Correction

Process: Posting a journal entry to a wrong account (incorrectly posting is an error, not part of the error correction process).

Cash Received in May

Amount: $22,000

Debit Balance Account

Account: Cash.

Trial Balance Purpose

Purpose: To ensure that the accounting equation (Assets = Liabilities + Equity) is balanced.

Error Undetatable by Trial Balance

Error: A transaction with a debit and credit entry of equal amounts but in the wrong accounts.

May Cash Payments

Payments: $20,000

Bad Debt Estimation Method

Method: Allowance method.

Current Asset from Credit Sales

Asset: Accounts Receivable.

Account Affected by Uncollectible Receivables

Account: Allowance for Doubtful Accounts (debit).

Uncollectible Receivable Recognition Method

Method: Direct write-off method.

Creditor Responsibility in Notes Receivable

Responsibility: The creditor (the party receiving the note) is responsible for ensuring that the note is properly documented and secured.

Allowance for Doubtful Accounts Purpose

Purpose: To estimate and record the potential uncollectible accounts receivable.

Non-Characteristic of Notes Receivable

Non-characteristic: Usually unsecured (many notes receivable involve collateral).

Maturity Value Significance

Significance: Represents the total amount that will be paid at maturity, including principal and any accrued interest.

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