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?

<p>Service revenue (A)</p> Signup and view all the answers

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

<p>Recognizing revenue earned despite not being paid yet. (D)</p> Signup and view all the answers

What is included in the adjusted trial balance?

<p>All accounts after adjusting entries are posted. (C)</p> Signup and view all the answers

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

<p>Accrued income (B)</p> Signup and view all the answers

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

<p>They are closed to retained earnings. (B)</p> Signup and view all the answers

Which types of accounts remain open after closing the books?

<p>Permanent accounts (A)</p> Signup and view all the answers

What is the first step in closing the books?

<p>Close income accounts into retained earnings (D)</p> Signup and view all the answers

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

<p>Statement of Input Costs (A)</p> Signup and view all the answers

What does the going concern principle require management to assess?

<p>The ability to continue operating (B)</p> Signup and view all the answers

Materiality and aggregation concepts state that:

<p>Significant items must be presented separately (C)</p> Signup and view all the answers

What is defined as an intentional misrepresentation of facts?

<p>Fraud (C)</p> Signup and view all the answers

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

<p>Rationalization (B)</p> Signup and view all the answers

What term describes the situation that allows fraud to occur?

<p>Opportunity (B)</p> Signup and view all the answers

What is retained earnings primarily composed of?

<p>Cumulative net income minus cumulative dividends (D)</p> Signup and view all the answers

What defines a dividend in a business context?

<p>A return of a portion of profits to shareholders (B)</p> Signup and view all the answers

Which account type is NOT included in shareholders' equity?

<p>Accounts Payable (B)</p> Signup and view all the answers

Which of the following is classified as an expense?

<p>Rent Expense (A)</p> Signup and view all the answers

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

<p>Retained Earnings (D)</p> Signup and view all the answers

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

<p>Income (D)</p> Signup and view all the answers

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

<p>Investment transaction (B)</p> Signup and view all the answers

Which of the following is classified as a liability?

<p>Accounts Payable (D)</p> Signup and view all the answers

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

<p>Service Revenue Earned (B)</p> Signup and view all the answers

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

<p>Asset (A)</p> Signup and view all the answers

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

<p>Discrepancies in accounting regarding €1.9 billion (D)</p> Signup and view all the answers

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

<p>Increase product sales (A)</p> Signup and view all the answers

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

<p>Sarbanes-Oxley Act (C)</p> Signup and view all the answers

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

<p>Separation of duties (B)</p> Signup and view all the answers

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

<p>Outstanding checks (D)</p> Signup and view all the answers

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

<p>Collusion among employees (B)</p> Signup and view all the answers

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

<p>Non-sufficient funds (NSF) checks (D)</p> Signup and view all the answers

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

<p>Regulates auditors to ensure accurate financial reporting (D)</p> Signup and view all the answers

What is the normal balance of the Share Capital account?

<p>Credit (B)</p> Signup and view all the answers

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

<p>It lists all accounts with their ending balances. (A)</p> Signup and view all the answers

Which process is NOT involved in correcting accounting errors?

<p>Ignore transactions that don't balance. (C)</p> Signup and view all the answers

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

<p>$8,000 (D)</p> Signup and view all the answers

Which account shows a debit balance in normal accounting practice?

<p>Expenses (D)</p> Signup and view all the answers

What is the purpose of a Trial Balance?

<p>To verify that total debits equal total credits. (A)</p> Signup and view all the answers

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

<p>Missing entries. (C)</p> 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?

<p>$3,000 (D)</p> Signup and view all the answers

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

<p>Allowance Method (C)</p> Signup and view all the answers

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

<p>Accounts Receivable (A)</p> Signup and view all the answers

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

<p>Accounts Receivable (A)</p> Signup and view all the answers

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

<p>Direct Write-Off Method (C)</p> Signup and view all the answers

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

<p>To lend money to the debtor (A)</p> Signup and view all the answers

What is the purpose of the Allowance for Doubtful Accounts?

<p>To reflect the amount expected to be collected (B)</p> Signup and view all the answers

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

<p>Always considered current assets (A)</p> Signup and view all the answers

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

<p>It is the total amount due at the note's maturity (C)</p> Signup and view all the answers

Flashcards

Retained Earnings

Cumulative net income minus cumulative dividends over a company's lifetime.

Dividends

Distribution of a company's earnings to shareholders.

Equity

Represents ownership interest in a company.

Income (Equity)

Increase in company value from selling goods/services.

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Expenses (Equity)

Decrease in company value from operating costs.

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Assets

Resources owned by the company.

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Liabilities

Obligations owed by the company.

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Share Capital

Represents the initial investment in a company.

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Transaction 1 (Effect)

Increased Share Capital and Equity.

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Shareholders

Owners of a company.

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Trial Balance

A list of all accounts and their ending balances, showing that total debits equal total credits.

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Journalizing

Recording business transactions in a journal.

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Accounting Equation

Assets = Liabilities + Equity. The fundamental equation in accounting.

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Trial Balance Purpose

Ensures the sum of debit balances equals the sum of credit balances, aiding in error detection in accounting records. It isn't a comprehensive audit.

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Cash Account

Tracks cash receipts and payments; beginning balance, income, and payments to result in an ending balance.

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Correcting Accounting Errors Types

Errors in accounting can be identified by computing the difference between total debits and credits, searching missing accounts, and checking for sliding/transposition errors.

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Accounting Equation

A fundamental principle in accounting; Assets = Liabilities + Equity.

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Accrual Accounting

Accounting method that records transactions when they occur, regardless of when cash changes hands.

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Contra Account

An account that has a companion account and its normal balance is opposite to that of the companion account.

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Accrued Expense

An expense that has been incurred but not yet paid for.

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Adjusting Entry

An entry made at the end of an accounting period to update accounts for revenue earned and expenses incurred.

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Income Statement

A financial statement that shows a company's revenues and expenses over a period of time.

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Balance Sheet

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.

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Closing Entries

Journal entries made at the end of an accounting period to close temporary accounts and transfer their balances to retained earnings.

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Temporary Accounts

Accounts that are closed at the end of each accounting period, such as revenue, expense, and dividend accounts.

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Close the Books

The process of updating account balances at the end of an accounting period to reflect the financial performance and position of a business. This involves transferring temporary accounts (income, expenses, dividends) to permanent accounts (retained earnings).

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Permanent Accounts

Accounts that remain open throughout the accounting cycle and represent the fundamental financial position of a business. These include assets, liabilities, and equity.

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What is Fraud?

An intentional act of deception or misrepresentation for the purpose of gaining an unfair advantage or causing harm to others.

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Misappropriation of Assets

A type of fraud where an employee steals or misuses company assets for personal gain.

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Fraudulent Financial Reporting

A type of fraud where managers intentionally misrepresent the financial results of a company, often to deceive investors or creditors.

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Opportunity (Fraud Triangle)

A situation that allows fraud to occur, such as weak internal controls or a lack of oversight.

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Pressure (Fraud Triangle)

Incentives or motivations that drive someone to commit fraud, such as financial pressure or personal gain.

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Accounts Receivable

Money owed to a company by customers who bought goods or services on credit.

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Notes Receivable

A formal, written promise to pay a specific amount of money, with interest, at a future date.

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Allowance Method

A way to account for uncollectible accounts by estimating bad debts in advance and recording an 'Uncollectible Account Expense'.

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Writing Off Uncollectible Accounts

Removing a specific customer's unpaid balance from the company's records when it's considered impossible to collect.

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Direct Write-Off Method

A simpler way to track uncollectible accounts, only recognizing bad debts when they are certain to be uncollectible.

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Creditor

The person or entity lending money in a notes receivable transaction.

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Debtor

The person or entity borrowing money in a notes receivable transaction.

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Maturity Date

The date when the borrower must pay back the borrowed amount (principal) and interest.

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Internal Control

A system of procedures and policies designed to prevent, detect, and correct fraud, ensuring accurate accounting records, safeguarding assets, and complying with legal requirements.

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Separation of Duties

Assigning different people to manage assets, record transactions, and approve those transactions, reducing the risk of one individual having control over multiple aspects of a process.

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Bank Reconciliation

The process of comparing a company's cash balance recorded in its books with the balance reported by the bank, identifying discrepancies and explaining the differences.

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Deposits in Transit

Deposits recorded by the company but not yet by the bank, due to timing differences in processing.

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Outstanding Checks

Checks issued by the company but not yet cashed by the recipient, resulting in a higher balance on the books.

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Bank Errors

Mistakes made by the bank in processing transactions, affecting the bank's balance.

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Book Errors

Mistakes made by the company in recording transactions, affecting the company's balance.

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Non-Sufficient Funds (NSF) Checks

Checks received by the company that bounce due to insufficient funds in the payer's account.

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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.

Equity Increase with Share Issuance

  • 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.

Share Capital Normal Balance

  • 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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