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20 Cards in this Set
- Front
- Back
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Asset
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An asset is a resource owned by a company that has measurable value and is expected to provide future benefits.
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Current Asset
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A current asset is an asset that will be used up or turned into cash within the next 12 months.
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Liability
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A liability is a debt or obligation arising from past transactions or events, which the company is likely to pay, settle, or fulfill by sacrificing resources in the future.
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Current Liability
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A current liability is a debt or obligation that will be paid, settled, or fulfilled within one year.
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Contribute Capital
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Contributed capital includes the amount of financing (cash and sometimes other assets) provided to the company by the owners.
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Retained Earnings
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Retained earnings are the cumulative earnings of a company that are not distributed to the owners and instead are reinvested in the business.
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Define a transaction and give an example of each of the two types of events that are considered transactions.
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A transaction is an exchange or event that has a direct and measurable financial effect on the assets, liabilities, or stockholders’ equity of a business. Transactions include two different types of events: (1) external exchanges and (2) internal events. The first situation (1) is exemplified by the sale of goods or services to customers. The second situation (2) is exemplified by employees using up the benefits of equipment owned by the company.
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For accounting purposes, what is an account? Explain why accounts are used in an accounting system.
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As defined in Chapter 1 (page 11), accounts are used to accumulate and report the effects of different business activities. Accounts are necessary to keep track of all increases and decreases in the basic accounting equation.
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What is the basic accounting equation?
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The basic accounting equation is: Assets = Liabilities + Stockholders’ Equity.
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Explain what debit and credit mean.
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Debit is the left side of a T-account and credit is the right side of a T-account. A debit is an increase in assets or a decrease in liabilities or stockholders’ equity.
A credit is the opposite – a decrease in assets or an increase in liabilities or stockholders’ equity. |
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Briefly explain what is meant by transaction analysis. What are the two principles underlying transaction analysis? What are the steps of the DECIDE approach to transaction analysis?
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Transaction analysis is the process of studying a transaction to determine its financial effect on the business in terms of the basic accounting equation:
Assets = Liabilities + Stockholders’ Equity The two principles underlying the process are: * Duality of effects: every transaction affects at least two accounts. * A=L+SE; the accounting equation must remain in balance after each transaction. The steps in the DECIDE approach to transaction analysis are: (1) Detect transactions, (2)Examine the accounts affected, (3)Classify each account as asset, liability, or stockholders’ equity, (4)IDentify the financial effects, (5)End with the effects on the basic accounting equation. |
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What two different accounting equalities must be maintained in transaction analysis?
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The accounting equalities in transaction analysis are:
(a) Assets = Liabilities + Stockholders’ Equity (b) Debits = Credits |
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What is the journal entry? What is the typical format of a journal entry?
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8.A journal entry is a method for expressing the effects of a transaction on accounts in a debits equal credits format. The title of the account(s) to be debited is (are) listed first. The title of the account(s) to be credited is (are) listed underneath the debited accounts and both account title(s) and amount(s) are indented to the right.
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What is a T-account? What is its purpose?
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T-accounts are a simplified version of the ledger, which summarizes transaction effects for each account. T-accounts show increases on the left (debit) side for assets, which are on the left side of the accounting equation. T-accounts show increases on the right (credit) side for liabilities and stockholders’ equity, which are on the right side of the accounting equation. The T-account is a tool for summarizing transaction effects for each account and determining balances.
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What are the key features that all assets possess? What are the key features of all liabilities?
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All assets have three features: (1) it is probable that they will generate future economic benefits for the company, (2) the company can obtain these benefits and control others’ access to them, and (3) these benefits arise from having acquired the assets in the past.
All liabilities share three common features: (1) they are unavoidable obligations, (2) they require a future sacrifice of resources, and (3) they arise from a past transaction or event. |
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Explain what the following accounting terms mean:
a. cost principle b. conservatism |
(a)The cost principle requires that assets and liabilities be recorded at their original cost to the company.
(b)Conservatism is the requirement to use the least optimistic measures when uncertainty exists about the value of an asset or liability. |
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Journal Entry
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The results of transaction analysis in debits-equal-credits format.
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A = L + SE; Debits = Credits
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The two equalities in accounting that aid in providing accuracy.
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Transaction
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An exchange or event that has a direct and measurable financial effect.
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Liabilities
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Debts or obligations to be paid with assets or fulfilled with services.
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