2nd Term Accounting Reviewer

ACCOUNTING EQUATION: Assets = Liabilities + Owner’s Equity (Capital) For Every Debit There Is A Credit OR Debits = Credits Debit (Left) An entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw or an expense or an entry that decreases a liability, owner's equity (capital) or revenue. Credit (Right) An entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense. Now, let's just use the first letter of each group to represent the type of account. • Group 1 A (Asset), D (Draw), and E (Expense) • Group 2 L(liability), O (Owner's Equity), and R (Revenue) All A, D, and E (Asset, Draw, and Expense) types of accounts, which normally have a debit balance, are increased with a debit and decreased with a credit. All L,O, and R (Liability, Owner's Equity, and Revenue) type accounts, which normally have a credit balance, are increased with a credit and decreased with a debit. TRUE OR FALSE 1. Assets are property or economic resources that are expected to provide a future benefit to a business. Ans: True 2. Assets include accounts payable and notes payable. Ans: False – assets include items such as cash, accounts receivable, vehicle, equipment, etc. 3. Assets are equal to liabilities plus owner's equity. Ans: True 4. If assets equal 100,000 and liabilities equal 25,000, then owner's equity is 125,000. Ans: False – since assets (100,000) must equal liabilities (25,000) plus owner’s equity, owner’s equity (capital) is 75,000. 5. Credits increase asset and expense accounts.

Ans: False – it’s debits that increase assets and expense accounts. 6. Not all businesses use the same chart of accounts. Ans: True 7. Payments made for an owner's personal expenses are charged to owner's draws. Ans: True 8. If liabilities equal 75,000 and owner's equity equals 25,000, then assets are 50,000. Ans: False – since liabilities (75,000) plus owner’s equity (25,000) must equal assets, assets equal 100,000. 9. An investment by the owner to his/her business will decrease owner's capital. Ans: False – an investment made by an owner increases not decreases owner’s equity (capital) 10. The normal balance for the owner's drawing account is a credit balance. Ans: False – the owner’s drawing account normally has a debit balance. 11. Supplies On Hand would be classified as an expense. Ans: False – supplies on hand is an asset account; its supplies used or consumed that is an expense account. 12. Fees earned are classified as an asset account. Ans: False – fees earned is a revenue account. 13. The cash account is increased with a credit. Ans: False – since cash is an asset account, its balance is increased with a debit. 14. A credit to Accounts Payable increases the accounts balance. Ans: True 15. A credit to fees earned will increase the balance of the fees earned account. Ans: True 16. Whether a debit or credit increases or decreases an account's balance depends on the type of account. Ans: True 17. The profit or loss for a period is reported using a balance sheet. Ans: False – the income statement is used to report the profit or loss for a period. 18. The financial position of a business as of a specific date is reported using a balance sheet. Ans: True 19. Accounts payable, notes payable, taxes payable, and accounts receivable are all types of liability accounts. Ans: False – all the accounts listed are liability accounts except accounts receivable which is an asset. 20. The amount calculated by subtracting total liabilities from total assets is called owner's equity or net assets. Page 1 of 4 Accounting Cheat Sheet/ Reviewer

Ans: True – based on the accounting equation, this statement is true. Note: Net Assets is another term that is often used to refer to this difference. 21. The general journal is a book or file that contains all of a business's accounts and balances. Ans: False – the general ledger is the accounting record that contains all of a business’ accounts and balances. 22. A debit is a number entered on the right side of an account and a credit is a number entered on the left side of an account. Ans: False - just the opposite is true; a debit is entered on the left side and a credit on the right side of an account. 23. A journal is a record in which transactions are initially recorded (recorded first). Ans: True 24. A transaction that requires more than one debit and/or more than one credit is called a compound journal entry. Ans: True 25. Posting is the process of transferring the balances from the Journals to the General Ledger. Ans: True 26. The formal financial statement that represents the basic accounting equation Assets = Liabilities + Owner's Equity is called the Income Statement. Ans: False – the formal financial statement based on the accounting equation is the Balance Sheet. 27. Nominal accounts are the temporary revenue, expense and draw accounts. Ans: True 28. A contra account's balance is always a credit balance. Ans: False – a contra account’s balance is the opposite of the normal balance of its related account. 29. If the trial balance shows the equality of debits and credits, it guarantees that all transactions have been recorded. Ans: False - A Trial Balance that balances does not necessarily prove that all the transactions have been recorded. There are some kinds of error that can still cause the Trial Balance to balance and not easy to detect. 30. One of the uses of Trial Balance is to test the equality of the recorded debits and credits. Ans: True ADJUSTING JOURNAL ENTRIES Key things to know

The purpose of adjusting journal entries is to get: 1) revenues to be what is earned in this period only 2) expenses to be what is incurred in this period only 3) assets to be what you have in future benefit at the end of the period 4) liabilities to be what you owe at the end of this period The adjustment is for things that have not yet been recorded or for changes that have occurred since the original journal entry was made.

Common accounts that are used for adjusting journal entries that go together: Insurance expense insurance Rent expense rent Supplies expense Salaries expense payable Interest expense payable Tax expense payable Bad debt expense for uncollectible

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Prepaid

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Prepaid

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Supplies Salaries

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Interest

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Tax

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Allowance

accounts Depreciation expense --Accumulated depreciation Interest revenue --Interest receivable Sales --Accounts receivable Fee revenue --Accounts receivable Rent revenue --Rent receivable Unearned revenue --Revenue

Items that Typically Require Adjustment at Period End Supplies When supplies were purchased, we assumed in previous exercises that Supplies Asset was debited. If Php5,000 of supplies are purchased the first year a business operates, the business would do an inventory at year end. If the inventory shows that only Php1,200 of supplies are still on hand, the Supplies Asset account would need to be Page 2 of 4 Accounting Cheat Sheet/ Reviewer

adjusted downward for the portion that is no longer on hand. The journal entry would be as follows: Supplies Expense

3800

Supplies

3800

date; Adjusting entry is required to show the receivable that exists at the balance sheet date Sample: What is the adjusting entry for P200 of services performed but not billed before October 31? Accounts Receivable 200

The original Supplies asset of Php5,000 MINUS current amount of the Supplies asset of Php1,200 EQUALS Php3,800 Supplies expense for the cost of the supplies used up. Accrued Expenses - expenses incurred but not yet paid in cash or recorded at the statement date; Adjusting entry is required to show the payable that exists at the balance sheet date Salaries Employees typically receive their paycheck monthly, once every two weeks, or perhaps once a week. If the last day of the month does not fall on a payday, some salary has been earned but is not yet due. If Tuesday is the last day of the month, and employees have earned Php500 for their unpaid work on Monday and Tuesday this needs to be recorded as an expense of the period even though it is not expected to be paid in cash until next Friday. The entry would be as follows: Salary Expense 500 Salaries Payable

Revenue

Depreciation - the cost of assets with long lives must be allocated over their useful lives; As we use the asset, we recognize a portion of its cost as expense; Depreciation expense is an estimate; Accounting depreciation is not an attempt to determine the market value decline for an asset, but a means of systematically assigning the cost of the asset to the periods it is used. Straight-Line Method of Depreciation: Depreciation = (Original Cost – Salvage Value) / No. of Useful Life For example, if a Php300,000 vehicle is expected to last 4 years and then be sold for Php60,000 it would be treated as depreciating Php6000 per year.

500 D

Unearned Revenues - Cash received and recorded as liabilities before revenue is earned. (cash received in advance); Earned when services are provided Sample: October 2 - What is the entry when you are paid in advance for services Php1,200? Cash Unearned Revenue

= =

(300,000 – 60,000) / 4 Php60,000 per year or Php5,000 per month

The monthly entry for the adjusting entry would be as follows: Depreciation Expense Accumulated Depreciation

500 500

1,200 1,200

Oct. 31: Some of the work has been performed, Php400 has been earned. What is the adjusting entry? Unearned Revenue 400 Revenue

200

400

Accrued Revenue - revenues earned but not yet received in cash or recorded at the statement

The Accumulated Depreciation account is a new type of account called a CONTRA-ASSET account. Contra means negative. In other words this is similar to the concept covered we called Expense as a negative capital account. Assets increase with a dr. Since Accumulated Depreciation is a negative Asset account it increases with a cr. On the balance sheet both the related asset and the accumulated depreciation account are shown. After one year the example vehicle Page 3 of 4 Accounting Cheat Sheet/ Reviewer

above would appear on the balance sheet as follows: Vehicle

300,000

Less Accumulated Depreciation

(60,000)

Equals Book Value of Vehicle

240,000

Showing both the Vehicle at its original cost and the separate Accumulated Depreciation account provides more information than if the depreciation had been credited directly to the Vehicle account. With the separate accounts, users of the financial statements can more readily see that this is a fairly new vehicle. If all they saw was a net balance of Php240,000, financial statement users would not know if this were an old Php1,000,000 asset or a relatively new Php300,000 asset.

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