Accounting Study Guide Unit #1 DELUXE VERSION: WITH PAST TEST 1640 words

What are the five main activities of accounting? 1. Gathering financial information 2. Preparing and collecting permanent records 3. Rearranging, summarizing and classifying financial info 4. Preparing info reports and summaries 5. Establishing controls to promote accuracy and have honesty among employees. What are 5 different kinds of questions that accounting can answer 1. Is the business earning enough profit? 2. Can we finance a business expansion? 3. How much does the company owe? 4. How much do other companies owe the company? 5. Are the selling prices for the products high enough? What are the 3 types of business operations? Give an example and definition.

Service: Intangible, sale of knowledge, expertise, advice etc. E.G. plumber Manufacture: creates products with raw materials E.G. toy factory Merchandise: sells tangible goods. E.G. gift shop
What are the 3 different types if business ownership?

Sole Proprietor: one owner legally responsible for the company Partnership: multiple owners (partnership agreement) how much income is share Corporation: separate legal entity owners not liable for debt
What is the accounting cycle? The order of steps used in bookkeeping and accounting practices. Identify the two kinds of financial statements. What does each measure? How do their headings differ? Income statement measures net income/less over a period of time and a balance sheet measures the financial position of a business at a certain time. Their headings differ because balance sheets show a certain date and income statement headings begin with year ending, month ending etc. Who are the 5 users of financial statements? Creditors Owner Government Unions Management

What is a source document? Provide 3 examples. Represents proof that a transaction has occurred. Hydro bills, phone bills, store receipts. Who benefits from gains and losses of the business? Owners benefit from gains. Creditors benefit from losses. What are the 7 steps of the accounting cycle? 1. Record transactions from source documents in the general journal and general ledger. 2. Write up trial balance from the general ledger. 3. Adjusting entries are recorded in the general journal and posted to the general ledger. 4. Write up the adjusted trial balance. 5. Prepare the formal financial statements. 6. Journalize and post the closing entries. 7. Write up the post closing trial balance. What are the 3 major professional accounting organizations?

CGA (Certified General Accountants Association) CMA (Society of Management Accountants of Canada) CICA (Canadian Institute of Chartered Accountants) (Member designations is CA)
How is net worth determined?

NW = A L
What are the three other ways to say net worth? 1. Owners Equity 2. Capital 3. Financial Position What is the fundamental accounting equation? A = Liabilities + Owners Equity Why does this equation always balance? Total Debits equals Total Credits Define and find an example for the following:

Asset: Anything owned that has a dollar value. Normally Debit. e.g. CASH Liability: A debt of an individual, business, or other organization. Normally Credit.
e.g. Mortgage What is the owners equity relationship on the balance sheet? O/E + Liabilities = Asse

Identify, explain and find an example for the three types of assets. Liquid Cash (asset that can easily be turned into cash) Used up Supplies (Asset that after use is unusable) Utilized Land (Hardest to liquidate) What is a balance sheet? Financial position at a certain point in time (like a snapshot) How is a balance sheet written? Assets on the left, Liabilities and Owners Equity on the right. What is the difference between accounts receivable and accounts payable? Accounts Receivable Business and people that owe you Accounts Payable Business you owe. Who are creditors and creditors? Creditor is someone you owe. Debtor is someone who owes you. Who has claim on the assets of a business? First Claim? Owner and Creditors. Creditors get the first claim. What is the business entity concept? Every business is different from other businesses for accounting purposes. What does the cost principle state and how does it help accountants? All assents and resulting liabilities must be recorded and maintained at the original invoice price. This keeps the records organized. What role does the realization principle play in accounting? Revenue is only recognized when earned. What is a business transaction? Provide 5 examples. A financial exchange that causes a change in financial position. Business purchases $40 of supplies Business provides service for $100 Business purchases a car for $640 The owner takes $80 for personal use The business receives $5000 for work that will be done next week What is the double-entry system of accounting? Whenever a transfer occurs all of the account changes must balance.

What is a normal balance? A normal balance is the classification of an account. For example: assets are debits, liabilities are credits. What is an exceptional balance? Provide 2 examples. An unusual charge that the business was not expecting Examples include Restructuring costs and unusual profits. Why do businesses prefer to provide service on account and make purchases on account? Businesses prefer to do this because they do not have to pay right away and have time to get the money. The term on account is used in four ways. What are these four ways? If an item is purchased on credit, when an item is sold on credit, when money is paid out to a creditor to decrease the amount owed to the creditor, when money is received from a debtor to reduce the amount owed. What is a trial balance? What is its purpose? A trial balance is a listing of all the account balances in a ledger. Its purpose is to see if the dollar values of the accounts with debit balances equal the dollar value of the accounts with credit balances. Why is the General Ledger expanded? The general ledger is expanded because revenue, expenses and drawings are separately debited and credited. What are revenue, expenses and drawings? Revenue : an increase in equity resulting from the proceeds of the sale of goods or services Expenses : A decrease in equity resulting from the costs of the materials and services used to produce the revenue. Drawings : A decrease in owners equity resulting from a personal withdrawal of funds or other assets by the owner. What two classifications appear on an income statement? Revenue and Expenses. What is the difference between net loss and net income? Net loss is when the expenses are greater than the revenue and net income is when the revenue is greater than the expenses. What is a fiscal period? The period of time over which earnings are measured. (Month ending)

What is a chart of accounts? A list of the accounts of a business and their numbers, arranged according to their order in the ledger. Explain why the following statements are true: Revenue accounts increase by crediting : owners equity is credited when increases Drawing accounts increase by debiting : owners equity is debited when decreases Expense accounts increase by debiting : owners equity is debited when decreases Why is the capital account no longer used to record revenues and expenses? Revenue and Drawing/Expenses have different reasons to credit and debit. Can a business have an increase to equity if there is a net loss? Explain. If the owner invests money into the business then the equity increases and there can still be net loss. What information from the financial statements would be of particular interest to a banker? Liquid assets and accounts payable. This shows the solvency and liquidity. Why is it just as important to control expenses of a business, as it is to increase revenue? If the companies expenses become to large, the company will have net loss because the expense will become greater than the revenue. A business might be quite profitable and yet have a shortage of cash. How is this possible? This is possible because a lot of the money can be owed to them (A/R) from past services. How do you show an auto purchased for $40,000 with a loan of $25000 on a balance sheet? Cash is credited $15000 Auto is debited $40000 A/P is credited $25000 What does Debit mean? Left side What does Credit mean? Right side What is true of every correct accounting entry? LS=RS Debit=Credit

What are the 6 GAAPS

The Business Entity Concept The balance sheet must reflect the financial
position of the business alone.

The Going Concern Concept assumes that a business will continue to

The Cost Principle The value of an account is never later changed. (car costs
less).

Objectivity Principle The transactions are based on fact (source documents). Realization Principle revenue must be recorded at the time the transaction was
completed.

Time Period Concept accounting takes place over specific time period
What is the unearned revenue account? It is a liability because it is money that was received for a task that has not been completed. Does a transaction always affect both sides of a balance sheet? Not always. Sometimes a transaction is made where an asset/liability is both debited and credited the equal amount. From this, the debits and credits cancel each other out. What is an account? A specialty ruled page used to record changes E.G Cash, A/R, Land. What are the rules of debit / credit theory? Assets Liabilities Owners Equity Debit + Debit Debit Credit Credit + Credit + What is liquidity? Solvency? How are they related? Liquidity turn assets to cash Solvency ability to pay off debts More Liquid = More Solvent What is Debt Ratio? TL/TA x 100 = Debt Ratio Capital only changes when: Decrease - Withdrawal by owner - Expenses (cost of operation) - Selling assets at a loss

Increase Investment by owner Provides a service (revenue) Selling an asset at a profit

Below is a 2010 Accounting Test By Mrs.Stanton. There is NO guarantee that it will be similar to your test in any way.