Marist College ACCT 203 Financial Accounting Quiz Prep Chapter 3

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1 Marist College ACCT 203 Financial Accounting Quiz Prep Chapter 3 The Accounting Cycle: Capturing Economic Events Peter Rivera August 2011 Disclaimer This Quiz Prep is provided as an outline of the key concepts from the chapter. It is not intended to be comprehensive or exhaustive. Quizzes may include material from the classroom lectures, the text or the homework assignments. ACCT Chapter 3 Quiz Prep 1

2 Chart of Accounts The Chart of Accounts is a listing of all of the accounts within a company s accounting records. Typically, the accounts are listed in the order in which they are presented on the financial statements with each account having a unique identification number. Assets Accounts Receivable Liabilities 200 Accounts Payable 210 Salaries Payable T Accounts T Accounts are graphic representations of the accounting ledger. They are used for education but are not used in real accounting systems. The 3 parts of a T account are: Account Name Debit Credit Left Side Right Side ACCT Chapter 3 Quiz Prep 2

3 Normal Balances Normal Balances can be either Debit or Credit. The Normal Balance is the side that increases the account balance. For example: is an Asset = Debit Normal Balance: Debits increase Debit Credit Credits decrease Opening Balance Receive Ending Balance Spend Another example, Normal Balances Loans Payable is a Liability = Credit Normal Balance: Loans Payable Debit Credit Opening Balance Ending Balance 600 Credits increase Payables Borrow more ACCT Chapter 3 Quiz Prep 3

4 Normal Balances Debit Expenses Dividends Assets Credit Revenues Liabilities Equity P&L Statement of Retained Earnings Balance Sheet General Process 1 Analyze: Is there an economic impact? If yes, what accounts are affected? 2 Prepare Journal Entries: Chronological Order (diary) Different journals: general, cash, etc. 3 Post to General Ledger: Page for each account 4 Prepare a Trial Balance: Ensure that debits still equal credits ACCT Chapter 3 Quiz Prep 4

5 General Process 1 Analyze: Is there an economic impact? If yes, what accounts are affected? 2 Prepare Journal Entries: Chronological Order (diary) Different journals: general, cash, etc. 3 Post to General Ledger: Page for each account 4 Prepare a Trial Balance: Ensure that debits still equal credits Prepare Journal Entries 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. Received $25 = Increased = Asset = Debit Normal Balance Therefore, Debit $25 ACCT Chapter 3 Quiz Prep 5

6 Prepare Journal Entries 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. Customer paid down $25 = Receivables decrease Receivables = Asset = Debit Normal Balance Therefore, Credit Accounts Receivable $25 Prepare Journal Entries 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. This is a simple entry because there is only one debit and one credit ACCT Chapter 3 Quiz Prep 6

7 Prepare Journal Entries 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. The sum of the Debits must = the sum of the Credits Prepare Journal Entries 9/15/ PP&E Accounts Payable 400 Bought PC for $100 cash and a $400 payable. Purchased a PC = PP&E increases PPE = Asset = Debit Normal Balance Therefore, Debit PPE $500 ACCT Chapter 3 Quiz Prep 7

8 Prepare Journal Entries 9/15/ PP&E Accounts Payable 400 Bought PC for $100 cash and a $400 payable. Paid $100 = Decreases = Asset = Debit Normal Balance Therefore, Credit $100 Prepare Journal Entries 9/15/ PP&E Accounts Payable 400 Bought PC for $100 cash and a $400 payable. Owe $400 = Accounts Payable Increases Acct Payable = Liability = Credit Normal Balance Therefore, Credit Acct Payable $400 ACCT Chapter 3 Quiz Prep 8

9 Prepare Journal Entries 9/15/ PP&E Accounts Payable 400 Bought PC for $100 cash and a $400 payable. This is a Compound Entry because there is more than one Debit and/or more than one Credit Prepare Journal Entries 9/15/ PP&E Accounts Payable 400 Bought PC for $100 cash and a $400 payable. The sum of the Debits must = the sum of the Credits ACCT Chapter 3 Quiz Prep 9

10 General Process 1 Analyze: Is there an economic impact? If yes, what accounts are affected? 2 Prepare Journal Entries: Chronological Order (diary) Different journals: general, cash, etc. 3 Post to General Ledger: Page for each account 4 Prepare a Trial Balance: Ensure that debits still equal credits Post to General Ledger 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. Open Bal 100 # General Ledger Open Bal 450 A/R ACCT Chapter 3 Quiz Prep 10

11 Post to General Ledger 9/14/ Accounts Receivable 25 Rec d Payment from XYZ Co. Open Bal 100 # General Ledger A/R Open Bal 450 # General Process 1 Analyze: Is there an economic impact? If yes, what accounts are affected? 2 Prepare Journal Entries: Chronological Order (diary) Different journals: general, cash, etc. 3 Post to General Ledger: Page for each account 4 Prepare a Trial Balance: Ensure that debits still equal credits ACCT Chapter 3 Quiz Prep 11

12 Prepare a Trial Balance General Ledger Open Bal End Bal 85 A/P Open Bal End Bal 35 The Debits and Credits for each account must be summed and netted to one balance for each account. In the Account, = 125 Dr 40 Cr 125 Dr 40 Cr = Net 85 Dr General Ledger Open Bal End Bal 85 Prepare a Trial Balance A/P Open Bal End Bal 35 In the Accounts Payable, 415Dr = 450 Cr 415 Dr 450 Cr = Net 35 Cr ACCT Chapter 3 Quiz Prep 12

13 Prepare a Trial Balance General Ledger Open Bal End Bal 85 A/P Open Bal End Bal 35 Trial Balance Account 85 A/R 435 PP&E 1,000 A/P 35 Common Stock Retained Earnings Revenues Expenses TOTALS Prepare a Trial Balance General Ledger Open Bal End Bal 85 Each Account must have either a Dr or a Cr balance but NOT BOTH; e.g is WRONG Trial Balance Account 85 A/R 435 PP&E 1,000 A/P 35 Common Stock 1,000 Retained Earnings 500 Revenues 1,965 Expenses 1,980 TOTALS 3,500 3,500 ACCT Chapter 3 Quiz Prep 13

14 Prepare a Trial Balance Trial Balance The Sum of the Debits and Credits on the Trial Balance MUST EQUAL Account 85 A/R 435 PP&E 1,000 A/P 35 Common Stock 1,000 Retained Earnings 500 Revenues 1,965 Expenses 1,980 TOTALS 3,500 3,500 Prepare a Trial Balance Trial Balance If the TOTALS do not equal then you definitely did something wrong. However, being equal does NOT mean that everything is correct. Account 85 A/R 435 PP&E 1,000 A/P 35 Common Stock 1,000 Retained Earnings 500 Revenues 1,965 Expenses 1,980 TOTALS 3,500 3,500 ACCT Chapter 3 Quiz Prep 14

15 Accounting Basis There are two basis of accounting: Basis Revenues are recognized when cash is received Expenses are recognized when cash is paid Accrual Basis Whether or not cash is exchanged is irrelevant: Revenues are recognized when earned Expenses are recognized when incurred Accrual Basis Accounting = GAAP Accounting Key Concepts Accounting Period The financials are for a specified time period, e.g., Year Ending December 31, 2011 Conservatism Given a choice among equally acceptable Generally Accepted Accounting Principals, a company should choose the one that is least likely to overstate assets or Income. ACCT Chapter 3 Quiz Prep 15

16 2 (More) GAAP Revenue Recognition (Realization) Principle Revenues are recognized (earned) when the service is performed or the goods delivered regardless of when or if they are paid for. Matching Principal Expenses must be matched with the revenues in the periods when efforts are made to generate revenues. Revenue Recognition + Matching = Accrual Accounting ACCT Chapter 3 Quiz Prep 16