Accounting equation and double entry system

Question 1

ELEMENTS OF FINANCIAL STATEMENTS

Answer 1

*Position
-Asset
-Liability
-Equity
*Performance
-Income
-Expenses
-Losses

Question 2

Valuable resources owned by the entity.
Resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Answer 2

Asset

Question 3

Assets should be classified only into two:

Answer 3

current assets and non-current assets.

Question 4

An entity shall classify assets as current when:

Answer 4

• it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
  *it holds the asset primarily for the purpose of trading;
  *it expects to realize the asset within twelve months after the reporting period; or
  *the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

All other assets should be classified as non-current assets.

Question 5

-Obligations of the entity to outside parties who have furnished resources.
-Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Answer 5

Liabilities

Question 6

An entity shall classify a liability as current when:

Answer 6

• it expects to settle the liability in its normal operating cycle;
• it holds the liability primarily for the purpose of trading;
  -the liability is due to be settled within twelve months after the reporting period; or
  -the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

All other liabilities should be classified as non-current liabilities.

Question 7

-Residual interest in the assets of the enterprise after deducting all its liabilities.
-May pertain to any of the following depending on the form of business organization:
*In a sole proprietorship, there is only one owner’s ______account because there is only one owner.
In a partnership, an owner’s ______ account exists for each partner.
-In a corporation, owners’ ____ or stockholders’ ____consists of share capital, retained earnings and reserves representing appropriations of retained earnings among others.

Answer 7

Equity

Question 8

The definition of _____ encompasses both revenue and gains.

Answer 8

Income

Question 9

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increase in equity, other than those relating to contributions from equity participants.

Answer 9

Income

Question 10

arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names (sales, fees, interest, etc..)

Answer 10

Revenue

Question 11

_____ represent other items that meet the definition of income and may, or may not arise in the course of the ordinary activities of an enterprise.

Answer 11

Gains

Question 12

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
It also encompasses losses.

Answer 12

Expenses

Question 13

____ represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of an enterprise.

Answer 13

Losses

Question 14

The basic summary device of accounting is ______.

Answer 14

THE ACCOUNT

Question 15

_____is a detailed record of the increases, decreases and balance of each element that appears in an entity’s financial statements.

Answer 15

Account

Question 15

A _____account is maintained for each element that appears in the balance sheet (asset, liabilities and equity) and in the income statement (income and expenses).

Answer 15

separate

Question 16

The simplest form of the account is known as the _____ because of its similarity to the letter __.

Answer 16

“T” account

Question 17

Left side

Answer 17

Debit side

Question 18

Right side

Answer 18

Credit side

Question 19

THE ACCOUNTING EQUATION

Answer 19

ASSETS = LIABILITIES + OWNER’S EQUITY

Question 19

Presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets.
It states that assets must always equal liabilities and owner’s equity.

Answer 19

THE ACCOUNTING EQUATION

Question 20

-Dual effects of a business transaction is recorded.
-A debit side entry must have a corresponding credit side entry.
-Each transaction affects at least two accounts.
-The total debits for a transaction must always equal the total credits.
-An accounts is debited when an amount is entered on the left side of the account and credited when an amount is entered on the right side.

Answer 20

THE DOUBLE-ENTRY SYSTEM

Question 21

TYPES AND EFFECTS OF TRANSACTIONS

Answer 21

Source of Assets
Exchange of Assets
Use of Assets
Exchange of Claims

Question 22

*________ of any account refers to the side of the account – debit or credit – where increases are recorded.
*Asset, owner’s withdrawal, and expense accounts normally have debit balances.
* Liability, owner’s equity, and income accounts normally have credit balances.

Answer 22

NORMAL BALANCE OF AN ACCOUNT

Question 23

An asset account increases and a corresponding claims account increases.

Answer 23

Source of Assets

Question 24

One asset account increases and other asset account decreases.

Answer 24

Exchange of Assets

Question 24

An asset account decreases and a corresponding claims account decreases.

Answer 24

Use of Assets

Question 24

One claims account increases and another claims account decreases.

Answer 24

Exchange of Claims

Question 25

CURRENT ASSETS

Answer 25

Cash Cash Equivalents Notes Receivable Accounts Receivable Inventories Prepaid Expenses

Question 26

Any medium of exchange that a bank will accept for deposit at face value. (coins, currency, checks, money orders, bank deposits and drafts)

Answer 26

Cash

Question 27

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Answer 27

Cash Equivalents

Question 28

Written pledge that the customer will pay the business a fixed amount of money on a certain date

Answer 28

Notes Receivable

Question 29

Claims against customer arising from sale of services or goods on credit

Answer 29

Accounts Receivable

Question 30

Assets which are (a) held for sale in the ordinary course of business; (b) in the process of production for such sales; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Answer 30

Inventories

Question 31

Expenses paid for by the business in advance. (insurance and rent)

Answer 31

Prepaid Expenses

Question 32

NON-CURRENT ASSETS

Answer 32

Property, Plant and Equipment Intangible Assets

Question 33

Identifiable nonmonetary assets without physical substance held for use. (goodwill, patents, copyrights, licenses, franchises, trademark)

Answer 33

Intangible Assets

Question 34

Tangible assets that are held by an enterprise for use for more than one period.

Answer 34

Property, Plant and Equipment

Question 35

CURRENT LIABILITIES

Answer 35

Accounts Payable Notes Payable Accrued Liabilities Unearned Revenues

Question 36

The business entity is the maker of the note; that is, the business entity is the party who promises to pay the other party a specified amount of money on a specified future date.

Answer 36

Notes Payable

Question 36

When the business entity receives payment before providing its customers with goods or services, the amounts received are recorded in the unearned revenue account. When the goods or services are provided to the customer, the unearned revenue is reduced and income is recognized

Answer 36

Unearned Revenues

Question 36

Amounts owed to others for unpaid expenses. (salaries payable, utilities payable, interest payable and taxes payable)

Answer 36

Accrued Liabilities

Question 37

By accepting the goods or services, the buyer agrees to pay for them in the near future.

Answer 37

Accounts Payable

Question 38

Bond is a contract between the issuer and the lender specifying the terms of repayment and the interest to be charged. Business organization often obtain substantial sums of money from lenders to finance the acquisition of equipment and other needed assets.

Answer 38

Bonds Payable

Question 38

NON-CURRENT LIABILITIES

Answer 38

Mortgage Payable Bonds Payable

Question 38

Long-term debt of the business entity for which it has pledged certain assets as security to the creditor.

Answer 38

Mortgage Payable

Question 39

OWNER’S EQUITY

Answer 39

Capital Withdrawals Income Summary

Question 40

. Original and additional investments of the owner of the business entity. It is increased by the amount of profit earned during the year or is decreased by a loss. Cash or other asset that the owner may withdraw from the business ultimately reduce it. This account title bears the name of the owner.

Answer 40

Capital

Question 41

Owner’s cash or other assets withdrawal.

Answer 41

Withdrawals

Question 42

Temporary account used at the end of the accounting period to close income and expenses. This account shows the profit or loss for the period before closing to the capital account.

Answer 42

Income Summary

Question 43

Revenues earned by performing services for a customer or client.

Answer 43

Service Fee/Income

Question 44

The cost incurred to purchase or to produce the products sold to customers during the period; also called cost of goods sold.

Answer 44

Cost of Sales

Question 44

Revenues earned as result of sale of merchandise or goods.

Answer 44

Sales

Question 45

EXPENSES

Answer 45

*Cost of Sales *Salaries or Wages Expenses *Telecommunication, Electricity, Fuel and Water Expenses *Rent Expense *Supplies Expense *Insurance Expense *Depreciation Expense *Uncollectible Account Expense *Interest Expense

Question 46

Includes all payments as a result of an employer-employee relationship such as salaries or wages, 13th month pay, cost of living allowances and other related benefits.

Answer 46

Salaries or Wages Expenses

Question 47

Expenses related to use of telecommunications facilities, consumption of electricity, fuel and water.

Answer 47

Telecommunication, Electricity, Fuel and Water Expenses

Question 48

Expense for space, equipment or other asset rental.

Answer 48

Rent Expense

Question 49

Expense of using supplies in the conduct of daily business.

Answer 49

Supplies Expense

Question 50

Portion of premiums paid on insurance coverage which has expired.

Answer 50

Insurance Expense

Question 51

The portion of the cost of a tangible asset allocated or charged as expense during an accounting period.

Answer 51

Depreciation Expense

Question 52

The amount of receivables estimated to be doubtful of collection and charged as expense during an accounting period.

Answer 52

Uncollectible Account Expense

Question 53

An expense related to use of borrowed funds.

Answer 53

Interest Expense

Question 54

there is only one owner’s equity account because there is only one owner.

Answer 54

sole proprietorship

Question 55

an owner’s equity account exists for each partner.

Answer 55

partnership

Question 56

owners' equity or stockholders’ equity consists of share capital, retained earnings and reserves representing appropriations of retained earnings among others.

Answer 56

corporation