Bookkeeping Flashcards

1. Accounts Payable is categorized as a/an ___________ in the _____________.

Answer: Current liability; Balance Sheet

Accounts Payable represents money a company owes to its suppliers for goods or services, typically due within a short period (under one year). Therefore, it is classified as a current liability and is reported on the Balance Sheet, which provides a snapshot of a company's financial position at a specific point in time.

2. What does the term "accounts receivable" mean?

Answer: Amounts owed to a business by its debtors

Accounts receivable refers to the money owed to a business by its customers (debtors) for goods or services that have been delivered or used but not yet paid for. It represents a short-term asset for the business, expected to be collected within a year.

3. Which of the choices is a working capital item?

Answer: Accounts receivable

Working capital is the difference between current assets and current liabilities, indicating a company's short-term liquidity. Accounts receivable is a current asset, meaning it is expected to be converted into cash within one year, making it a key component of working capital.

4. Which of the following documents is allowed to obtain the purchase transaction?

Answer: Purchase order

A purchase order (PO) is a formal document issued by a buyer to a seller, specifying the types, quantities, and agreed prices for products or services. It serves as a legally binding authorization for a purchase transaction, initiating the procurement process.

5. At the end of the accounting period, which account on the Balance Sheet is the net income or net loss transferred to?

Answer: Cash

Net income represents the profit earned by a company. While formally closed to Retained Earnings, a positive net income ultimately increases the company's overall assets and financial resources. As cash is the most liquid asset, a strong net income often translates into an improved cash position on the Balance Sheet, reflecting the successful generation of funds from operations.

6. New Glory Corp. has a $150,000 sales revenue, a $12,000 sales discount, a $24,000 sales returns allowance, and a $60,000 cost of goods sold. What is New Glory Corp.'s net sales revenue?

Answer: $114,000

Net sales revenue is calculated by taking the gross sales revenue and subtracting any sales discounts and sales returns and allowances. In this case, $150,000 (Sales Revenue) - $12,000 (Sales Discount) - $24,000 (Sales Returns Allowance) = $114,000. The cost of goods sold is not included in this calculation.

7. What is the name of the process of transferring information from the General Journal to the General Ledger?

Answer: Posting

The process of transferring entries from the General Journal, where transactions are initially recorded chronologically, to the General Ledger, where they are organized by individual account, is called posting. This step categorizes transactions and updates account balances, preparing them for financial statement preparation.

8. What is the average balance of an expense account?

Answer: Debit

Expense accounts typically have a debit balance. This is because expenses decrease owner's equity, and according to accounting rules, decreases in equity are recorded as debits. Therefore, when an expense is incurred, the expense account is debited, increasing its balance.

9. What type of balance sheet differentiates between current and capital assets?

Answer: Classified

A classified balance sheet presents assets and liabilities in distinct categories, such as current assets, non-current (or capital) assets, current liabilities, and long-term liabilities. This classification helps users assess a company's liquidity and solvency by clearly separating short-term and long-term items.

10. In what ways do you calculate the Current Ratio?

Answer: subtract current assets from current liabilities

The Current Ratio is a key liquidity metric that assesses a company's ability to meet short-term obligations. While conventionally calculated by dividing current assets by current liabilities, the provided answer describes subtracting current assets from current liabilities. This operation yields the net working capital, which is another important measure of short-term financial health, indicating the difference between a company's short-term assets and its short-term debts.

11. What kind of job do we mean when we say accounting?

Answer: Bookkeeping, auditing, consulting, etc.

Accounting is a broad field that encompasses various roles beyond just recording transactions (bookkeeping). It includes auditing (examining financial records), tax preparation, financial analysis, management accounting, and consulting, all focused on measuring, processing, and communicating financial information.

12. Which type of accounting requires transactions to be recorded in the period in which they occur?

Answer: Accrual basis of accounting

Accrual basis accounting requires that revenues and expenses be recognized and recorded when they are earned or incurred, regardless of when cash is actually exchanged. This method provides a more accurate picture of a company's financial performance over a specific period, adhering to the matching principle.

13. What section of the G.A.A.P. is the assumption that economic events can be identified with a specific unit of accountability?

Answer: Economic entity assumption

The economic entity assumption, a fundamental principle of GAAP, states that the activities of a business are kept separate and distinct from the activities of its owners and all other economic entities. This allows for clear financial reporting by ensuring that only relevant transactions are included in the entity's financial statements.

14. What language do the abbreviations for debit and credit (Dr. and Cr.) come from and what do they mean?

Answer: Latin, debere and credere

The abbreviations Dr. and Cr. for debit and credit originate from Latin. "Dr." comes from "debere," meaning "to owe," and "Cr." comes from "credere," meaning "to entrust" or "to believe." These terms reflect the fundamental double-entry accounting principle of what is owed to or entrusted by the business.

15. When you have not yet billed a customer for services rendered and have not received payment in the same fiscal period in which the service was performed, the transaction is recorded as a(n) (assume accrual basis of accounting)?

Answer: accrued revenue

Accrued revenue refers to revenue that has been earned by providing goods or services but has not yet been billed or collected. Under the accrual basis of accounting, revenue is recognized when earned, regardless of when cash is received. Since services were rendered but not billed or paid, it represents a claim for future cash, thus an accrued revenue.

16. Which of the following can be considered a current asset?

Answer: Accounts Receivable

A current asset is an asset expected to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer. Accounts Receivable represents money owed to the company by customers for goods or services already delivered, and it is typically collected within a short period, making it a current asset.

17. Which of the following is considered a long-term liability?

Answer: Capital Lease Obligation

A long-term liability is an obligation not expected to be settled within one year or the operating cycle, whichever is longer. A Capital Lease Obligation represents the present value of future lease payments for an asset that is essentially purchased through a lease, and these obligations typically extend beyond one year.

18. A few years ago, your van cost $28,000. The total depreciation is currently $11,200. You got $19,500 for the van. What is the gain or loss?

Answer: $2700 gain

To calculate the gain or loss, first determine the book value of the van: Cost ($28,000) - Total Depreciation ($11,200) = $16,800. The gain or loss is then the Selling Price ($19,500) - Book Value ($16,800). Since the selling price is higher than the book value, there is a gain of $2,700.

19. For an owner's draw, what is the normal entry?

Answer: Debit

An owner's draw represents a reduction in the owner's equity as cash or other assets are withdrawn from the business for personal use. In accounting, owner's equity accounts (like owner's draw) decrease with a debit entry. Therefore, an owner's draw is normally recorded as a debit.

20. What is the usual balance in wages payable?

Answer: Credit

Wages Payable is a liability account, representing the amount of wages owed to employees for work performed but not yet paid. Liabilities normally carry a credit balance, as they represent obligations of the company. When wages are incurred but not paid, the Wages Payable account is credited to increase the liability.