Professional Documents
Culture Documents
Chapters 1-5
approx 60 questions, all multiple choice
definitions as well as journal entries
PRACTICE CHAPTER RATIOS
Chapter 1
Accounting is when you analyze and record transactions of a company and show them to others in
formal financial statements.
Financial accounting – for outsiders looking at our company – external
this is different from tax accounting. You keep different books for financial and tax accounting
Managerial accounting – for internal users in the company – managers, CEOs etc.
Ethics – try to be morally correct and honest
Chapter 2
Prepaid expense account – asset
Unearned revenue – liability
Cash, A/R, N/R, land, building, equipment -assets
Payables – liability
revenue, expense, dividends, stocks – owners equity
double entry accounting – the value of debits and credits must be equal in value.
Posting – when you take your info from your journal to your ledger
Transactions
trial balance – list of accounts and their balances at a point in time.
More info on statements
Chapter 3
period – calendar year (january – december), fiscal year – any 12 month period, natural business year –
when business has calmed down GAAP says you can only use accrual basis for financial statements,
but you can still use cash basis for internal accounting.
Cash basis – record only when cash changes hands
Accrual basis – record expenses over time (such as 10 year insurance policies etc)– more accurate and
better for business decisions.
Adjusting entries – used because of matching principle
Four major types of adjustment. They all affect the income statement and balance sheet but never the
cash account.
Deferred adjustments –
prepaid expenses (supplies, insurance, depreciation etc)
depreciation (building purchases etc) total depreciation is a contra account. To calculate depreciation
you do purchase cost – salvage value divided by years of use
unearned revenue money you have received that you have not done your part for yet
accrued adjustments -
accrued expenses – salary,
accrued revenue – you have earned the revenue but have not received payment
closing process – close temporary accounts – income statement accounts (revenue, dividends) put net
income into retained earnings
after you close you can start accounts for the new year
Chapter 4
Merchandising Activities
Income Statement Formula
Sales – COGS = Gross Profit
Gross Profit – Expenses = Net Income
Lifo, Fifo, WA
Lifo – reduces taxes
WA – middle ground – smooths out price changes
Fifo – most sales – best looking IS