UNIT 1: FINANCIAL STATEMENTS

PART 1: FINANCIAL STATEMENTS

1.1. VOCABULARY
bank reconciliation
the process of comparing the actual state of the bank account with the bank nominal code
in the accounts
cash in hand
the amount of liquid equity held by an entity at a certain point of time
cross-check
verify by comparing two sets of data
draft
a first version
invoice
the written record of a payment due, which is sent to the customer before payment
irregularities
defects, failures of mistakes
keep track of
follow, or pay attention to (particularly in changeable situations)
ledger control
a process in which totals from subsidiary nominal accounts are entered into a control
account to make it easier to interpret the data
ledgers
accounting books in which accounts were prepared
meticulously
very careful, paying attention to every detail
notes to the accounts
additional information added at the end of the accounts to give a full understanding of the
company’s situation
receipt
the written record of a payment made, which is given to the customer after payment
retain
keep in one’s possession
to file
officially submit a document to a legal entity
to post
enter or record (a financial transaction)

1.2. PRACTICE
1) The management board studied the …… ……… …………… …………… to make sure
they understood the workings properly.
2) The company issued a pro-forma ………, with 14-day payment terms, when the order
was confirmed.
3) Mr Smith decided not to invest the profit from the last year so he ……… it in his bank
account.
4) The financial director looked at the ……… set of accounts and then approved them.
5) The auditors ……… studied the accounting records looking for anything suspect.
6) Each month the accounts supervisor ………-………the records which were posted
against the nominal code assigned.
7) Working in a multi-national accounting department, you should ……… ……… ………
the exchange rate at all times.
8) After James had finished the ……… ………, it became clear the company had a major
cash flow problem.
9) The accounts showed a large profit for the year, but as the company had spent a lot on
new assets there was a lack of ……… ……… ………. .
10) Peter was posting the previous day’s sales into the system when his manager arrived.
11) The latest date for ……… your tax return is the 31stof March, so ensure that you have it
finished and sent by the 29th.
12) The company will only reimburse staff for petty cash purchases if they provide a
………. .
13) If the IRS finds any ……… in your tax calculations, you can be fined.
14) Each accounting function maintains a separate ………. .
15) The financial controller does the ……… ……… for the company as the first step in his
management accounting.

1.3. READING
If you walked into any accounts office twenty years ago, you would have seen piles
of financial statements and reports in every corner. However, now, there is an increasing
trend towards the paperless office.
Accounting teams, much like other office workers, are using electronic copies to
replace the traditional hard copies of everything from tax returns to financial statements.
But how has this electronic revolution changed the accountant’s working day?
As you can imagine, accounting especially for larger corporations generates a lot of
paperwork. The actual accounts are only a small portion of the accounting records. To start
with each transaction has to be meticulously recorded which before computerized
programmes meant a large number of ledgers. These books were the basis for the accounts
so it was essential that they were accurately maintained. Each accounting function would
operate a different set of ledgers which would then be reconciled in the process of
generating the final accounts.
In each set of accounts, for each company the accounting firm had to prepare the
workings, otherwise known as T-accounts, the trial balance summarizing these accounts,
the bank reconciliations showing the cash in hand, a draft set of accounts and of course the
approved set of accounts, with accompanying notes to the accounts and this was just the
beginning.
Each company was also expected to keep records of all tax matters, in case of the
need to produce them for an audit. This meant hundreds or even thousands of receipts, bills
and invoices. All of which were summarized on the tax returns, again more paper.
Additionally if a company made use of management accounting services, the
number of reports which were produced increased dramatically. Although these
management reports were only internal and as such did not need to be retained by law, it
was common practice for companies to store these along with the accounting records for
that year thus allowing easy reference.
 All in all, a lot of paperwork was generated by the act of accounting which was not
a problem until it came time to find a certain piece of information from a previous year.
Then, accountants were completely reliant on the filing clerks who knew the system – but
if something went wrong it could take weeks to find the right document.
The electronic revolution in accounting started with the invention of spreadsheets,
which allowed bookkeepers to perform complex calculations without the need of a
calculator. This greatly speeded up the process of reconciliation. Instead of waiting until
after all figures had been entered into the ledgers to see if the accounts balanced a
bookkeeper could keep track of the balance after each entry.
Of course spreadsheets had their limitations as it still required the user to manually
post each transaction using the double entry system and as such the process still requires a
skilled bookkeeper to ensure that no errors occur.
With the development of computerized accounting programmes such as SAGE, the
double-entry system has been automated and the user need only enter the transaction once
and the second side will be automatically posted into the correct account. These systems
make the process of report generation much faster as all of the data is stored and can be
extracted in a variety of methods, by various criteria thus reports for any given period can
be generated almost instantly. The one disadvantage of computerized accounting
programmes comes from the difficulty in cross-checking journal entries for irregularities
as the data is presented as a list of transactions rather than being clearly visible as a set of
T-accounts. As such many experienced accountants still use hard copies for ledger control.
Even governmental institutions have started accepting returns filed online which
eliminates the need for a printed hard copy at all although, it is still advisable to keep a
copy of any important document – just in case.

PART 2: THE ACCOUNTING EQUATION

2.1. VOCABULARY
accounting equation
the foundation of double entry accounting which shows that all assets are either financed
by borrowing money or paying with the money of the company's shareholders
capital
the total financial value of all assets less any liabilities. The net worth of a company
contingent liabilities
a potential obligation that may be incurred depending on the outcome of a future event
current assets
all assets that are expected to be converted into cash within one year of normal business
activity
draws
the withdrawal of business cash or other assets by the owner for the personal use of the
owner
goodwill
the favour or advantage that a business has acquired especially through its brands and its
good reputation
income statement
the financial statement which measures a company's financial performance over a specific
accounting period
incur
come into or acquire (some consequence, usually undesirable)
intangible asset
an asset which is not physical in nature
intellectual property
creations of the mind: inventions, literary and artistic works, and symbols, names, images,
and designs used in commerce
quantify
determine or express the quantity of
shareholder equity
a firm's total assets minus its total liabilities
sole proprietorship
a type of business entity that is owned and run by one individual
terminology
The vocabulary of technical terms used in a particular field
2.2. PRACTICE
1) The ............. ............. was the first thing I learnt on the bookkeeping course I went on.
2) After three years trading the ............. of the company had increased to $100m.
3) The management accountant estimated a ............. ............. of $45,000 on the
purchase of the new property.
4) Of course you cannot depreciate ............. ............. as they won't be in the company a
year from now.
5) The accounting team tried to explain that the owner shouldn't make so many .............
from the company as it was leading to huge losses.
6) The company had assets of $62 million excluding ..............
7) After studying the ............. ............. it was clear that the company was in financial
trouble.
8) The company has ............. taxes of $27,000 this quarter.
9) The valuation team had trouble valuing the ............. ............. of the firm.
10) Lawyers and accountants in Hollywood have to be experienced in ............. .............
law.
11) When entering a new market, you should be able to ............. the potential sales and
the risk attached to them.
12) The board of management was delighted with the 15% rise in ............. ............. on
the past year.
13) Many people choose to form a ............. ............. as it is the simplest form of business
entity.
14) There is some very complicated ............. in accounting so you should make sure you
have a good dictionary.

2.3. READING
Financial accounting is an area which can be explained simply by using the
accounting equation, which is assets = liabilities + capital.
But what does that really mean? To understand the significance of the equation,
first we must explore the meaning of the three words; assets, liabilities and capital. These
terms are often used in accounting but can have very different meanings.
 In general, assets are something of value to the company but usually when we
think of assets we think of current and fixed assets. However, in the accounting equation
we should also take longterm and intangible assets into consideration as they all fall into
the category of assets and thus add value to an entity. Intangible assets can be hard to
quantify as we are often unable to compare them with the market. Intangible assets include
such things as licenses, intellectual property and goodwill which may have a specific value
to the entity.
The understanding of liabilities can be even more complicated as the numerous
classifications can leave even an experienced accountant scratching his head. These
classifications vary by region, but are based along the lines of: fixed, long-term, current,
trade, financial and contingent. Many of these appear to be self-explanatory but when it
comes to contingent liabilities it is important to remember that this is not an actual
liability, it represents a possible liability in an uncertain situation. Of course, you can
equate liabilities to negative assets.
Capital is generally understood as the money invested in the entity by the owner /
owners, but it can be so much more. Capital is divided into fixed capital which represents
the excess between the fixed assets and the fixed liabilities and working capital which is
the excess of current assets over current liabilities.
Having cleared up the terminology, we can start to explain the purpose of the
accounting equation.
The accounting equation is how double-entry bookkeeping is established. The
equation represents the relationship between the assets, liabilities, and owner's equity of a
small business. It is necessary to understand the accounting equation to learn how to read a
balance sheet.
The accounting equation shows what the firm owns (its assets) are purchased by
either what it owes (its liabilities) or by what its owners invest (its shareholder equity or
capital). This relationship is expressed in the form of an equation.
This equation must balance because everything the entity owns (assets) has to be
purchased with something, either a liability or owner's capital. Assets refer to items like
inventory or accounts receivable. Examples of liabilities are bank loans or accounts
payable. Owner's capital or equity is the investment or capital the owner has in the firm.
 The accounting equation can be shown in two other ways:
Liabilities = Assets - Owner's Equity
Owner's Equity = Assets - Liabilities
If you know any two of the three components of the accounting equation, you can
calculate the third component. If you look at a balance sheet, you will see that the balance
sheet is basically an extended form of the accounting equation.
There is also an expanded accounting equation which shows the relationship
between the income statement and the balance sheet. The expanded accounting equation,
after you consider sales revenue and expenses, is:
Assets = Liabilities + Owner's Equity + Revenue - Expenses - Draws
The capital or (owner's equity) part of the accounting equation can be divided into
two parts - revenue and expenses. Until now, the accounting equation has focused on the
balance sheet components. Now, splitting the owner's equity part of the accounting
equation into revenues and expenses highlights the relationship between the balance sheet
and the income statement because the key components of the firm's income statement are
revenue and expenses.
Revenues are what any given business earns from its product or service. Expenses
are what it costs the business to operate and provide the aforementioned product or service.
The relationship between revenues and expenses is simple. If revenues are greater than
expenses, the business makes a profit. If revenues are less than expenses, the business
incurs a loss.
The owner or owners of the entity may also withdraw a salary from the business. If
the company is an SME (small or medium enterprise), sole proprietorship, partnership, or
limited liability company, then the owner or owners will take a draw from the business as
their salaries. These drawings reduce the owner's equity in the entity.
It's vitally important that the accounting equation balance because, if not, your
financial reports will not make sense.
PART III. OUTPUT
3.1. Match the word on the left with the one the right.
1. accounting a. A written statement that shows the financial state of a
company at a particular time.
2. assets b. An official financial record that gives details of all a
company's income and expenses for a particular period and shows
if it has made a profit or a loss.
3. expenses c. The activity of keeping detailed records of the amounts of
money a business or person receives and spends.
4. balance sheet d. Money that a business spends on supplies, workers,
services, etc. in order to operate.
5. income statement e. The things that a company owns, that can be sold to pay debts.
6. profit f. An amount of money that is invested in or is used to start a firm.

7. capital g. Debts and obligations of a company.

8. liabilities h. A financial benefit when the amount of revenue gained from a
business activity exceeds the expenses, costs to sustain the
activity.

3.2. Use these words to fill in the blanks

(1) ………………….. summarizes and submits financial information of a business or
organization in reports and statements. One of the most important financial reports is
the (2) ………………….. . This report shows the economic performance of a business,
whether it has made a (3) ………………….. or loss. The basic format is revenues less
(4) ………………….. equals income (in Britain income is called profit). If expenses are
greater than sales, then there is a loss.
Another very important report is the (5) ………………….. . This shows assets,
liabilities, and owner’s equity of the business on a specific day, usually the last day of
the accounting year.
(6) ………………….. are normally divided into current and non-current assets. Current
assets are the assets that are used to fund day-to-day operations and pay ongoing
expenses. Noncurrent assets are intended for use in the long-term operations of a
business. Non-current assets will still be with the company in several years.
(7) ………………….. can be either short term or long term. The former are current
liabilities, which are debts payable within one year, while the latter are classified
as long-term liabilities, which are debts payable over a longer period.

3.3. Reading and answer these questions

a. Reading
AN INTRODUCTION TO ACCOUNTING
Accounting is frequently called the “language of business” because of its ability to
communicate financial information about an organization. Various interested parties,
including internal users, such as a company's managers and employees, and external
users, such as creditors, potential investors, governmental agencies, financial analysts,
and labor unions, rely on a company’s financial information to help them make
informed financial decisions. An effective accounting system, therefore, must include
accurate collecting, recording, classifying, summarizing, interpreting, and reporting of
information on the financial status of an organization.
In order to achieve a standardized system, the accounting process follows
accounting principles and rules. Regardless of the type of business or the amount of
money involved, common procedures for handling and presenting financial information
are used. Incoming money (revenues) and outgoing money (expenditures) are carefully
monitored, and transactions are summarized in financial statements, which reflect the
major financial activities of an organization.
Two common financial statements are the balance sheet and the income
statement. The balance sheet shows the financial position of a company at one point of
time, while the income statement shows the financial performance of a company over a
period of time. Financial statements allow interested parties to compare one organization
to another and/or to compare accounting periods within one organization. For example,
an investor may compare the most recent income statements of two corporations in
order to find out which one would be a better investment.
People who specialize in the field of accounting are known as accountants. In
the United States, accountants are usually classified as public, private, or
governmental. Public accountants work independently and provide accounting services
such as auditing and tax computation to companies and individuals. Public accountants
may earn the title of CPA (Certified Public Accountant) by fulfilling rigorous
requirements. Private accountant work solely for private companies or corporations
that hire them to maintain financial records, and governmental accountants work for
government agencies or bureaus. Both private and governmental accountants are paid
on a salary basis, whereas public accountants receive fees for their services.
Through effective application of commonly accepted accounting systems,
private, public and governmental accountants provide accurate and timely financial
information that is necessary for organizational decision-making.
b. Answer these questions
1. Why is accounting called the “language of business”?
2. How is a standardized accounting system achieved?
3. What do the balance sheet and the income statement have in common? How are
they different?
4. How are accountants classified in the United States?
5. What kinds of services do public accountants probably provide?
6. Which type of accounting–public, private, or governmental–appeals to you the most?
3.4. Choose the correct answer
1. Accounting information is used by ……. to help them to make financial
decisions.
A. managers C. potential investors
B. creditors D. all of the above
2. Regardless of the type of business or the amount of money involved ………
A. all companies use identical accounting systems
B. balance sheets are more important than income statements
C. common procedures are used in handling financial information
D. no standardized accounting system is employed
3. Business monetary transactions are summarized in ………. .
A. bank books B. computers C. financial statements D. cash registers
4. Public accountants may earn the title of CPA by ………. .
A. becoming governmental accountants
B. obtaining a Bachelor of Arts degree in Accounting
C. fulfilling rigorous requirements
D. paying a fee
5. Private and governmental accountants are paid on a …………. basis.
A. salary B. weekly C. fee D. monthly
 UNIT 2: THE ACCOUNTS

PART 1. VOCABULARY

1.1. Choose the correct answer.

1. Amounts to be received in the future for goods or services sold on credit.
A. Accounts payable C. Income tax
B. Withdrawals D. Accounts receivable
2. Payment for the use of someone else's property.
A. Rent C. Income tax
B. Revenue D. Dividend
3. The cost of the supplies used in running an office.

A. Revenue C. Dividends
B. Office supplies D. Withdrawals
4. Amounts owed to others but not yet paid.
A. Income tax C. Accounts payable
B. Accounts receivable D. Withdrawals
5. Amounts of money invested into businesses in order to earn more money.
A. Income tax C. Revenue
B. Investments D. Dividends
6. Amount of money taken out of the business by the owner for personal use.
A. Withdrawals C. Income tax
B. Dividends D. Investments
7. The direct expenses to produce, manufacture or purchase the goods or services you
sell.
A. Withdrawals C. Cost of goods
B. Dividends D. Rent
8. Earnings distributed to stockholders
A. Rent C. Dividends
B. Revenue D. Investments
9. Direct tax on the earnings of individuals and corporations.
A. Income tax C. Rent
B. Revenue D. Investments
10. The total amount of money a business takes in during a given period by selling goods and
services.
A. Rent C. Investments
B. Dividends D. Revenue

1.2. Match the word on the left with the one the right.
A. current assets
B. fixed assets
C. intangible assets
D. current liabilities
E. long-term liabilities
F. cost of sales
G.gross profit on sales
H. net operating profit
I.merchandise inventory
J. selling and general 10. the profit left after the cost of selling has been subtracted from
expenses
1. the cost involved in selling goods, paying shop and office staff,
advertising, etc.
2. debts that will not have to be paid for several years (e.g. money
borrowed by selling shares or mortgaging property)
3. the cost to the firm of the merchandise sold (including the cost of
raw materials, labour, factory overheads)
4. cash, or other assets, that will be changed into cash or consumed
within a short time
5. the value of goods that are in stock and for sale
6. assets that are intended for use rather than sale, and that will be
of use for more than one year (e.g. buildings, cars). Also known
as plant assets.
7. the profit from sales after the costs of selling, and general expenses,
have been subtracted.
8. assets that do not have physical reality, such as the goodwill of
customers, trade connections, patents, copyrights.
9. debts that have to be paid within a short time
the value of sales.

PART 2. READING
SYSTEMS OF ACCOUNTS
The accounting process identifies business transactions and events, analyzes
and records their effects, and summarizes and presents information in reports and financial
statements. The accounting process that focuses on analyzing and recording transactions
and events follows these steps. Business transactions and events are the starting points.
Relying on source documents, the transactions and events are analyzed using the accounting
equation to understand how they affect company performance and financial position. These
effects are recorded in accounting records, informally referred to as the accounting books,
or simply the books. Additional steps such as posting and then preparing a trial balance help
summarizes and classifies the effects of transactions and events. Ultimately, the accounting
process provides information in useful reports or financial statements to decision makers.
Source documents identify and describe transactions and events entering the
accounting process. They are the sources of accounting information and can be in either
hard copy or electronic form. Examples are sales tickets, checks, purchase orders, bills from
suppliers, employee earnings records, and bank statements.
An account is a record of increases and decreases in a specific asset, liability, equity,
revenue, or expense item. The general ledger, or simply ledger, is a record containing all
accounts used by a company. The ledger is often in electronic form. While most companies’
ledgers contain similar accounts, a company often uses one or more unique accounts
because of its type of operations. Accounts are arranged into three general categories (based
on the accounting equation), as shown below.
ASSET ACCOUNTS = LIABILITY ACCOUNTS + EQUITY ACCOUNTS
Asset accounts
Assets are resources owned or controlled by a company and that have expected future
benefits. Most accounting systems include separate accounts for the assets described here.
A Cash account reflects a company’s cash balance. All increases and decreases in
cash are recorded in the Cash account. It includes money and any medium of exchange that
a bank accepts for deposit (coins, checks, money orders, and checking account balances).
Accounts receivable are held by a seller and refer to promises of payment from
customers to sellers. These transactions are often called credit sales or sales on account
(or on credit). Accounts receivable are increased by credit sales and are decreased by
customer payments.
A note receivable, or promissory note, is a written promise of another entity to pay a
definite sum of money on a specified future date to the holder of the note. A company
holding a promissory note signed by another entity has an asset that is recorded in a Note
(or Notes) Receivable account.
 Prepaid Accounts (also called prepaid expenses) are assets that represent
prepayments of future expenses (not current expenses). When the expenses are later
incurred, the amounts in prepaid accounts are transferred to expense accounts. Common
examples of prepaid accounts include prepaid insurance, prepaid rent, and prepaid
services (such as club memberships). Prepaid accounts expire with the passage of time
(such as with rent) or through use (such as with prepaid meal tickets). When financial
statements are prepared, prepaid accounts are adjusted so that (1) all expired and used
prepaid accounts are recorded as regular expenses and (2) all unexpired and unused
prepaid accounts are recorded as assets (reflecting future use in future periods).
Supplies are assets until they are used. When they are used up, their costs are
reported as expenses. The costs of unused supplies are recorded in a Supplies asset account.
Supplies are often grouped by purpose - for example, office supplies and store supplies.
Office supplies include stationery, paper, toner, and pens. Store supplies include packaging
materials, plastic and paper bags, gift boxes and cartons, and cleaning materials. The costs
of these unused supplies can be recorded in an Office Supplies or a Store Supplies asset
account. When supplies are used, their costs are transferred from the asset accounts to
expense accounts.
Equipment is an asset. When equipment is used and gets worn down, its cost is
gradually reported as an expense (called depreciation). Equipment is often grouped by
its purpose - for example, office equipment and store equipment. Office equipment
includes computers, printers, desks, chairs, and shelves. The Store equipment account
includes the costs of assets used in a store such as counters, showcases, ladders, hoists,
and cash registers.
Buildings such as stores, offices, warehouses, and factories are assets because they
provide expected future benefits to those who control or own them. Their costs are recorded
in a Buildings asset account.
The cost of land owned by a business is recorded in a Land account. The cost of
buildings located on the land is separately recorded in one or more building accounts.
Liabilities accounts
 Liabilities are claims (by creditors) against assets, which means they are obligations
to transfer assets or provide products or services to other entities. An organization often has
several different liabilities, each of which is represented by a separate account that shows
amounts owed to each creditor. Creditors are individuals and organizations that own the
right to receive payments from a company. If a company fails to pay its obligations, the law
gives creditors a right to force the sale of that company’s assets to obtain the money to meet
creditors’ claims. When assets are sold under these conditions, creditors are paid first, but
only up to the amount of their claims. Any remaining money, the residual, goes to the
owners of the company. Creditors often use a balance sheet to help decide whether to loan
money to a company. A loan is less risky if the borrower’s liabilities are small in
comparison to assets because this means there are more resources than claims on resources.
Common liability accounts are described here.
Accounts payable refer to oral or implied promises to pay later, which usually arise
from purchases of merchandise. Payables can also arise from purchases of supplies,
equipment, and services. Accounting systems keep separate records about each creditor.
A note payable refers to a formal promise, usually denoted by the signing of a
promissory note, to pay a future amount. It is recorded in either a short-term Note Payable
account or a long-term Note Payable account, depending on when it must be repaid.
Unearned Revenue refers to a liability that is settled in the future when a
company delivers its products or services. When customers pay in advance for
products or services (before revenue is earned), the revenue recognition principle
requires that the seller consider this payment as unearned revenue. Examples of
unearned revenue include magazine subscriptions collected in advance by a publisher,
sales of gift certificates by stores, and season ticket sales by sports teams. The seller
would record these in liability accounts such as Unearned Subscriptions, Unearned
Store Sales, and Unearned Ticket Revenue. When products and services are later
delivered, the earned portion of the unearned revenue is transferred to revenue
accounts such as Subscription Fees, Store Sales, and Ticket Sales.
 Accrued liabilities are amounts owed that are not yet paid. Examples are wages
payable, taxes payable, and interest payable. These are often recorded in separate liability
accounts by the same title.
Equity accounts
The owner’s claim on a corporation’s assets is called equity, stockholders’ equity, or
shareholders’ equity. Equity is the owners’ residual interest in the assets of a business after
deducting liabilities. Equity is impacted by four types of accounts: common stock,
dividends, revenues, and expenses.
When an owner invests in a company in exchange for common stock, the
invested amount is recorded in an account titled Common Stock. Any further owner
investments are recorded in this account. When the company pays any cash dividends it
decreases both the company’s assets and its total equity. Dividends are not expenses of
the business. They are simply the opposite of owner investments. A Dividends account
is used in recording asset distributions to stockholders (owners).
Revenues and expenses also impact equity. Examples of revenue accounts are
Sales, Commissions Earned, Professional Fees Earned, Rent Earned, and Interest
Revenue. Revenues increase equity and result from products and services provided to
customers. Expenses decrease equity and result from assets and services used in a
company’s operations.
2.1. Read the reading with title SYSTEM OF ACCOUNTS, and then decide if the
statement below are true (T) or false (F).
1. The Cash account shows the value of money that the company keeps in the bank
accounts and in the cash registers.
2. The amount of money that customers owe to the corporation is recorded in the
accounts payable.
3. The amount of money that the corporation owes to its suppliers is recorded in
the accounts payable.
4. Credit sales do not reflect the cash amount a company keeps in cash
registers or banks.
5. Supplies are always recorded as assets.
 6. If a company fails to pay its obligations, all the value of its assets that are sold
in a forced sale belongs to the creditors.
7. Buildings and equipment are recorded in asset accounts.
8. All notes payable to the bank are the corporation’s short-term liabilities.
9. Expired prepaid meal tickets are recorded as expenses.
10. Unearned revenue is recorded in liability accounts when the goods have not
been delivered.
11. Revenues and expenses have no relation with shareholder’s equity.
12. Equity is the source of capital that the corporation owns, including the
common stock, and retained earnings.

2.2. Which of the following accounts do not belong to a property account group?
1. cash
2. other businesses’ securities (stocks and bonds) that are marketable
3. account receivables
4. accounts payable
5. unearned store sales
6. land
7. dividends
8. interest payable
9. buildings
10. equipment
11. wages
12. common stock
13. retained earnings

2.3. Account classification

MMM Corporation makes the balance sheet and uses the following account classification:

1. Current assets
2. Investments and funds
3. Property, plant, and equipment
 4. Intangible assets
5. Current liabilities
6. Long-term liabilities
7. Contributed capital
8. Retained earnings
Here are some accounts. Use the numbers on account categories to classify the following
accounts:
a. Office Supplies……….
b. Accounts payable……….
c. Store equipment……….
d. Merchandise inventory (ending balance) ……….
e. Common stock……….
f. Land held for future expansion……….
g. Patents……….
h. Bonds payable……….
i. Retained earnings……….
j. Allowance for uncollectible accounts……….
k. Mortgage payable……….
l. Short-term investments……….
m. Notes receivable--due in 6 months……….
n. Salaries payable……….
o. Prepaid Insurance……….

2.4. CHOOSE THE CORRECT ANSWER.

1. Accounts Payable
A. Owner’s equity B. Asset C. Liability D. Expense
2. Interest receivable
A. Expense B. Asset C. Owner’s equity D. Revenue
3. Vehicles
A. Revenue B. Expense C. Owner’s equity D. Asset
4. Buildings
A. Owner’s equity B. Asset C. Revenue D. Expense
 5. Insurance
A. Owner’s equity B. Asset C. Revenue D. Expense
6. Sales
A. Revenue B. Expense C. Owner’s equity D. Asset
7. Cost of Goods Sold
A. Asset B. Liability C. Owners' Equity D. Expense
8. Accounts Receivable
A. Asset B. Liability C. Revenue D. Expense
9. Furniture
A. Asset B. Liability C. Owners' Equity D. Expense
10. Common Stock
A. Owners' Equity B. Asset C. Revenue D. Expense
11. Prepaid Expenses
A. Asset B. Liability C. Owners' Equity D. Expense
12. Retained Earnings
A. Owners' Equity B. Revenue C. Expense D. Asset
13. Inventories
A. Owner’s equity B. Asset C. Revenue D. Expense
14. Cash at Bank
A. Owners' Equity B. Revenue C. Expense D. Asset
15. Goodwill
A. Owner’s equity B. Asset C. Revenue D. Expense

PART 3. Classify the following properties by marking √ in the corresponding

column:

Name of Account Current Fixed Current Long-term

Asset Asset Liability Liability
Accounts receivable
Accounts payable
Notes payable
Mortgage payable
Cash
 Supplies
Salaries payable
Land
Equipment
Goodwill
Bonds
Buildings
Patents
Income Tax payable

PART 4. Based on the concept of accounting activities, define the following

information is true (T) or false (F).
1. A debt or obligation that must be paid or liquidated within the one year or one
operating cycle of the business is classified as a current liability. ……
2. Assets are the economic resources that are expected to produce future benefits.
……
3. An asset that may reasonably be expected to be realized in cash or be consumed
within one year or one operating cycle of the business, whichever is longer, is
classified as a current asset. ……
4. Land, buildings, and equipment are examples of business expenses. ……
5. Current assets include cash, short-term investments, prepaid expenses, and accounts
payable. ……
6. Long-lived assets (resources used to produce or sell products or services) that lack
physical form and have benefits that are uncertain are called intangible assets. ……
7. A twenty-year mortgage note is an example of a long-term liability. ……
8. Prepaid expenses refer to amounts received in advance of when the product or service
is received. ……