accounting final Flashcards


The balances of two asset accounts have changed. However, the asset Equipment increased by the same amount that the asset Cash decreased. Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice. No standard financial language across the business, no common way to refer to financial impact of business transactions. The accounting equation is the cornerstone of double-entry accounting and must always remain in balance. This transaction affects only the assets of the equation; therefore there is no corresponding effect in liabilities or shareholder’s equity on the right side of the equation. Indicate the order the financial statements are prepared.

  • Increase Cash by $4,000; Increase Common Stock by $4,000.
  • Transactions are generally entered in chronological order.
  • The statement reports the financial position of a company at a point in time.
  • A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.
  • As you can see, we added all transactions that related to the bank to arrive at our ending balance of $20,000.
  • This could be due, for example, to sales discounts or merchandise returns.
  • Reduce the balance owed to encourage customers to pay their bill.

This may be difficult to understand where these changes have occurred without revenue recognized individually in this expanded equation. The statement of financial position is another term for the balance sheet. The statement lists the assets, liabilities, and equity of an organization as of the report date. As such, it provides a snapshot of the financial condition of a business as of a specific date.

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This formula, also known as the sheet equation, shows that what a company owns is purchased by either what it owes or by what its owners invest . Which statement below best describes the accounting equation? The change in retained earnings equals net income less dividends. Equality of revenue and expense transactions over time. Resources of the company equal creditors’ and owners’ claims to those resources. Financing activities equal investing and operating activities.

Buildings, machinery, and land are all considered long-term assets. Machinery is usually specific to a manufacturing company that has a factory producing goods. Machinery and buildings also depreciate. Unlike other long-term assets such as machinery, buildings, and equipment, land is not depreciated. The accounting equation uses total assets, total liabilities, and total equity in the calculation.


Do not include leased items in your assets. If a company wants to manufacture a car part, they will need to purchase machine X that costs $1000. It borrows $400 from the bank and spends another $600 in order to purchase the machine. Its assets are now worth $1000, which is the sum of its liabilities ($400) and equity ($600).

What Is an Asset in the Accounting Equation?

An asset is anything with economic value that a company controls that can be used to benefit the business now or in the future. They include fixed assets such as machinery and buildings. They may include financial assets, such as investments in stocks and bonds. They also may be intangible assets like patents, trademarks, and goodwill.

This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry on the credit side. A company received a bill for newspaper advertising services received, $400.

The Accounting Equation

Bankrupt, its are sold and these funds are used to settle its debts first. Only after debts are settled are shareholders entitled to any of the company’s assets to attempt to recover their investment. Identify which of the following statements is correct as to why accounting is important. We live in an information age whereby accounting information impacts everyone. From the following statements, select the one that describes the effect of dividends on equity.

The company’s asset account Cash decreased. The company’s asset account Cash will decrease. The company’s asset account Cash increases. A cost element is created based on identifying a GL account being relevant for profit / loss. For management reporting but not be required for statutory reporting. The first step in optimising the chart of accounts is being clear about the role of accounts.

What Is a Liability in the Accounting Equation?

Reduce only revenue accounts to zero, and keep expense balances unchanged. A company writes off over $1 million in bad debt expenses. You collect $1,000 in cash from a customer. This entry would be recorded as a ________________ on the _________________ side of a T-account. Is not authorised by the Dutch Central Bank to process payments or issue e-money. An application under Electronic Money regulations 2011 has been submitted and is in process. We are not permitted to carry out regulated business activities.

Here you want to see a trend where the operating profit margin is increasing every quarter and year. So it’s important to not just do the calculation on the current financials but look at previous months, quarters, and/or years. The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts. Below are examples of items listed on the balance sheet. The accounting equation shows on a company’s balance that a company’s total assets are equal to the sum of the company’s liabilities and shareholders’ equity. A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity. Record each of the above transactions on your balance sheet.

Accounting equation examples

The’ equity number is a company’s total assets minus its total liabilities. Software companies may provide a sample CoA, however they are not experts in an individual business. Which of the following is the correct order for preparing the financial statements? Balance sheet, statement of stockholders’ equity, and income statement. Balance sheet, income statement, and statement of stockholders’ equity. Statement of stockholders’ equity, income statement, and balance sheet. Income statement, statement of stockholders’ equity, and balance sheet.