Accounting 101- Basic Accounting

Accountant
A person who keeps the financial history of the transactions of an economic unit in written form. (p. 4)
Accounting
The process of analyzing, classifying, recording, summarizing, and interpreting business transactions in financial or monetary terms. (p. 3)
Economic unit
Includes both business enterprises and not-for-profit entities. (p. 3)
Ethics
A philosophy or code or system of morality that is, how we conduct ourselves from day to day in a variety of situations requiring a decision, usually of a right or wrong nature. (p. 8)
(FASB) Financial Accounting Standards Board SEC-FASB-GAAP
The organization, created in 1973 by the SEC, that created GAAP. (p. 4)
(GAAP) Generally Accepted Accounting Principles
The rules or guidelines used for carrying out the accounting process. (p. 4)
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(IASB) International Accounting Standards Board
The International organization that provides Standards or rules for international financial reporting. (p. 4)
(IFRS) International Financial Reporting Standards
The rules or guidelines that guide International Financial Reporting. (p.g 4)
Paraprofessional accountants
People who are qualified in accounting to assume the duties of a general bookkeeper as well as some of the duties of a professional accountant under that accountant’s supervision. (p. 7)
Sarbanes-Oxley Act
A U.S. federal law enacted as a response to a number of major corporate and accounting scandals that establishes a wide range of rules related to the audit environment and internal controls. (p. 9)
(SEC) Securities and Exchange Commission
The agency responsible for regulating public companies traded on a U.S. Stock Exchange. (p. 4)
Transaction
An event directly affecting an economic entity that can be expressed in terms of money and that must be recorded in the accounting records. (p. 3)
Owner’s Equity
Owner’s right to or investment in the business. (p. 13)
Assets
Cash, properties or things of value owned by an economic unit or business entity. (p. 13)
Business entity
A business enterprise, separate and distinct from the persons who supply the assets it uses. (p. 13)
Creditor
One to whom money is owed. (p. 14)
Capital
The owner’s investment, or equity, in an enterprise.
(p. 13)
Chart of Accounts
The official list of accounts tailor-made for the business. (p. 22)
Liabilities
Debts or amounts owed to creditors. (p. 14)
Revenues
Amounts earned by a business (fees for services, income from sales, rent income, interest earned for lending money).
Expenses
The costs that relate to earning revenue (the costs of doing business); examples are wages, rent, interest, and advertising. They may be paid in cash immediately or at a future time (AP) (p.21)
Account numbers
The numbers assigned to accounts according to the chart of accounts. (p. 22)
Accounts
The categories under the Assets, Liabilities, and Owner’s Equity headings. (p.16)
Accounts Payable
A liability account used for short-term obligations or charge accounts, usually due within 30 days (p. 18)
Accounts Receivable
An account used to record the amounts due from (legal claims against) charge customers. (p.27)
Backups
Procedures that store company data files in a a safe place, such as online or on a flash drive. (p. 34)
Cloud computing
Software that is used via the Internet instead of from a local computer. Software and data can be accessed anywhere there is an Internet connection. (p. 34)
Computerized accounting
An accounting system that records transactions using a computer and accounting software such as QuickBooks. (p. 33)
Double-entry accounting
The system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance. (p.17)
Equity
The value of a right or claim to or financial interest in an asset or group of assets. (p. 13)
Fair market value
The present worth of an asset or the amount that would be received if the asset were sold to an outsider on the open market. (p. 19)
Fundamental accounting equation
(Assets=Liabilities+Owner’s Equity) An equation expressing the relationship of assets, liabilities, and owner’s equity. (p. 14)
Manual accounting system
An accounting system in which transactions are recorded by hand. (p. 33)
Separate entity concept
The concept by which a business is treated as a separate economic or accounting entity. The business stands by itself, separate from its owners, creditors, and customers. (p. 16)
Sole proprietorship
A one-owner business. (p. 16)
Withdrawal (This is also referred to as drawing and is treated as a decrease in owner’s equity). (p.30)
The taking of cash or other assets out of a business by the owner for his or her own use.
A QuickBooks file with the extension (.QBB) is what type of file?
a backup file
.QBW
A file extension indicating a QuickBooks working file
Purchasing supplies on credit has what impact on the accounting equation?
Increase Supplies and increase Accounts Payable
Balance sheet
A financial statement showing the financial position of an organization on a given date, such as June 30 or December 31. This statement lists the balances in the asset, liability, and owner’s equity accounts. (p. 78)
Compound entry
A transaction that requires more than one debit or more than one credit to be recorded. (p. 71)
Credit
The right side of a T account; to credit is to record an amount on the right side of a T account. Credits represent increases in liability, capital, or revenue accounts and decreases in asset, drawing, or expense accounts. (p. 62)
Debit
The left side of a T account; to debit is to record an amount on the left side of a T account. Debits represent increases in asset, drawing, or expense accounts and decreases in liability, capital, or revenue accounts. (p. 62)
Financial position
The resources or assets owned by an organization at a point in time, offset by the claims against those resources and owner’s equity; shown on a balance sheet. (p. 78)
Financial statement
A report prepared by accountants that summarizes the financial affairs of a business. (p. 76)
Footings
The totals of each side of a T account. (p. 60)
Income statement
A financial statement showing the results of business transactions involving revenue and expense accounts over a period of time. (p. 76)
Net income
The result when total revenue exceeds total expenses over a period of time. (p. 76)
Net loss
The result when total expenses exceed total revenue over a period of time. (p. 76)
Normal balance
The plus side of a T account. (p. 60)
PDF (portable document format)
An electronic file format that converts a printed document into an electronic image. (p. 85)
Profit and loss statement
Another term for an income statement. (p. 83)
Report form
The form of the balance sheet in which assets are placed at the top and liabilities and owner’s equity are placed below. (p. 78)
Slide
An error in placing the decimal point in a number. (p. 80)
Statement of Owner’s Equity
A financial statement showing the activity in the Owner’s equity, or Capital account, over the financial period. (p. 77)
T Account form
A form of account shaped like the letter T in which increases and decreases in the account may be recorded. One side of the T is for entries on the debit or left side. The other side of the T is for entries on the credit or right side. (p. 59)
Transposition
An error that involves interchanging, or switching around, digits during the recording of a number. (p. 80)
Trial balance
A list of all account balances to prove that the total of all debit balances equals the total of all credit balances. (p. 75)
Cost principle
The principle that a purchased asset should be recorded at its actual cost. (p. 115)
Cross-reference
The ledger account number in the Post. Ref. column of the journal and the journal page number in the Post. Ref. column of the ledger account. (p.120)
General ledger
A book or file containing the activity (by accounts), either manual or computerized, of a business. (p. 118)
Journal
The book in which a person makes the original record of a business transaction; commonly referred to as a book of original entry. (p. 111)
Journalizing
The process of recording a business transaction in a journal. (p. 111)
Ledger account
A complete record of the transactions recorded in an individual account. (p. 118)
Posting
The process of transferring figures from the journal to the ledger accounts. (p. 120)
Source documents
Business papers, such as checks, invoices, receipts, letters, and memos, that furnish proof that a transaction has taken place. (p. 111)
Two-column general journal
A general journal in which there are two amount columns, one used for debit amounts and one used for credit amounts. (p. 113)
The ________________ is used to determine where the amount in the ledger comes from.
posting reference (or cross-reference)
(p. 144 Quiz)
For a journal entry to be complete, it must contain _________________.
the date, a debit entry, a credit entry, and an explanation. (p. 144 Quiz)
Transferring information from the journal to the ledger is called ______________.
posting
What are some examples of source documents?
Canceled checks, vendor invoices, and receipts
Accounting cycle
The sequence of steps in the accounting process completed during the fiscal period. (p. 167)
Accrual
Recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded. (p. 175)
Accrued wages
Unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period. (p. 175)
Adjusting entries
Entries that bring the books up to date at the end of the fiscal period. (p. 181)
Adjustments
Internal transactions that bring ledger accounts up to date as a planned part of the accounting procedure. (p. 170)
Book value or Carrying value
The cost of an asset minus the accumulated depreciation. (p. 173)
Contra account
An account that is contrary to, or a deduction from, another account; for example, Accumulated Depreciation, Equipment is listed as a deduction from Equipment. (p. 172)
Depreciation
An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear and tear, or obsolescence; the cost of the asset is therefore spread out over its estimated useful life. A part of depreciation expense is apportioned to each fiscal period (p. 171)
Fiscal period
Any period of time covering a complete accounting cycle, generally consisting of 12 consecutive months. (p. 167)
Fiscal year
A fiscal period consisting of 12 consecutive months. (p. 167)
Matching principle
The principle that the expenses for one time period are matched up with the related revenues for the same time period. (p 181)
Mixed accounts
Certain accounts that apper on the trial balance with balances that are partly income statement amounts and partly balance sheet amounts–for example, Prepaid Insurance and Insurance Expense. (p. 175)
Straight-line depreciation
A means of calculating depreciation in which the cost of an asset, less any trade-in value, is allocated evenly over the useful life of the asset. (p. 171)
Work sheet
A working paper used by accountants to record necessary adjustments and provide up-to-date account balances needed to prepare the financial statements. (p. 167)
The ____________ represents the sequence of steps in the accounting process.
accounting cycle (p. 204 Quiz)
On the work sheet, assets are recorded in which column?
Balance sheet, debit (p. 204 Quiz)
Accrual basis of accounting
An accounting method under which revenue is recorded when it is earned, regardless of when it is received, and expenses are recorded when they are incurred, regardless of when they are paid. (p. 235)
Cash basis of accounting
An accounting method under which revenue is recorded only when it is received in cash, and expenses ar recorded only when they are paid in cash. (p. 234)
Closing entries
Income Summary account
Interim statements
Nominal (temporary-equity) accounts
Post-closing trial balance
Real (permanent) accounts
ATM (Automated Teller Machine)
Machines that enable depositors to make deposits, withdrawals, and transfers using a coded plastic card. (p. 274)
Bank reconciliation
A process by which an accountant determines whether and why there is a difference between the balance shown on the bank statement and the balance of the Cash account in the business’s general ledger. The object is to determine the adjusted (or true) balance of the Cash account. (p. 279)
Bank routing number
A nine-digit number used by the Federal Reserve Bank to identify the financial institution of the account holder. (p. 276)
Bank statement
A periodic statement that a bank sends to the drawer/depositor of a checking account listing deposits received and checks paid by the bank, debit and credit memos, electronic transactions, and beginning and ending balances. (p. 277)
Canceled checks
Checks issued by the depositor that have been paid (cleared) by the bank and listed on the bank statement. They are called canceled checks because they are canceled by a stamp, indicating that they have been paid. (p. 279)
Cash funds
Separately held reserves of cash set aside for specific purposes. (p. 272)
Change Fund
A cash fund used by a business to make change for customers who pay cash for goods or services. (p. 293)
Collections
Payments collected by the bank and added to the customer’s bank account in the form of a credit memorandum. (p. 280)
Denominations
Varieties of coins and currency, such as quarters, dimes, and nickels and $1 and $5 bills. (p. 290)
Deposit in transit
A deposit not recorded on the bank statement because the deposit was made between the time of the bank’s closing date for compiling items for its statement and the time the statement is received by the depositor; also known as a late deposit. (p. 280)
Deposit slips
Printed forms provided by a bank on which customers can list all items being deposited; also known as deposit tickts. (p. 273)
Drawer
The party who writes the check. (p. 275)
Electronic Funds Transfer (EFT)
A transfer of funds initiated through an electronic terminal, such as a telephone, computer, or magnetic tape.
Endorsement
The process by which the payee transfers ownership of the check to a bank or another party. A check must be endorsed when deposited in a bank, because the bank must have legal title to it in order to collect payment from the drawer of the check (the person or firm who wrote the check). (p. 275)
Errors
Mistakes made by a customer or the bank. (p. 280)
Interest income
The amount earned from lending money to another person or business. (p. 280)
Ledger balance of cash
The balance of the Cash account in the general ledger before it is reconciled with the bank statement. (p. 279)
NSF (non-sufficient funds) check
Check drawn against an account in which there are not sufficient funds and returned by the payee’s bank to the drawers bank because of nonpayment; also known as a dishonored check. (p. 280)
Internal controls
Plans and procedures built into the accounting system with the following objectives: (1) to protect assets against fraud and waste, (2) to provide accurate accounting data, (3) to promote efficient operation, and (4) to encourage adherence to management policies. (p. 271)
Online banking
Customers conducting banking transactions, such as paying bills, transferring funds, and reviewing bank statements through a secure website. (p. 274)
Outstanding checks
Checks that have been written by the drawer and deducted on his or her records but have not reached the bank for payment and are not deducted from the bank balance by the time the bank issues its statement.
(p. 280)
Payee
The person to whom a check is payable. (p. 275)
Petty Cash Fund
A cash fund used to make small, immediate cash payments. (p. 289)
Petty cash payments record
A record indicating the amount of each petty cash voucher, the accounts to which it should be charged, and the purpose of the expenditure. (p. 291)
Petty cash payments record
A form stating who requested cash from the Petty Cash Fund, signed by (1) the person in charge of the fund and (2) the person who received the cash, and indicating the purpose of the petty cash payment.
(p. 290)
Petty cash voucher
(PIN) personal identification number
A unique personal identification number that is entered by the user to protect access to the user’s account.
(p. 274)
Positive pay
A fraud prevention cash management program offered by banks in an attempt to protect customers and the bank. (p. 276)
Promissory note
A written promise to pay a specific sum at a definite future time. (pgs. 282, 514)
Remote deposit
The process of capturing checks and deposits electronically for presentation to a financial institution. (p. 274)
Service charge
The fee the bank charges for handling checks, collections, and other items. It is in the form of a debit memorandum. (p. 280)
Signature card
The form a depositor signs to give the bank a copy of the official signatures of any persons authorized to sign checks. The bank can use it to verify the depositors signatures on checks. (p. 274)
Substitute check
The creation of a two-sided digital version of an original check. (p. 274)
FICA taxes
Social Security taxes plus Medicare taxes, paid by both employee and employer under the provisions of the Federal Insurance Contributions Act. The proceeds are used to pay old-age and disability pensions and to fund the Medicare program. (p. 325)
Gross pay
The total amount of an employee’s pay before any deductions. (p. 323)
Independent contractor
Someone who is engaged for a definite job or service and who may choose his or her own means of doing the work. This person is not an employee of the firm for which the service is provided. (p. 324)
Net pay
Gross pay minus deductions. Also called take-home pay. (p. 323)
Payroll bank account
A special checking account used to pay a company’s employees. (p. 339)
Medicare taxes
Federal government taxes levied on employees and employers; proceeds are used for medical insurance for eligible people aged 65 and over. (p. 325)
Payroll register
A manual or computerized schedule prepared for each payroll period listing the earnings, deductions and net pay for each employee. (p. 334)
Pre-tax deductions
Employee deductions that are not subject to income tax. The deductions include medical insurance premiums medical and dependent care expenses under a flexible spending pland, and 401(k) contributions. (p. 329)
Social Security Act of 1935
An act that provides for worker retirement funding through deductions from workers’ wages and matching amounts from their employers. (p. 325)
Social Security taxes
Federal government taxes levied on employees and employers; proceeds ar used for old-age pensions and disability benefits. (p. 325)
Taxable earnings
The amount of an employee’s earnings subject to a tax. (p. 329)
Wage-bracket tax tables
A chart providing the amounts to be deducted for income taxes based on amount of earnings, marital status and number of allowances claimed. (p. 330)
Withholding allowance
An allowance claimed by an employee (on a W-4), which employers use to calculate the amount of income tax withheld from an employee’s paycheck. (p. 329)
Workers’ compensation laws
Laws that protect employees and dependents against losses due to death or injury incurred on the job.
(p. 326)
(EFTPS) Electronic Federal Tax Payment System
Federal tax deposits are made using this system. Payments can be made 24 hours a day, 7 days a week. Businesses can schedule payments up to 120 days in advance of the due date. To be considered on time, tax deposits must be scheduld at least one calendar day prior to the due date. (p. 371)
(EIN) Employer Identification Number
The number assigned to each employer by the Internal Revenue Service for use in the submission of reports and payments for FICA taxes and federal income tax withheld. (p. 367)
(FUTA) Federal unemployment tax
A tax levied only on the employer that is equal to 0.6 percent of the first $7,000 of total earnings paid to each employee during the calendar year. This tax is used to administer the funds. (p. 369)
Form 940
An annual report filed by employers showing total wages paid to employees, total wages subject to federal unemployment tax, and other information. Also called the Employer’s Annual Federal Unemployment (FUTA) Tax Return. (p. 382)
Form 941
A quarterly report showing the tax liability for withholdings of employees; federal income tax and FICA taxes and the employer’s share of FICA taxes. Total tax deposits made in the quarter are also listed on thes Employer’s Quarterly Federal Tax Return. (p. 375)
Form 941-V
A payment voucher completed when making payments with the 941 report. (p. 376)
Form W-2
A form containing information about employee earnings and tax deductions for the year. Also caled Wage and Tax Statement. (p. 380)
Form W-3
An annual report sent to the Social Security Administration listing the total wages and tips, total federal income tax withheld, total Social Security and Medicare taxable wages, total Social Security and Medicare tax withheld, and other information for all employees of a firm. Also called the Transmittal of Wage and Tax Statements. (p. 381)
Payroll Tax Expense
A general expense account used for recording the employer’s portion of the FICA taxes, the federal unemployment tax, and the state unemployment tax. (p. 367)
Quarter
Three consecutive months. (p. 372)
(SUTA) State unemployment tax
A tax levied against employers by most states based on a portion of employee earnings during the calendar year. Rates and earning limits vary among states. The proceeds are used to pay subsistence benefits to unemployed workers. (p. 369)
Workers’ compensation insurance
This insurance paid for by the employer provides benefits for employees injured or killed on the job. The rates vary according to the degree of risk inherent in the job. The plans may be sponsored by states or by private firms. The employer generally pays the premium in advance at the beginning of the year based on the estimated payroll. The rates are adjusted after the exact payroll is known. (p. 386)
Accounts payable ledger
A subsidiary ledger that lists the individual accounts of creditors in alphabetical or numerical order with their respective balances. (p. 439)
Accounts receivable ledger
A subsidiary ledger that lists the individual accounts of credit customers in alphabetical or numerical order, with their respective transactions and balances. (p. 431)
Controlling account
An account in the general ledger that summarizes the balances of a subsidiary ledger (p. 431)
Cost of Goods Sold account
An account, used in the perpetual inventory system, that represents the cost of the inventory sold. (p. 443)
Credit memorandum
A written statement indicating a seller’s willingness to reduce the amount of a buyer’s debt. The seller records the amount of the credit memorandum in the Sales Returns and Allowances account. (p. 429)
FOB destination
Shipping terms under which the seller pays the freight charges and includes them in the selling price. Title or ownership changes hands when the buyer receives the goods. (p. 437)
FOB shipping point
Shipping terms under which the buyer pays the freight charges between the point of shipment and the destination. Payment may be made directly to the carrier upon receiving the goods or to the supplier if the supplier prepaid the freight charges on behalf of the buyer. Title or ownership changes hands when goods are transferred to the freight company. (p. 437)
Invoices
Business forms prepared by the seller that list the items shipped, their cost, their terms of the sale, and the mode of shipment. They may also state the freight charges. The buyer considers them purchase invoices; the seller considers them sales invoices. (p. 426)
Merchandise inventory
Goods (an asset account) that a company buys and intends to resell at a profit. (p. 425)
Merchandising businesses
Businesses that buy and sell goods. (p. 425)
Periodic Inventory system
A method of recording inventory that requires the company to determine the amount of goods on hand by periodically taking a physical count and then attaching a value to it. (p. 425)
Perpetual Inventory system
A method of recoring inventory that provides the firm with a running balance of inventory. (p. 425)
Purchases account
An account for recording inventory that provides the firm with a running balance of inventory. (p 425)
Purchases Returns and Allowances account
An account that records a company’s return of merhandise it has purchased or a reduction in the bill for an agreed-upon reason; it is treated as a deduction from Purchases. (p. 436)
Purchases journal (P)
Used to record purchases of merchandise purchased on account for resale only.
Sales journal (S)
A special journal used to record sales of merchandise sold on account only. This specialized type of transaction calls for debits to Accounts Receivable and credits to Sales. (Don’t duplicate the transaction in the general journal). (p. 447)
Cash receipts journal (CR)
Used to record all transactions that include a debit to Cash such as cash sales, checks received, or interest earned on a checking account.
Cash payments journal (CP)
Used to record all transactions that include a credit to Cash, such as payments by check or bank service charges.
Special Journals
Books of original entry used to simplify the recording process. One or more of these journals may be used in a manual accounting system, or they may be used in certain computerized systems designed to facilitate specialized types of repetitive transactions. (p. 447)
Sales account
A revenue account for recording the sale of merhandise. (p. 425)
Sales Tax Payable Account
An account used to record a tax levied by a state or city government on the retail sale of goods and services. The tax is paid by the consumer but collected by the retailer. (p. 429)
Subsidiary ledger
A group of accounts representing individual subdivisions showing the debits and credits of a controlling account. (p. 431)
Sales Returns and Allowances account
The account a seller uses to record the physical return of merchandise by customers or reduction in a bill for an agreed-upon reason. Sales Returns and Allowances is treated as a deduction from Sales. This account is usually evidenced by a credit memorandum issued by the seller. (p. 428)
Cash discount
The amount a customer can deduct for paying a bill within a specified period of time; used to encourage prompt payment. Not all sellers offer cash discounts.
(p. 497)
Cash payments journal
A special journal used to record all transactions involving cash payments or decreases to the Cash account. (p. 516)
Cash receipts journal
A special journal used to record all transactions involving cash receipts or increases to the Cash account. (p. 511)
Credit period
The time the seller allows the buyer before full payment on a charge sale has to be made. (p. 497)
Notes Payable
The account containing the balance of promissory notes. (p. 514)
Sales discount
A deduction from the original price granted by the seller to the buyer for the prompt payment of an invoice (p. 498)
Trade discount
Substantial discounts from the list or catalog prices of goods, granted by the seller; not recorded by the buyer or the seller. (p. 508)
Cash equivalents
Items included in the broad definition of cash. Included are short-term, highly liquid investments (for example, money market accounts, U.S. Treasury bills, and commercial paper) having maturities with a maximum of 90 days from the date aquired. (p. 633)
Current Assets
Cash and any other assets or resources that are expected to be realized in cash or to be sold or consumed during the normal operating cycle of the business (or one year if the normal operating cycle is less than 12 months). (p. 616)
Current Liabilities
Debts that will become due within the normal oprating cycle of a business, usually within one year, and that are normally paid from current assets. (p. 617)
Current ratio
A firm’s current assets divided by its current liabilities. Portrays a firm’s short-term debt paying ability. (p. 618)
Transaction: Owner deposited cash in a bank account in the name of the business.

What accounts are involved? What are the classifications of the accounts involved? Are the accounts increased or decreased?

Accounts involved: Cash and Capital
Classifications: Cash (Asset), Capital (Owner’s Equity)
Cash is increased because the company has more money than before.
Transaction: Company bought equipment, paying cash.

What accounts are involved? What are the classifications of the accounts involved? Are the accounts increased or decreased?

Accounts involved: Cash and Equipment
Classifications: Cash (Asset), Equipment (Asset)
Cash is decreased because the company used cash to purchase the equipment. Equipment is increased because the company has more equipment now than it did before.
Transaction: Company bought equipment on account from a supplier.

What accounts are involved? What are the classifications of the accounts? Are the accounts increased or decreased?

Accounts involved: Equipment & Accounts Payable
Classifications: Equipment (Asset), AP (Liability)
Equipment is increased because the company has more equipment than before. AP is increased because the company owes more to creditors than it owed before.
Transaction: Company paid a creditor on account.

What accounts are involved? What are the classifications of the accounts? Are the accounts increased or decreased?

Accounts involved: Cash & Accounts Payable
Classifications: Cash (Assets), AP (Liability)
Cash is dereased because the company used cash to pay the creditor. AP is decreased because the company owes less now than before.
Transaction: The owner invests personal cash in the business.
Effect: The company’s asset account Cash increases
and The proprietor’s Capital account increases.
Liabilities are not involved in this transaction.
Effect: The company’s asset account Cash increases
and The proprietor’s Capital account increases.
Liabilities are not involved in this transaction.
Transaction: The owner withdraws cash from the business for personal use.
Effect: The company’s asset account Cash will decrease and The proprietorship’s owner’s equity decreases by an entry to the Drawing account.
Liabilities are not involved in this transaction.
Transaction: The company receives cash from a bank loan.
Effect: The company’s asset account Cash increases and The company’s liabilities (such as Notes Payable or Loans Payable) have increased.
Owner’s (Stockholders’) Equity is not involved in this transaction.
Transaction: The company repays the bank that had lent money to the company.
Effect: The company’s asset account Cash decreased and The company’s liabilities (such as Notes Payable or Loans Payable) have decreased.
Owner’s (Stockholders’) Equity is not involved in this transaction.
Transaction: The company purchases equipment with its cash
Effect: The asset account Equipment increases, and another asset is also affected The asset account Cash decreases, and another asset is also affected.
Liabilities and Owner’s Equity are not involved in this transaction.
Effect: The asset account Equipment increases, and another asset is also affected The asset account Cash decreases, and another asset is also affected.
Liabilities and Owner’s Equity are not involved in this transaction.
Transaction: The owner contributes his/her personal truck to the business.
Effect: An asset such as Trucks increased and The proprietor’s Capital account increased.
Liabilities are not involved in this transaction
Transaction: The company purchases a significant amount of supplies on credit.
Effect: The company’s asset account Supplies increases.The company’s liability account Accounts Payable increases.
Owner’s (Stockholders’) Equity is not involved in this transaction.
Transaction: The company purchases land by paying half in cash and signing a note payable for the other half.
Effect: The asset Land has increased. Liabilities (Notes Payable account) have increased and the asset Cash has decreased.
Owner’s (Stockholders’) Equity is not involved in this transaction.
In May, Consulting Company X provides services for and bills Client Q then records the transaction by a debit to Accounts Receivable for $5,000 and a credit to Service Revenues for $5,000.
What is the effect of this entry upon the accounting equation for Company X?
Effect: The asset Accounts Receivable increased and Revenues cause Owner’s (Stockholders’) Equity to increase.

Liabilities are not involved in this transaction.

T account form
A form of account shaped like the letter T in which increases and decreases in the account may be recorded
Trial balance
A list of all account balances to prove that the total of all debit balances equals the total of all credit balances
Credit
The right side of a T account
Net income
The result when total revenue exceeds total expenses over a period
Income statement
A financial statement showing the results of business transactions involving revenue and expense accounts over a period of time
Financial statement
A report prepared by accountants that summarizes the financial affairs of a business
Debit
The left side of a T account
Statement of owner’s equity
A financial statement showing the activity in the owner’s equity, or Capital account, over the financial period
Normal balance
The plus side of a T account
compound entry
A transaction that requires more than one debit or more than one credit to be recorded.
Footings
The totals of each side of a T account
Report form
The form of the balance sheet in which assets are placed at the top and liabilities and owner’s equity are placed below
Balance sheet
A financial statement showing the financial position of an organization on a given date, such as June 30 or December 31.
Net loss
The result when total expenses exceed total revenue over a period of
Financial position
The resources or assets owned by an organization at a point in time, offset by the claims against those resources and owner’s equity
Transposition
An error that involves interchanging, or switching around, digits during the recording of a number
Slide
An error in placing the decimal point in a number