Review for Test 1

1. Formula for calculating net income.

2. Definition for the term expense.
Costs of selling products or services.
3. Normal balance for an expense account and where it is reported.
Debit and income statement.
4. Know the types of long term assets.
Land, building, and equipment.
5. Adjusting entry for prepaid rent.
Rent expense; debit
Prepaid rent; credit
6. Adjusting entry for the supplies account.
Supplies expense; debit
Supplies; credit
7. Best description for financial account.
Measurement of business activities of a company and communication of those measurements to external parties
for decision-making purposes.
8. Definitions of liabilities.
Amounts owed.
9. Net income appears on which financial statement.
Income statement and stockholders equity.
10. Know the going concern concept.
I n the absence of information to the contrary, a business entity will continue to operate indefinitely.
11. Transaction which would increase both assets and liabilities.
Issuing common stock for cash increases both sides of the accounting equation
12. Paying a cash dividends, the effect on the type of account.
Paying dividends causes assets and stockholders' equity to decrease
Dividends; credit
Cash; credit.
13. Purchasing office supplies on account, the effect on the types of accounts.
Asset (supplies) to increase and also causes a liability (accounts payable) to increase
Supplies: Debit
Account Payable: Credit
14. Know the matching principle. Chapter 3
Recognize expenses in the same period as the revenues they help to generate.
15. Know the purpose of closing entries.
Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained
Earnings account.
16. Definition for prepayments.
Cash payment (or an obligation to pay cash) occurs before the expense recognition.

17. Best description of the accounting equation.
Assets = Liabilities + Stockholders equity
18. Order in which financial statements are prepared.
1) Income statement 2) Stockholders equity 3) Balance sheet
19. Definition for accounting receivable.
When a company has earned revenue but hasn't yet received cash or recorded an amount receivable, it still should
record the revenue. This is referred to as accrued revenue when a company has earned revenue but hasnt yet
received cash or recorded an amount receivable. Accounts receivable. Revenue also accrues when a firm
performs services but has not yet collected cash or billed the customer.
20. Definition for unearned revenue.
When a company receives cash in advance from a customer for products or services to be provided in the future.
21. Payment on an account payable, the effect on the types of accounts.
22. Given four transactions, how many affect the total liabilities.
Account payable, salaries, interest, income tax, & unearned Revenue.
23. Identify the incorrect journal entry.
(if 2 diff. entries are debited or if two different entries are credited)
24. Revenue recognition principle.
The revenue recognition principle states that we should recognize revenue in the period in which we earn it, not
necessarily in the period in which we receive cash.
25. Under cash basis accounting when is supplies expense recorded.
Under cash-basis accounting record revenues at the time cash is received and expenses at the time cash is paid.
26. Type of trial balance after all adjusting entries have been posted.
Adjusted trail balance
27. Adjusting entry for prepaid insurance
The adjusting entry for a prepaid expense always includes a debit to an expense account (increase an expense) and a
credit to an asset account (decrease an asset).
Insurance expense; debit
Prepaid insurance; credit
28. Adjusting entry for the supplies account.
Supplies Expense: Debit
Supplies: Credit
29. Advantages and disadvantages of corporations.
Limited liability
30. Know what GAAP is
Generally accepted accounting principles.
Standards or methods for presenting financial accounting information.
31. Expenses are recorded on which financial statement.
Income statement
32. Purchasing office equipment account, effect on types of accounts.
Equipment; debit
Cash; credit
33. Journal entry for performing services for cash
Cash; debit
Service revenue; credit
34. Recording revenues and expenses under both Accrual and cash basis accounting
Under accrual-basis accounting, we record revenues when we earn them (revenue recognition principle) and record expenses
with the revenue they help to generate (matching principle). Under cash-basis accounting, we record revenues when we
receive cash and expenses when we pay cash. Cash-basis accounting is not allowed for financial reporting purposes.
35. Adjusting entries are part of accrual accounting and done at the period.
Adjusting entries are a necessary part of accrual-basis accounting. They help to record revenues in the period earned
and expenses in the period they are incurred to generate those revenues. Another benefit is that, by properly
recording revenues and expenses, we correctly state assets and liabilities.
Adjusting entries are needed when cash flows or obligations occur before the earnings-related activity
(prepayment) or when cash flows occur after the earnings-related activity (accrual).