What Are the Three Characteristics of Accounting Events?

Chapter 7 Notes

A company’s accounting system must enable it to record and impact of its accounting activity. Furthermore, the company’s accounting system must capture data to enable it to compare the results of its activities to the plans for the period.

What are the three characteristics of accounting events?

Specific to the ______for which accounting records are kept—business ______concept (Chapter 1)
Measurable in ______terms—monetary ______concept (Chapter 1)
______the entity’s assets, liabilities, and/or owners’ equity—going concern and ______concepts (Chapter 1)

What is the accounting equation and what are the 9 basic combinations of accounting events?

______= Liabilities + Owners’ Equity
Assets increase, assets decrease: ______is used to purchase supplies
Assets increase, liabilities increase: supplies are purchased ______
Assets ______, owners’ equity ______: customer is billed for services provided
Assets ______, liabilities ______: supplies previously purchased on account are paid for
Assets ______, owners’ equity ______: supplies are used in the business
______increase, ______decrease: a long-term note payable is used to pay off several smaller obligations
Liabilities ______, owners’ equity ______: a bill for utilities is received but not yet paid
Liabilities decrease, owners’ equity increase: an ______to a customer is met
Owners’ equity ______, owners’ equity ______: one type of capital stock is exchanged for another type of capital stock (covered in the second half of the text)

What do “debit” and credit signify?”

Debit signifies ______, as in left-hand side of an account
Credit signifies ______, as in right-hand side of an account

How do debits and credits related to the eight (skip #9) basic accounting events?

Assets increase, assets decrease: cash is used to purchase supplies
DR supplies
CR cash
Assets increase, liabilities increase: supplies are purchased on account
DR supplies
CR accounts payable
Assets increase, owners’ equity increase: customer is billed for services provided
DR accounts receivable
CR fees earned
Assets decrease, liabilities decrease: supplies previously purchased on account are paid for
DR accounts payable
CR cash
Assets decrease, owners’ equity decrease: supplies are used in the business
DR supplies expense
CR supplies
Liabilities increase, liabilities decrease: a long-term note payable is used to pay off several smaller obligations
DR accounts payables
CR note payable
Liabilities increase, owners’ equity decrease: a bill for utilities is received but not yet paid
DR utility expense
CR utilities payable
Liabilities decrease, owners’ equity increase: an obligation to a customer is met
DR unearned revenue
CR fees earned

What is the difference between journalizing and posting?

______is the process of recording an entire accounting event in the journal.
______is the process of recording the appropriate part of the accounting event in the ledger account.

What are adjusting entries?

Entries made to reflect ______events
Revenue accrual—also ______an asset
Revenue deferral—also ______a liability
Expense accrual—also ______a liability
Expense deferral—also ______an asset

Asset
Increase / Asset
Decrease / Liability
Increase / Liability
Decrease
Revenue
Increase / X / X
Expense
Increase / X / X

What are closing entries?

Entries made to ______-out income statement accounts and ______their balances to owners’ equity
To ______a revenue—debit it and credit retained earnings
To ______an expense—credit it and debit retained earnings

What are the advantages of a computer-based transaction system?

Transactions posted ______to the accounts—no journalizing required
Detailed listing can be printed at ______.
Internal controls and edit checks ______and ______errors
A wide ______of reports can be prepared

What are transaction and master files?

Transaction—______
Master--______

What are the advantages of database system?

Business events that are ______accounting events can also be recognized
______in operating inefficiencies
Elimination of ______data

What is the difference between a business event and an accounting event?

An accounting event must be specific to the entity, measurable, and impact assets, liabilities, and/or owners’ equity.

A ______event is any activity the company wants to plan and evaluate. Thus all ______events are ______events, but not all business events are accounting events.

Lecture Examples

The chapter featured a merchandising company. Therefore, the two examples that follow feature a service and a manufacturing company, respectively.

1.A pet grooming service experienced the following events during its first month of operations. Analyze these events, prepare the journal entries, and prepare the resulting financial statements. Then prepare the closing entries.

a.The owner, LaRee, deposited $20,000 into the bank and set up an accounting for the company.

b.A one-year, 12%, bank loan for $5,000 was obtained.

c.Equipment costing $12,000 with an estimated useful life of 10 years was purchased for cash.

d.Supplies costing $3,000 were purchased on account.

e.Services were provided to customers for $1,500 on account.

f.Services were provided to customers for $2,000 cash,

g.Customers (see “e”) paid $500 on their accounts.

h.A bill for $160 of utilities was received. The bill is due by the 30th of next month.

i.The only employee was paid $700.

j.Paid $800 on account (see “d”).

k.LaRee withdrew $500 from the business for personal expenses.

l.At the end of the period a count of supplies revealed $2,400 of supplies on hand.

Answer:

a.Assets increase; owner’s equity increase

Cash20,000

LaRee, capital20,000

b.Assets increase; liabilities increase

Cash5,000

Note payable5,000

c.Assets increase, assets decrease

Equipment12,000

Cash12,000

d.Assets increase; liabilities increase

Supplies3,000

Accounts payable3,000

e.Assets increase; owners’ equity increase

Accounts receivable1,500

Fees earned1,500

f.Assets increase; owners’ equity increase

Cash2,000

Fees earned2,000

g.Assets increase; assets decrease

Cash500

Accounts receivable500

h.Liabilities increase; owners’ equity decrease

Utility expense160

Utilities payable160

i.Assets decrease; owners’ equity decrease

Salary expense700

Cash700

j.Assets decrease; liabilities decrease

Accounts payable800

Cash800

k.Assets decrease; owners’ equity decrease

LaRee, withdrawals500

Cash500

ADJUSTING ENTRIES

l.Assets decrease; owners’ equity decrease

Supplies expense600

Supplies600

($3,000 - $2,400 = $600)

m.Liabilities increase; owners’ equity decrease

Interest expense50

Interest payable50

($5,000 * .12 * 1/12 = $50)

n.Assets decrease; owners’ equity decrease

Depreciation expense100

Accumulated depreciation100

($12,000/120 = $100)

Income Statement

Fees earned$ 3,500

Less operating expenses:

Utility expense$160

Salary expense 700

Supplies expense 600

Interest expense 50

Depreciation expense 100 1,610

Net income$ 1,890

Statement of Owner’s Equity

LaRee, capital, beginning balance$ -0-

Add: contributions by owner 20,000

Add: net income 1,890

Less: withdrawals by owner (500)

LaRee, capital, ending balance$ 21,390

Statement of Cash Flows

Operating cash flows:

Cash received from customers$ 2,500

Cash paid for supplies (800)

Cash paid for salaries (700)

Net cash flows from operating$ 1,000

Investing cash flows:

Cash used to buy equipment$(12,000)

Financing cash:

Cash provided by owner$ 20,000

Cash received from borrowing 5,000

Cash paid to owner (500)

Net cash flows from financing$ 24,500

Net change in cash$13,500

Balance Sheet

Cash$13,500Accounts payable$ 2,200

Accounts receivable 1,000Utilities payable 160

Supplies 2,400Interest payable 50

Equipment 12,000Note payable 5,000

Accum depr (100)LaRee, capital 21,390

Total assets$28,800Total liab & own eq$28,800

CLOSING ENTRIES

o.Fees earned3,500

LaRee, capital3,500