Basic and Introduction of Accounting

TRUE • • • • • • • • • • • • • • • When accounts do not appear on the unadjusted trial balance but are needed to post adjustments, they are simply added to the account title column. Once the adjusted trial balance is in balance, the flow of accounts will now go into the financial statements. On the income statement, miscellaneous expenses are usually presented as the last item without regard to the peso amount. Prepaid Insurance is an example of a current asset. Land is an example of a plant asset. Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilities. Accrued taxes payable are generally reported on the balance sheet as a current liability. Deferred expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. The income statement is prepared from the adjusted trial balance or the income statement columns on the work sheet. Accumulated Depreciation is a permanent account. The drawing account is a temporary account. The balance sheet accounts are referred to as real or permanent accounts. Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period. The income summary account is closed to the owner's capital account. The post-closing trial balance will generally have fewer accounts than the trial balance. • • • • • • • • • • • • • FALSE Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets. The amount of the net income for a period appears on both the income statement and the balance sheet for that period. At the end of the fiscal period, prepaid expenses are reported on the Income Statement as expenses. Office Equipment is an example of a current asset account. Capital and Drawing are reported in the owner's equity section of the balance sheet. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. Accrued expenses are ordinarily listed on the balance sheet as current assets. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. Examples of temporary accounts are supplies and prepaid expenses which are in the ledger for just a short time before they expire. The accumulated depreciation account is closed to the income summary account. The drawing account is closed to the income summary account. The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. • • • • • • • • • • • • • • • The work sheet is not considered a part of the formal accounting records. The post-closing trial balance will generally have fewer accounts than the trial balance. Assets, liabilities, and owner’s capital are real accounts and do not get closed at the end of the period. The income summary account is also known as the clearing account. All income statement accounts will be closed at the end of the period. Once an account has been closed for the period, inserting a line in the balance columns zero’s out the account making it ready for the following period. The last step of the accounting cycle is to prepare a post-closing trial balance. Financial statements should be prepared before the closing entries are journalized and posted. Any twelve-month accounting period adopted by a company is known as its fiscal year. A fiscal year that ends when business activities have reached their lowest point is called the natural business year. The work sheet is not considered a part of the formal accounting records. The work sheet is a working paper that accountants can use to summarize adjusting entries and the account balances for the financial statements. A work sheet heading is dated for a period of time. On the work sheet, the capital and drawing account balances are extended to the Balance Sheet columns. After the account balances have been extended from the Adjusted Trial Balance columns on the work sheet, the difference between the initial totals of the Balance Sheet debit and credit columns is Net Income or Net Loss. FALSE • • • • • • • • • • • • • • In a sole proprietorship, a closing entry for the drawing account may not be necessary. Journalizing and posting closing entries must be completed before financial statements can be prepared. During the closing process, some balance sheet accounts are closed and end the period with a zero balance. Closing entries are entered directly on to the work sheet. A post-closing trial balance contains only asset and liability accounts. A post-closing trial balance should be prepared before the financial statements are prepared. Balance Sheet are not considered real accounts. It is not necessary to post the closing entries to the general ledger. The accounting cycle begins with preparing an unadjusted trial balance. The unadjusted, adjusted, and final trial balances are prepared during the accounting cycle of a period. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. A net loss is shown on the work sheet in the credit columns of both the Income Statement columns and the Balance Sheet columns. If the totals of the Income Statement debit and credit columns of a work sheet are P22,750 and P25,000, respectively, after all account balances have been extended, the amount of the net loss is P2,250. The worksheet and the financial statements both require peso signs. • • • • • • • • • • • After Net Income or Loss is entered on the work sheet, the debit column total must equal the credit column total for the Balance Sheet pair of columns. Net income is shown on the work sheet in the Income Statement debit column and the Balance Sheet credit column. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account. In a periodic inventory system, the cost of goods purchased includes the cost of transportation-in. When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the Statement of Owner's Equity. The ending merchandise inventory for 2007 is the same as the beginning merchandise inventory for 2008. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement. • • • • • • • • • • • • • • The balance in the capital account on the worksheet will equal the amount presented in the balance sheet. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger. In a merchandise business, sales minus operating expenses equals net income. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. Merchandise inventory account is found on the income statement. Under the periodic inventory system, the cost of goods sold is equal to the beginning merchandise inventory plus the cost of goods purchased plus the ending merchandise inventory. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory. As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet. In a multi-step income statement the peso amount for income from operations is always the same as net income. Net sales is equal to sales minus cost of merchandise sold. Gross profit minus selling expenses equals net income. Transportation In is the amount paid by the company to deliver merchandise sold to a customer. The cost of merchandise inventory is limited to the purchase price less any purchase discounts. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. • • • • • • • • • • • • • • In the Merchandising Income Statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales. Other income and expenses are items that are not related to the primary operating activity. Transportation-in is considered a cost of purchasing inventory. As inventory is sold in many retail businesses, the largest expense is created. Under the perpetual inventory system, when a sale is made, both the retail and cost values are recorded. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made. Sales Returns and Allowances is a contra-revenue account. A seller may grant a buyer a reduction in selling price and this is called a sales allowance. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable. Merchandise Inventory normally has a debit balance. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. When the terms of sale are FOB shipping point, the buyer should pay the transportation charges. • • • • • • • • • • • • When merchandise that was sold is returned, a credit to sales returns and allowances is made. In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is one of the accounts debited to record the transaction. Sales Discounts is a revenue account with a credit balance. Retailers record all credit card sales as charge sales. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount. Discounts taken by the buyer for early payment of an invoice are credited to Cash Discounts by the buyer. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a credit to Purchase Discounts. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts. Sellers and buyers are required to record trade discounts. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. Merchandise is sold for P4,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of P250. If P800 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is P79. • • • • • • • TRUE If merchandise costing P2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of P100, is paid within 10 days, the amount of the purchases discount is P50. Comparing the merchandise entries for the seller and the buyer, the seller is required to record more entries for the same transactions than the buyer. The chart of accounts for a merchandise business would include an account called Delivery Expense. The seller may prepay the transportation costs even though the terms are FOB shipping point. Purchased goods in transit should be included in the ending inventory if the goods were shipped FOB shipping point. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. s • • • • • • FALSE If the buyer bears the transportation costs related to a purchase, the terms are said to be FOB destination. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to purchases. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. Closing entries for a merchandising business are not similar to those for a service business. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Transportation In are found on the balance sheet.