What is shareholders equity?
It is calculated as the net assets of the corporation (Assets – Liabilities). It usually
comprises of Common Shares or Share Capital and Retained Earnings (in later courses
will see items such as Contributed Surplus or Accumulated Other Comprehensive Income).
Also the claims of the shareholders on the business.
What is the journal entry to collect cash on account? What are its effects on the financial
statements?
Dr. Cash
Cr. Accounts Receivable
It is simply converting one type of current asset into another type of current asset. It does
not change the Assets, Liabilities, or Equity of the business. It does not affect the income
statement or Statement of Retained Earnings. It does not affect the current ratio or quick
ratio.
List the steps of the accounting cycle?
Journal Entries, Posting to Ledger, Trial Balance, Adjusting Entries, Adjusted Trial
Balance.
The purchase of office supplies on account would have what effect on the financial
statements?
Dr. Office Supplies
Cr. Office Supplies Payable
A current asset and a current liability increases. Usually liquidity measured through
current ratio or quick ratio will decrease.
What is an accrued liability and list examples?
Expenses incurred but not yet paid for or recorded and thus need adjusting entries.
Examples include: advertising payable, rent payable, utilities payable, salaries payable,
insurance payable.
What is the effect on financial statements when you collect on account and subsequently
pay an account owing?
Dr. Cash
Cr. Accounts Receivable
Dr. Payable
Cr. Cash
Thus the cumulative effect is a decrease in an asset and a liability. The first entry increases
and decreases a current asset. The second entry decreases a current asset and decreases a
current liability.
The concept that allows the recording of a wastepaper basket as an expense rather than an
asset?
Materiality
Shown below is the adjusted trial balance of Kisumu Inc. as
of December 31, 2018
Account Debit Credit
Cash 25,000 Current Asset
Accounts Receivable 40,000 Current Asset
Marketable Securities 15,000 Current Asset
Notes Receivable- Due 5-31-2019 18,000 Current Asset
Prepaid Insurance 12,000 Current Asset
Equity Investments 75,000 Long Term Investments
Debt Investments 20,000 Long Term Investments
Inventory 65,000 Current Asset
Accounts Payable 15,000 Current Liability
Notes Payable: Due 15-07-2019 60,000 Current Liability
Notes Payable: Due 15-07-2020 30,000 Long Term Liability
Common Shares 60,000 Shareholders’ Equity
Mortgage Payable 65,000 Long Term Liability
Bonds Payable 115,000 Long Term Liability
Income Taxes Payable 65,000 Current Liability
Sales 225,000 Revenue
Cost of Goods Sold 135,000 Expense
Salaries Expense 40,000 Expense
Rent Expense 15,000 Expense
Insurance Expense 10,000 Expense
Dividends Declared 4,000 Statement of Retained Earnings
Amortization Expense 20,000 Expense
Retained Earnings 70,000 Beginning Balance
Land 170,000 Property, Plant, & Equip
Buildings 125,000 Property, Plant, & Equip
Dividend Revenue 16,000 Other Revenue
Accumulated Amortization- Buildings 80,000 Contra Asset
Patents 5,000 Intangible Asset
Trademarks 7,000 Intangible Asset
Total 801,000 801,000
Calculate:
Current Assets: $175,000
Current Liabilities: $140,000
Net Income: $21,000
Retained Earnings: $87,000
Prepare the journal entries for the following transaction and state the effect on the
financial statements:
Purchase Machinery by issuing a note payable
Dr. Machinery
Cr. Note Payable
Increases an asset and a liability