FABM Finals Reviewer: Unit 9 & 10

• Rules of debit and credit are the primary and fundamental principles of the modern double-entry accounting system
• For Statement of Comprehensive Income accounts:

  • Increases in Revenues are debited
  • Increases in Expenses are debited
• In double-entry accounting, debits must equal the credit sides of the transactions
• Source documents are necessary to support the recording of financial transactions of the business
• A common source document for service businesses is the Official Receipt
• Posting is the process of transferring transactions from the general journal to the general ledger
• General ledger is a record of accounts that classifies and summarizes transactions from the general journal
• A Chart of Accounts lists all accounts with their corresponding account numbers
• The T-account is the simplest form of account, serving the same purpose as the General Ledger but with less information
• Adjusting entries are classified as: non-cash expenses, accruals, and deferrals
• Accruals:

  • Accrued expenses are expenses already incurred but not yet paid
  • Accrued revenues are income already earned but not yet received
• Deferrals:

  • Prepayments (Deferred Expenses) are expenses already paid but not yet used
  • Deferred Revenue are income already received but not yet earned
• Accrued Expenses:

  • Expenses that have been incurred by the business but are yet to be recorded and yet to be paid
• Deferrals:

  • Involve advance payments made by the company for future expenses or advance payments of a company’s client for future services
• Two ways to record deferrals: Balance Sheet method and Income Statement method
• Prepayments:

  • When a business pays expenses in advance
  • Also known as Deferred Expenses or Prepaid Expenses
  • Examples: Insurance, administrative, and rent payments
• Prepayments are considered assets

  • Become an expense when they are already consumed or have expired
• Deferred Revenue or Unearned Revenue:

  • When clients make advance payments to the business for contracts involving future services
• Income Statement method is an alternative way to record prepayments and deferred revenue
• In recording prepayments under the Income Statement method, transactions are initially recorded as expenses rather than prepaid expenses
• Adjusted Trial Balance lists the updated general ledger balances, except for the owner's capital account, following the adjustments made by the accountant
• The Income Summary account is used to close the revenue and expense accounts
• Merchandising business buys tangible goods and resells them to customers
• Operating cycle begins with purchasing inventories and ends by collecting cash from selling the goods
• Merchandise refers to goods held for sale to customers in the ordinary course of business
• Merchandise can be classified into convenience, impulse, electronic and household, and specialized
• Sales and customer retention are considered in everyday operations of a merchandising business
• Sales is revenue derived from the selling of goods
• Sales Returns and Allowances:

  • Debit to record customers' returns or allowances for returns
  • Occurs when customers return products due to defects or change of preference
• Sales Returns: customers return goods to the seller for credit or refund

  • Sales Allowances: seller allows a deduction from the selling price when customers are dissatisfied
• Purchases refer to the amount of goods bought to be sold during the current accounting period
• Purchase Returns and Allowances:

  • Record merchandise returned by the company to its suppliers
  • How buyers see a sales return recorded by their supplier
• Purchase Discount:

  • Record early payments by the company to suppliers of merchandise
  • How buyers see a supplier's sales discount given to them
• Cost of Goods Sold or Cost of Sales:

  • Represents the actual cost of merchandise sold during the year
• Merchandise Inventory:

  • Amount of goods bought by the company for selling to customers
• Special journals are designed to record specific types of transactions of a similar nature
• Purchase Journal:

  • Used to record any merchandise bought on account
  • Journal entries are recorded based on the invoice obtained from the supplier on the purchase date
• Cash Receipts Journal:

  • Used to record sales of merchandise through cash and other money received from other transactions
• Cash Disbursement Journal:

  • Used to record payment of checks for additional inventory or other purchases made by the business
• Inventories are merchandise items purchased by merchandising businesses and held for resale to customers

  • The cost of unsold merchandise is reported in the Merchandise Inventory account
  • Reported as a current asset on the company's balance sheet