D102 Financial Accounting - Set 1 - Part 1

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The owner's equity section of a balance sheet includes retained earnings, which represent cumulative earnings that the company has not distributed as dividends but retained for future use.

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The balance sheet reports the financial position of a company at a specific point in time, showing the assets, liabilities

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Gross profit is calculated by subtracting the cost of goods sold from total sales, showing the profit before operating expenses.

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A multiple-step income statement provides a breakdown of gross profit, which is not presented in a single-step income statement.

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Financing activities include transactions where cash is obtained from or repaid to owners or creditors, such as issuing stock or repaying loans.

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Investing activities involve the purchase and sale of long-term assets like machinery, buildings, or equipment.

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Issuing new stock is considered a financing activity, as it involves generating funds by offering shares of the company to investors.

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Expenses are recorded as a debit because they reduce equity by increasing the total costs of a company.

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After closing entries are made, only permanent accounts, like retained earnings, appear on the post-closing trial balance.

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The percentage of accounts receivable method estimates bad debts based on a percentage of the outstanding accounts receivable balance.

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Unearned revenue is money collected in advance of providing goods or services, and it is recorded as a liability until earned.

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Nominal accounts, such as sales revenue, are temporary accounts that are closed to retained earnings at the end of an accounting period.

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Debits increase asset accounts, and credits decrease liability accounts, following the double-entry accounting system.

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When inventory is purchased, it is debited to the inventory account, and the amounts paid are credited to cash and accounts payable.

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Revenue is recorded as a credit because it increases equity through income generation.

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Payroll tax expense is debited because it increases the expense account, reflecting the company's obligation to pay payroll taxes.

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Accounts payable is credited to show an increase in the company's obligation to pay a liability in the future.

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The matching principle ensures that all costs and expenses incurred to generate revenue are recorded in the same accounting period as the related revenue.

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Sales revenue is a nominal account, which means it is closed to retained earnings at the end of the accounting period.

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The post-closing trial balance only includes real (permanent) accounts after nominal (temporary) accounts have been closed.