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Accounting
50 flashcards
The main purpose of accounting is to record, classify, summarize, and interpret financial information about a business entity to allow for informed decision making.
Assets are resources owned or controlled by a company that have future economic benefits. Examples include cash, accounts receivable, inventory, equipment, and buildings.
Liabilities are present obligations or debts owed by a company that must be paid or settled in the future. Examples include accounts payable, loans, mortgages, and bonds payable.
The accounting equation is Assets = Liabilities + Owners' Equity. It shows that a company's total assets are financed by either liabilities or owners' equity.
The double-entry system requires that every transaction be recorded in at least two accounts, with one account being debited and the other credited, keeping the accounting equation in balance.
The main financial statements are the income statement, balance sheet, statement of cash flows, and statement of changes in equity.
Revenues are inflows of assets from selling goods or services. Expenses are outflows or using up of assets in the process of generating revenues.
Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid. This matches revenues to related expenses.
The matching principle states that expenses should be matched and recorded in the same accounting period as the revenues they helped to generate.
Depreciation is the systematic allocation of the cost of a long-term tangible asset over its useful life to account for wear and tear.
Accounts receivable are amounts owed to a company by customers for goods or services provided on credit.
Accounts payable are amounts owed by a company to its suppliers or creditors for goods or services received on credit.
A trial balance lists all accounts and their debit or credit balances to test the mathematical equality of debits and credits after posting entries to the accounts.
For accounts to be in balance means that the sum of the debit entries equals the sum of the credit entries for all accounts in the double-entry system.
The cost principle states that assets should be recorded at their actual cost, which includes all amounts incurred to acquire the asset and make it ready for use.
GAAP (Generally Accepted Accounting Principles) are standards followed in the US, while IFRS (International Financial Reporting Standards) are global accounting standards designed for cross-border comparability.
An adjusting entry is a journal entry made at the end of an accounting period to record unrecognized income or expenditure for that period.
Inventory refers to a company's goods that are available for sale or materials used to produce goods for sale in the ordinary course of business.
Common inventory valuation methods include FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted average cost method.
The revenue recognition principle states that revenues should be recorded when they are realized or realizable and have been earned, regardless of when cash is received.
The time period assumption states that the economic life of a business can be divided into artificial time periods for the purpose of preparing financial statements.
A current asset is an asset that is expected to be converted into cash or used up within one year in the normal operating cycle of the business.
An auditor examines a company's financial statements and records and provides an opinion on whether the statements are fairly stated and follow applicable accounting standards.
Debit entries are recorded on the left side and represent an increase in assets or expenses. Credit entries are on the right side and represent an increase in liabilities, revenue or equity.
Retained earnings are the cumulative net income or profit after dividends that a company reinvests or retains in the business instead of paying out to shareholders.
The statement of cash flows reports a company's cash inflows and outflows over a period, categorized into operating, investing and financing activities.
Goodwill is an intangible asset that represents the excess purchase price paid for a company over the fair value of its identifiable net assets.
Working capital is the difference between a company's current assets and current liabilities, representing funds available for operations.
A budget is a financial plan that estimates a company's or individual's future revenues and expenditures over a specific period.
A bank reconciliation is the process of comparing a company's cash account balance in its books against the bank's records, accounting for timing differences.
Cash basis accounting records revenues and expenses when cash is received or paid. Accrual basis accounts for revenue when earned and expenses when incurred.
A contra account is an account that offsets or decreases the balance of another account on the same side of the accounting equation.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is used as a measure of a company's operating profitability.
Materiality refers to the importance of an amount, transaction, or discrepancy that could influence the decisions of financial statement users.
Accounts receivable are amounts owed for goods/services on open accounts. Notes receivable represent formalized written promises to receive cash in the future.
The going concern assumption states that a business will continue to operate indefinitely into the foreseeable future with no intention of liquidating.
A cash flow statement reports a company's cash inflows and outflows over an accounting period, showing sources and uses of cash from operations, investing, and financing.
The conceptual framework is a theory that outlines the objectives and fundamental principles of financial reporting that guide the development of accounting standards.
Book value refers to the value of an asset as recorded on the balance sheet. Market value is the current worth or price an asset could sell for on the open market.
The general ledger is the main accounting record that contains all the accounts for recording transactions relating to a company's assets, liabilities, revenue and expenses.
An economic entity refers to a distinct unit, such as a business or individual, whose accounts and activities are separate from other units for accounting purposes.
Key qualities include relevance, reliability, comparability, consistency, understandability, timeliness and materiality.
Key principles include the cost principle, accrual basis, going concern, economic entity, and periodicity assumptions.
A related party transaction involves a transfer of resources between a company and entities or individuals related through control, ownership or management.
Window dressing refers to manipulative accounting practices that inflate revenues and profits temporarily to improve the appearance of financial statements.
The matching principle requires that expenses be matched and recorded in the same period as the revenues they helped generate.
Operating expenses relate to the primary revenue generating activities of a business. Non-operating expenses do not directly relate to operations.
Realization is the accounting principle that revenue should only be recorded when the earnings process is substantially complete and cash or receivables have been received.
A closing entry transfers the balances of temporary accounts like revenues and expenses to permanent equity accounts at the end of an accounting period.
The accounting cycle refers to the sequence of steps taken to analyze, record, classify, summarize and report transactions in a given period.