Chapter 1 & 2 Accounting Exam

Revenue Recognition Principle

revenue is recognized when good or services are provided to customers and at the amount expected to be received from the customer

Business Entity Assumption (entity concept)

a business is accounted for separately from other business entities and its owner

Going Concern Assumption

accounting information presumes that the business will continue operating instead of being closed or sold

Cost Principle (measurement principle)

accounting information is based on actual cost; cost is measured on a cash/cash-to-equal basis

Matching Principle (expense recognition principle)

a company records the expenses it incurred to generate the revenue reported

Full Disclosure Principle

a company reports the details behind financial statements that would impact users’ decisions

Assets

resources a company owns that are expected to yield future benefits

Liabilities

creditor’s claims on assets (things you owe)

Equities (capital)

owner’s claim on assets; the sum of assets subtracted from liabilities

Revenues

money that a company earns from sale of products or services

Expenses

cost of providing products and services to customers

Sole Proprietorship

1 owner

No additional business income tax

The owner is responsible for proprietorship debt

Not a separate legal entity

The business ends with owner death or choice

Partnership

2 or more owners

No additional business income tax

Partners are jointly responsible

Not a separate legal entity

Business ends with partner death or by choice

Corporation

1 or more (shareholders)

Additional corporate income tax

Shareholders not responsible for debt

Separate legal entity with same responsibilities

Indefinite business life

Limited Liability Company (LLC)

1 or more owners (members)

No additional business income tax

Members not liable for debts

Separate legal entity with same responsibilities

Indefinite business life

Financial Accounting

focuses on the needs of external users and must follow GAAP

Managerial accounting

focuses on the needs of internal users

Internal user

directly manage the organization

External users

do not directly run the organization and have limited access to the accounting information (gets info from general-purpose financial statements)

Opportunity

must be able to commit fraud with low risk of getting caught

Pressure

must feel pressure or have incentive to commit fraud

Rationalization

justifies fraud/ignores criminal nature

Income Statement

Revenue - Expenses = Net Income

Statement of Owner’s Equity

Beginning capital + owner’s investments + net income - withdrawals = end capital

Balance sheet

assets = liabilities + equity

Statement of Cash Flows

(+/-) Operating cash flows (-/+) Investing cash flows (-/+) Financing Cash flows = Change in cash

Type: asset

Normal Balance: debit

Statement: balance sheet

Prepaid Insurance

Type: liability

Normal Balance: credit

Statement: balance sheet

Magazine subscription collected in advance

Type: withdrawal

Normal Balance: debit

Statement: balance sheet/ statement of owner’s equity

C. David, Withdrawals

Type: revenue

Normal balance: credit

Statement: income statement

sales

Type: Capital

Normal Balance: Credit

Statement: balance sheet

C. Pen, Capital

Type: expense

Normal Balance: debit

Statement: Income statement

Utilities Expense

Securities and Exchange Commission

SEC stands for

Chief executive officer

CEO stands for

Financial Accounting Standards Board

FASB stands for

International Accounting Standards Board

IASB stands for

International Financial Reporting Standards

IFRS stands for

American Institute of Certified Public Accountants

AICPA

Generally Accepted Accounting Principles

GAAP

revenue - expenses

net income equals

net income/average total income

return on assets equals

total liabilities / total assets

debit ratio equals

The date of the transaction

the title of accounts debited and the amount

the title of accounts credited and the amount

a brief explanation of the transaction below the line of entry

A journal entry requires