Principles, Forms, and Financial Statements in Accounting

What is the Separate Entity Assumption?

The principle that a business's financial activities must be kept separate from those of its owners or other businesses.

What is the Cost Principle?

The accounting principle that assets should be recorded and reported at their original purchase cost.

What is the Revenue Recognition Principle?

The principle that revenue should be recognized when it is earned and realizable, regardless of when cash is received.

What is the Matching Principle?

The accounting principle that expenses should be matched with the revenues they help to generate in the same period.

What is the Time Period Assumption?

The assumption that a business's financial activities can be divided into specific time periods for reporting purposes.

What is the Conservatism Principle?

The principle that accountants should choose methods that minimize the overstatement of income or assets.

What is the Materiality Principle?

The principle that financial reporting should disclose all information that could influence the decision of users.

What is the Going Concern Assumption?

The assumption that a business will continue to operate indefinitely unless there is evidence to the contrary.

What is the Cost-Benefit Principle?

The principle that the benefits of providing financial information should outweigh the costs of providing it.

What is the Unit of Measure Assumption?

The assumption that financial transactions are recorded in a consistent monetary unit, typically the currency of the country.

What is a sole proprietorship?

A business owned and operated by a single individual, where there is no legal distinction between the owner and the business.

What is a partnership?

A business structure where two or more individuals share ownership and the responsibilities of managing the business.

What is a corporation?

A legal entity that is separate from its owners, providing limited liability protection to its shareholders.

What is financial accounting?

The field of accounting focused on the preparation of financial statements for external users.

What is managerial accounting?

The field of accounting that provides information for internal decision-making purposes.

What are the key differences between financial and managerial accounting?

Financial accounting focuses on external reporting and compliance, while managerial accounting focuses on internal management and decision-making.

What is an asset?

A resource owned by a business that is expected to provide future economic benefits.

What is a liability?

An obligation of a business that it is required to pay in the future.

What is equity?

The residual interest in the assets of a business after deducting liabilities; essentially the owner's claim on the business.

What is revenue?

The income generated from normal business operations, typically from the sale of goods or services.

What is an expense?

The costs incurred by a business in the process of earning revenue.

What are operating activities?

Business activities that relate to the core operations of the company, including sales and expenses.

What are investing activities?

Activities that involve the acquisition and disposal of long-term assets and investments.

What are financing activities?

Activities that result in changes in the size and composition of the equity capital and borrowings of the entity.

What does the income statement report?

It reports a company's revenues and expenses over a specific period, resulting in net income or loss.

What does the statement of retained earnings report?

It reports the changes in retained earnings over a specific period, including net income and dividends paid.

What does the balance sheet report?

It reports a company's assets, liabilities, and equity at a specific point in time.

What does the statement of cash flows report?

It reports the cash inflows and outflows from operating, investing, and financing activities over a specific period.

What is the accounting equation?

The equation that represents the relationship between assets, liabilities, and equity: Assets = Liabilities + Equity.

What is a fiscal year?

A one-year period that companies use for financial reporting and budgeting, which may not align with the calendar year.

What is an interim period?

A financial reporting period shorter than a full fiscal year, often a quarter or a month.

What is an operating cycle?

The average time it takes for a company to purchase inventory, sell it, and collect cash from customers.

What is liquidity?

The ability of a company to meet its short-term obligations using its most liquid assets.

What is double-entry accounting?

An accounting system that records each transaction in at least two accounts, ensuring the accounting equation remains balanced.

What is the accounting cycle?

The series of steps that companies follow to record and process financial transactions and prepare financial statements.

When do we record a transaction?

A transaction is recorded when it occurs, which is typically when an economic event takes place.

How do you know if something is an asset or expense?

An asset provides future economic benefits, while an expense represents a cost incurred to generate revenue.

How do transactions affect the accounting equation?

Transactions can increase or decrease assets, liabilities, or equity, but the equation must always remain balanced.

What is a debit?

An entry on the left side of an account that increases assets and expenses or decreases liabilities and equity.

What is a credit?

An entry on the right side of an account that increases liabilities and equity or decreases assets and expenses.

What is a normal balance?

The expected balance of an account, which is a debit for assets and expenses and a credit for liabilities and equity.

What is a chart of accounts?

A listing of all accounts used by a business, organized by categories such as assets, liabilities, equity, revenues, and expenses.

What is a general ledger?

A complete record of all financial transactions over the life of a company, organized by account.

What is a T-account?

A visual representation of an account that shows debits on the left and credits on the right.

What are dividends?

Payments made by a corporation to its shareholders, typically from profits.

What are equity components in a corporation?

The parts of equity include common stock, preferred stock, additional paid-in capital, and retained earnings.

What are the debit/credit rules?

Debits increase assets and expenses, while credits increase liabilities and equity; the opposite is true for decreases.

What is the general journal?

A chronological record of all transactions of a business, including date, accounts affected, and amounts.

What is posting?

The process of transferring information from the general journal to the individual accounts in the general ledger.

What is a journal entry?

A record of a financial transaction that includes the date, accounts affected, and amounts debited and credited.

How does the Matching Principle apply?

It ensures that expenses are recorded in the same period as the revenues they help to generate, providing a clearer picture of profitability.

What is a trial balance?

A report that lists all the balances of the accounts in the general ledger to ensure that debits equal credits.

What are trial balance limitations?

A trial balance may not detect all errors, such as those that do not affect the equality of debits and credits.

What are the steps in the accounting processing cycle?

The steps include identifying transactions, recording them in journals, posting to ledgers, preparing trial balances, and creating financial statements.

What is cash basis accounting?

An accounting method that recognizes revenue and expenses only when cash is exchanged.

What is accrual basis accounting?

An accounting method that recognizes revenue when earned and expenses when incurred, regardless of cash flow.

Which businesses use cash basis accounting?

Typically, small businesses and sole proprietorships with simpler financial transactions.

Which businesses use accrual basis accounting?

Larger businesses and those with more complex transactions, often required by GAAP.

What are the 3 matching methods?

The three methods are direct matching, systematic allocation, and immediate recognition.

How do you convert cash net income to accrual net income?

Adjust for changes in accounts receivable, accounts payable, and inventory.

How do you convert accrual net income to cash net income?

Adjust for non-cash expenses and changes in working capital accounts.

What is the straight-line depreciation formula?

Depreciation Expense = (Cost - Salvage Value) / Useful Life.

What is book value?

The value of an asset as recorded on the balance sheet, calculated as cost minus accumulated depreciation.

What is the interest formula?

Interest = Principal × Rate × Time.

Why do we need adjusting entries?

To ensure that revenues and expenses are recorded in the correct accounting period, adhering to the accrual basis of accounting.

What are the effects of missing adjusting entries?

Financial statements may be inaccurate, leading to misrepresentation of a company's financial position.

What are the two categories of adjusting entries?

Deferrals and accruals.

What is a deferral?

An adjustment for an expense or revenue that has been recorded but not yet incurred or earned.

What is an accrual?

An adjustment for an expense or revenue that has been incurred or earned but not yet recorded.

How do you prepare adjustments?

Identify accounts that need adjustments, determine the amounts, and record the necessary journal entries.

What is an adjusted trial balance?

A trial balance prepared after adjusting entries have been made, ensuring that debits equal credits.

What are the full steps of the accounting cycle?

1. Identify transactions, 2. Record in journals, 3. Post to ledgers, 4. Prepare trial balance, 5. Adjust entries, 6. Prepare financial statements, 7. Close accounts.

What is a worksheet?

A tool used in the accounting cycle to organize and adjust account balances before preparing financial statements.

How are financial statements prepared from a worksheet?

By transferring adjusted balances from the worksheet to the respective financial statement formats.

What are closing entries?

Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts.

What is the purpose of the income summary?

To summarize the revenues and expenses for the period before closing them to retained earnings.

How to close with net income?

Debit the income summary account and credit retained earnings for the amount of net income.

How to close with net loss?

Credit the income summary account and debit retained earnings for the amount of net loss.

What is a post-closing trial balance?

A trial balance prepared after closing entries have been made, ensuring that all temporary accounts have been closed.