Accounting - Topic Two Test (2-6)

Cash basis accounting

Records a transaction only when cash is received or paid out.

Accrual basis accounting

Records a transaction when it happens regardless of when cash moves.

Difference between cash and accrual basis accounting

Cash: Records when money moves; simpler and shows actual cash flow. Accrual: Records when transactions happen; matches revenue and expenses to the correct period and gives a more accurate profit picture. Both track income and expenses

When revenue is earned and an expense is incurred under accrual accounting

Revenue is earned when goods are sold or a service is delivered. An expense is incurred when goods or services are used. Record them in the period they relate to

Why accrual basis gives a more accurate measure of profit

It matches revenue earned with expenses incurred in the same reporting period

Why profit is not the same as cash in the bank

Profit is revenue earned minus expenses incurred during a period

Accounting equation

Assets = Liabilities + Owner’s Equity

Assets

Resources owned by the business that have value and can provide future benefits

Liabilities

Debts or obligations owed to others

Owner’s equity

The owner’s claim on the business after liabilities are paid. It includes capital invested and retained earnings.

Classifying assets

liabilities and owner’s equity

Effect of a transaction on the accounting equation

A transaction changes one or more elements