Accounting and Finance

5101 Business Praxis: Section 1

Fixed Asset

A tangible asset that is generally used to generate profit and will not be turned into cash within the year.

Examples: property, plant, equipment/

Variable Asset

An asset that may be transformed into cash sooner than one year and will include the inventory of the actual product.

Example: accounts receivable

Intangible Asset

A non-physical asset that has or produces value and is owned.

Examples: logos, trademarks, patents.

Liquidity

The ease with which an asset can be converted into cash without significantly affecting its market price.

Equity

Shows what the owner has contributed in addition to the retained earnings. Or simply put, ownership minus debt is equity.

Depreciation

The allocation of the cost of a tangible asset over its useful life, reflecting the loss of value as it ages.

Cash Flow

The movement of money in and out of a business or individual, indicating liquidity and financial health over a specific period.

Generally Accepted Accounting Principles (GAPP)

A set of standards and rules for how accounting figures and statements, such as income statements, balance sheets, and cash flow statements are prepared.

Financial Accounting Standards Board (FASB)

Who issues GAAP?

Cash Accounting

Accounting method where transactions are counted when money is received or expenses are paid out, regardless of when an item was ordered or delivered.

Accrual Accounting

Records income/expenses when they are earned or incurred, regardless of payment timing

What is the fundamental accounting equation?

Assets = Liabilities + Owners’ Equity

What are the three types of assets?

Fixed, Current (Variable), and Intangible

Why is GAAP important?

It standardizes financial reporting so investors can compare companies

Which businesses use cash vs. accrual?

Small businesses often use cash; large or GAAP-compliant businesses use accrual

What is the accounting cycle?

A series of steps to record and process financial transactions from start to finish

What is the first step of the accounting cycle?

Identify transactions by collecting source documents (receipts, checks, invoices, bank statements)

What comes after collecting source documents?

Analyze the transactions to determine their effect on accounts

What is the third step of the accounting cycle?

Record the transactions in journals (chronological order, double-entry)

What is the purpose of posting to ledgers?

To organize transactions into individual accounts (assets, expenses, etc.)

What is an unadjusted trial balance?

A list of all account balances before adjustments

What are adjusting entries?

Journal entries made to update accounts for accrued and deferred items

What comes after adjusting entries?

Prepare an adjusted trial balance

Which financial statements are prepared after the adjusted trial balance?

Income statement, balance sheet, statement of cash flows

What are closing entries?

Entries that reset temporary accounts (like revenues and expenses) to zero for the new period

What is the final step of the accounting cycle?

Prepare a post-closing trial balance