Study Guide

Accounting

The process of planning, recording, analyzing, and interpreting financial information.

Accounting System

A planned process designed to compile financial data and summarize the results in accounting records and reports.

Financial statements

Financial reports that summarize the financial condition and operations of a business.

Net Worth Statement

A formal report that shows what an individual owns, what an individual owes, and the difference between the two.

Asset

Anything of value that is owned.

Liability

An amount owed.

personal net worth

The difference between personal assets and personal liabilities.

equity

the difference between assets and liabilities.

ethics

The principles of right and wrong that guide an individual in making decisions.

Business ethics

The use of ethics in making business decisions.

service business

A business that performs an activity for a fee.

propriertorship

A business owned by one person.

Business Plan

A formal written document that describes the nature of a business and how it will operate.

GAAP

Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities.

equities

Financial rights to the assets of a business.

Owner's equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets.

accounting equation

The equation showing the relationship among assets, liabilities, and owner's equity.

transaction

any business activity that changes assets, liabilities, or owner's equity.

account

A record that summarizes all the transactions pertaining to a single item in the accounting equation.

Account title

the name given to an account.

account balance

the difference between the increases and decreases in an account.

capital account

an account used to summarize the owner's equity in a business.

creditor

a person or business to whom a liability is owed.

revenue

an increase in equity resulting from the sale of goods or services.

sale on account

a sale for which payment will be received at a later date.

expense

the cost of goods or services used to operate a business.

withdrawls

Assets taken from the business for the owner's personal use.

t/f
accounting is the language of business.

True

t/f
A creditor would favor a positive net worth.

True

t/f
The principles of right and wrong that guide an individual in making personal decisions is called business ethics.

False

t/f
Keeping personal and business records separate is an application of the business entity concept.

True

t/f
Generally Accepted account Principles, GAAP, allows for flexibility in reporting.

False

t/f
Recording business costs in terms of hours required to complete projects is an application of the unit of measurement concept.

False

t/f
Assets such as cash and supplies have value because they can be used to acquire other assets or be used to operate a business.

True

t/f
The relationship among assets, liabilities, and owner's equity can be written as an equation.

True

t/f
The accounting equation does not have to be in balance to be correct.

False

t/f
When a company pays insurance premiums in advance to an insurer, it records the payment as a liability because the insurer owes future coverage.

False

t/f
When items are bought and paid for later, this is referred to as buying on account.

True

t/f
When cash is paid on account, a liability is increased.

False

t/f
When cash is received from a sale, the total amount of both assets and owner's equity is increased.

True

t/f
The accounting concept Realization of Revenue is applied when revenue is recorded at the time goods or services are sold.

True

t/f
When cash is paid for expenses, the business has more equity.

False

t/f
If two amounts are recorded on the same side of the accounting equation will no longer be in balance.

False

t/f
When a company receives cash from a customer for a prior sale, the transaction increases the cash account balance and increased the accounts receivable balance.

False

t/f
A withdrawal decreases owner's equity.

True