Accounting exam 1

What is Accounting?

The process of identifying, recording, and communicating financial information.

Financial Accounting

Accounting focused on external users such as investors and creditors, following GAAP.

Managerial Accounting

Accounting focused on internal users, primarily management, for decision-making purposes.

Operating Activities

Day-to-day transactions involving revenue and expenses.

Investing Activities

Transactions related to buying and selling long-term assets.

Financing Activities

Transactions with lenders and stockholders, including loans and issuing stock.

Advantages of Corporations

Limited liability, easy transfer of ownership, and ability to raise capital.

Disadvantages of Corporations

Double taxation and increased regulations.

Income Statement

A financial statement that reports revenues and expenses to determine net income.

Statement of Stockholders’ Equity

A financial statement showing changes in equity, including common stock and retained earnings.

Balance Sheet

A financial statement that shows a company's financial position, summarizing assets, liabilities, and equity.

Statement of Cash Flows

A report outlining cash inflows and outflows from operating, investing, and financing activities.

GAAP

Generally Accepted Accounting Principles, the foundation for financial reporting.

FASB

Financial Accounting Standards Board, the entity that establishes GAAP.

SEC

Securities and Exchange Commission, which regulates financial markets.

Independent Auditor

A professional who ensures financial statements are free from material misstatements.

Qualitative Characteristics of GAAP

Fundamental characteristics include relevance and faithful representation.

Enhancing Characteristics of GAAP

Include comparability, verifiability, timeliness, and understandability.

Economic Entity Assumption

A GAAP assumption that a business's transactions are separate from its owners' personal transactions.

Monetary Unit Assumption

A GAAP assumption that financial transactions are recorded in a stable currency.

Accrual Basis Accounting

A method of accounting where revenue is recognized when earned and expenses when incurred.

Revenue Recognition Principle

Revenue is recorded when it is earned, not necessarily when cash is received.

Expense Recognition Principle

Expenses are recorded when incurred, adhering to the matching principle.

Adjusting Journal Entries

Entries made to ensure that all revenues and expenses are recorded in the correct accounting period.

Depreciation

The systematic allocation of the cost of an asset over its useful life.

Adjusted Trial Balance

A worksheet that ensures debits equal credits after adjustments have been made.

Classified Balance Sheet

A balance sheet that categorizes assets and liabilities into current and long-term.

Closing Process

The procedure of closing temporary accounts to Retained Earnings at the end of an accounting period.

Temporary Accounts

Accounts such as revenues, expenses, and dividends that are closed at the end of each accounting period.

Permanent Accounts

Accounts that carry forward their balances from one accounting period to the next.

Post-Closing Trial Balance

A balance that ensures only permanent accounts remain open after closing entries.