Accounting Concepts and Financial Statements Practice Flashcards

This set of vocabulary flashcards covers fundamental accounting definitions, financial statement components, and the core principles of the accounting cycle as presented in the lecture notes.

Accounting

The systematic recording, reporting, and analyzing of the financial transactions of a business.

Operating Activities

Business activities involving revenues earned from the sale of products such as sales, service, and interest revenue, as well as expenses like cost of goods sold and marketing.

Investing Activities

The purchase of resources a company needs to operate, such as computers, delivery trucks, furniture, and buildings.

Financing Activities

Activities involving the primary sources of outside funds, including borrowing money (liabilities) and issuing shares of stock for cash.

Assets

Resources owned by a business that provide probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

Liabilities

Claims by creditors against the assets of a company representing amounts owed.

Creditors

The party to whom amounts of money are owed by a business.

Dividends

Payments made by a company to its stockholders.

Net Income

The result that occurs when total revenues exceed total expenses.

Net Loss

The result that occurs when total expenses exceed total revenues.

Cash Basis Accounting

An accounting method that recognizes revenues when collected rather than when earned and expenses when paid rather than incurred.

Accrual Basis Accounting

A method based on Generally Accepted Accounting Principles ($GAAP$) that records revenue when it is earned and expenses when they are incurred.

Basic Accounting Equation

The relationship defined as $Assets = Liabilities + Equity$.

Current Assets

Assets expected to be converted to cash, sold, or used up within the next accounting period, usually defined as $1$ year.

Current Liabilities

Liabilities that will require the use of current assets or the creation of other current liabilities at maturity.

Retained Earnings Equation

The calculation for ending equity expressed as $Beginning RE + Revenues - Expenses - Dividends = Ending RE$.

Revenues

Inflow of assets or settlement of liabilities from delivery of goods or services related to a company’s central or core operations.

Expenses

Outflow or consumption of assets or incurrence of liabilities from delivery of goods or services related to a company’s central or core operations.

Form 10K

The annual report that publicly traded $U.S.$ companies must provide to shareholders and file with the $SEC$.

Relevance

A qualitative characteristic of financial information meaning it makes a difference in a decision.

Reliability

A qualitative characteristic of financial information meaning it is verifiable, free from bias, and possesses representational faithfulness.

Entity Assumption

The assumption that the assets and liabilities of a reporting entity are kept separate from those of the owners.

Going Concern

The assumption that an entity will not be liquidated in the near future.

Historical Cost

The principle that assets should be recorded at their historical acquisition price.

Revenue Recognition Principle

The principle that revenue is recognized when the earnings process is substantially completed, generally when goods and services are delivered.

Matching Principle

The principle that expenses incurred to generate revenues should be recorded in the same period as those revenues.

Materiality

An accounting constraint stating that only transactions with amounts large enough to make a difference are considered material.

Conservatism

The constraint that directs accountants, when in doubt, to understate assets, overstate liabilities, accelerate recognition of losses, and delay recognition of gains.

General Journal

Known as the book of original entry, it records transactions in chronological order.

General Ledger

The entire group of accounts maintained by a company.

Trial Balance

A list of accounts and their balances at a given time used to prove that total debits equal total credits.

Adjusting Entries

Entries required every time a company prepares financial statements to ensure revenue and expense recognition principles are followed; they never include cash.

Prepaid Expenses

Expenses paid in cash and recorded as assets before they are used or consumed.

Unearned Revenues

Cash received before services are performed, which creates a liability.

Accrued Revenues

Revenues for services performed but not yet received in cash or recorded.

Accrued Expenses

Expenses incurred but not yet paid in cash or recorded.

Chart of Accounts

A listing of all accounts used by a company to record financial transactions.

Debit

An entry made on the left side of an account.

Credit

An entry made on the right side of an account.

Closing Entries

The process of transferring temporary account balances to the permanent stockholders’ equity account, Retained Earnings, at the end of an accounting period.