Exam I - Intermediate

Accounting Principles and Assumptions

Historical Cost Principle

is the original cost or value of an item at the time of the transaction for a business.

Business Entity Assumption

states that a business enterprise is legally and economically separate.
A business is a separate economic unit from the owner's personal assets and other businesses.

Going Concern Assumption

states that a company will continue to operate indefinite period of time as long as there is no evidence contrary to the economic growth and survival of the company, such as the business going sold or going bankrupt.

Expense Recognition Principle

states that expenses incurred during a specific period should be matched together with the revenue earned in the proper period.
Determines the appropriate period of expenses incurred to generate revenue for a business.
Expenses are recorded when:

  1. They are matched with revenue,

  2. In the period incurred,

  3. They are systematically allocated over the period of use.

Revenue Recognition Principle

revenue is recognized when earned even when cash has not been received.
The company should perform the service or deliver the goods, determine the price transaction, and receive cash or a promise to pay.

Time Period Concept

ensures that accounting information is reported at regular intervals.
A company can report its financial statements yearly, semi-annually, quarterly, and monthly.

Timeliness

Information is available in a timely manner to investors, banks, SEC, to make a difference in decision-making. 

MaterialityIt determines the relevance of information, Information is material if reporting inaccurately or omitting it would affect the decisions made by the users of the financial statement. 

Conservatism

is the approach accountants take in order to put a business on the safer side by understating the net assets and net income rather than overstating them.
Especially when the value of expenses and liabilities are uncertain.

Accounting Standards

GAAP

It stands for General Accepted Accounting Principles which are the accounting standards, principles, and procedures that companies in the U.S. must follow when they are compiling their financial statement.
GAAP is established by the Financial Accounting Standard Board (FASB).

IFRS

It stands for International Financial Reporting Standards.
There are accounting standards, developed by the International Accounting Standard Board (IASB) to provide a global framework for how public companies prepare and disclose their financial statements.

Journal Entries

Closing Entries

Journal entries are made at the end of an accounting period to zero out all temporary accounts (revenue, expenses, dividends, and income summary) and transfer their balance to permanent accounts (retained earnings).
Ensuring the prior-period revenue and expenses are not included in the next period’s net income or loss.

Adjusting Entries

Journal entries are made at the end of an accounting period to update an account.
It ensures that all revenues are recognized when control of a good or service has passed to a customer, and all expenses are recognized in the period incurred, according to accrual accounting.