Accounting exam 1

What is an asset account and payable account ?

Any receivable is an asset account, any payable is a liability account.

Time Period Assumption

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years

A corporation

A business legally separate from its owners.

Business Entity Assumption

The accounting concept that requires every business to be accounted for separately from other business entities, including its owner or owners

Objectivity Principle

The accounting concept that requires financial statement information to be supported by independent, unbiased evidence

Accrual Basis Accounting

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues

Revenue is properly recognized:

Upon completion of the sale or when services have been performed and the business obtains the right to collect the sales price.

Unearned Revenues are:

generally Liabilities created when a customer pays in advance for products or services before the revenue is earned.

Accrual basis of accounting is:

generally accepted for external reporting because it is more useful than cash basis for most business decisions.

Primary objective of financial accounting

is to Provide accounting information that serves external users.

Ethical behavior requires

that Auditors' pay not depend on the success of the client's business.

When an asset is purchased

the purchase price paid by the company is recorded in the company's books, not market value or the offered sale price.

Technology reduces

the time, effort and cost of recordkeeping.

Debt ratio

used To assess the risk associated with a company's use of liabilities.

How does the accounting process begin

with Analysis of business transactions and source documents.

A company's ledger

A record containing all accounts and their balances used by the company.

Business's source documents

Provide objective evidence that a transaction has taken place.

account balance

The difference between the total debits and total credits for an account including the beginning balance.

Accounting peroid

The length of time covered by a set of periodic financial statements, primarily a year for most companies

Revenue Recognition Principle

The rule that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash, and (3) measures the amount of revenue as the cash plus the cash equivalent value of any noncash assets received from customers in exchange for goods or services

Going Concern Assumption

The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue

Cash Basis Accounting

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid

double-entry accounting system

an accounting system That records the effects of transactions and other events in at least two accounts with equal debits and credits.

Prepaid accounts (also called prepaid expenses)

are generally Assets that represent prepayments of future expenses.

Unearned is classified

as a liability in a company's chart of accounts.