Accounting Exam 1

Assets

Economic resources that are expected to benefit the business in the future. Something the business owns or has control of

Explain the purpose of Generally Accepted Accounting Principles including the organization currently responsible for the creation and governance of the GAAP

Establishes the rules for recording transactions and preparing financial statements. The FASB is responsible for it

Which concept states that accounting info should be complete, neutral, and free from material error?

Faithful Representation

Briefly describe the two major fields of accounting

Financial accounting is an external decision maker such as investments and loans. Managerial accounting is internal decision making such as budgeting

What does the going concern assumption mean for a business?

It assumes that the business will remain in operation for the forseeable future

Return on Assets. Show how to calculate it

Measures how profitably a company uses its assets. Net income/ average total assets

What is the role of the Financial Accounting Standards Board?

Privately funded and creates the rules and standards that govern financial accounting

Source Document

Provides the evidence and data for accounting transactions

Debt Ratio

Shows the proportion of assets financed with debt. Total liabilities/ total assets

Ledger

The record holding all the accounts of a business, the changes in those accounts, and their balances

A business purchases an acre of land for $5000. Current value is $5550. What should the value be recorded at?

$5000

Compound Journal Entry

A journal entry that is characterized by having multiple debits and or multiple credits

Unearned Revenue

A liability created when a business collects cash from customers in advance of providing services or delivering goods

Accrued Liability

A liability for which the business know the amount owed but the bill has not been paid

Chart of Accounts

A list of all of a company's accounts with their account numbers

Trial Balance

A list of all the ledger accounts with their balances at a point in time

Not for profit

A not-for-profit is an organization that has been approved by the Internal Revenue Service to operate for a religious, charitable, or educational purpose. A board, usually composed of volunteers, makes the decisions for the not-for-profit organization. Board members have fiduciary responsibility, which is an ethical and legal obligation to perform their duties in a trustworthy manner. A not-for-profit has no owners.

Partnership

A partnership joins two or more individuals as co-owners. Each owner is a partner and can commit the partnership in a binding contract. This is called mutual agency. Mutual agency means that one partner can make all partners mutually liable. Many retail stores and professional organizations of physicians, attorneys, and accountants are partnerships. Most partnerships are small or medium-sized, but some are gigantic, with thousands of partners. For accounting purposes, the partnership is a separate organization, distinct from the partners. A partnership has two or more owners called partners.

Prepaid Expense

A payment of an expense in advance

Time Period Concept

Assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quater, or year

Accounts Receivable

The right to receive cash in the future from customers for goods sold or for services performed

Describe the various types of individuals who use accounting information and how they use that information to make important decisions

Business owners use accounting info to set goals. Outside investors provide money to get a business going. Governments use the info to levy taxes

Liabilties

Debts that are owed to creditors

Revenues

amounts earned from delivering goods or services to customers

Expenses

the cost of selling goods or services

Debit

the left side of a T-account

Equity

the owner's claim to the assets of the business

Credit

the right side of a T-account

Corporation

A corporation is a business owned by stockholders, or shareholders. These are the people who own shares of stock in the business. Stock is a certificate representing ownership interest in a corporation. A business becomes a corporation when the state approves its articles of incorporation and the first stock share is issued. The articles of incorporation are the rules approved by the state that govern the management of the corporation. Unlike a proprietorship and a partnership, a corporation is a legal entity distinct from its owners. A corporation has one or more owners called shareholders.

Account

A detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period

Cost Principle

A principle that states that acquired assets and services should be recorded at their actual cost

Journal

A record of transactions in date order

Accounts Payable

A short-term liability that will be paid in the future

T-account

A summary device that is shaped like a capital T with debits posted on the left side of the vertical line and credits on the right side of the vertical line

Double Entry System

A system of accounting in which every transaction affects at least two accounts

Notes Payable

A written promise made by the business to pay a debt, usually involving interest, in the future

Notes Receivable

A written promise that a customer will pay a fixed amount of money and interest by a certain date in the future

Cash Basis Accounting

Accounting method that records revenue only when cash is received and expenses only when cash is paid

Accrual Basis Accounting

Accounting method that records revenues when earned and expenses when incurred

Fiscal Year

An accounting year of any twelve consecutive months that may or may not coincide with the calendar year

Audit

An examination of a company's financial statements and records

Economic Entity Assumption

An organization that stands apart as a separate economic unit

Statement of Retained Earnings

Answers the question of how the business uses its earnings. Did the company pay dividends or did the company keep the earnings to further invest in the business. The retained earnings account increases by net income and decreases by dividends and net losses

Income Statement

Answers the question of whether the business is profitable. The income statment summarizes an entity's revenues and expenses and reports the net income or net loss for a specific period (IRBS)

What are the 2 certifications available for accountants

Certified Public Accountants are licensed professionals who serve the general public. Certified Management Accountants work for a single company

Matching Principle

Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Explain the role of the IASB in relation to the IFRS

IASB publishes the IFRS which are global accounting standards that are used or required in more than 120 country

LLC and LLP

In a limited-liability partnership, each member/partner is liable (obligated) only for his or her own actions and those under his or her control. Similarly, a business can be organized as a limited-liability company. In an LLC, the business—and not the members of the LLC—is liable for the company's debts. This arrangement prevents an unethical partner from creating a large liability for the other partners, much like the protection a corporation has. Today most proprietorships and partnerships are organized as LLCs and LLPs. An LLC has one or more owners called members.

Normal Balance

The balance that appears on the increase side of an account

Contributed Capital

Owner contributions to a corporation

Statement of Cashflow

Reports on a business's cash receipts and cash payments for a specific period

Balance Sheet

Reports on the assets, liabilities and stockholder's equity of the business

Common Stock

Represents the basic ownership of a corporation

Revenue Recognition Principle

Requires companies to record revenue when it has been earned and determines the amount of revenue to record

Sarbanes-Oxley Act

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports

How do retained earnings increase? In what two ways do they decrease?

Revenues increase retained earnings. Expenses and Dividends decrease

How is net income calculated?

Revenues minus expenses

What is the accounting equation?

The basic tool of accounting, measuring the resources of the business (what the business owns or has control of) and the claims to those resources.

Financial Statements in the U.S. are recorded in U.S. dollars. What assumptions support this case

The monetary unit assumption

Posting

Transferring data from the journal to the ledger

Propietorship

has a single owner, called the proprietor, who often manages the business. Proprietorships tend to be small retail stores or professional businesses, such as attorneys and accountants. From an accounting perspective, every sole proprietorship is distinct from its owner: The accounting records of the proprietorship do not include the proprietor's personal records. However, from a legal perspective, the business is the proprietor. A proprietorship has one owner called a proprietor.

What is accounting?

is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers.