Accounting Exam 1 - Fundamentals of Accounting
What is the equation associated with the balance sheet?
A (assets) = L (liability) + OE (owner equity)
On which financial statement do assets appear?
Balance sheet
On which financial statement do liabilities appear?
Balance sheet
Give 4 examples of assets described on a balance sheet.
Cash Temporary Investments Inventory Accounts Receivable Supplies Prepaid Insurance Land Animals Machines Land Improvements Buildings Equipment Goodwill etc.
What does the balance sheet represent?
Company's financial position at the end of a specified time. It is a snapshot of the company's financial position at a moment in time. (IE: If the accounts reported on a balance sheet are dated December 31, 2015 - this reflects instant when all transactions THROUGH December 31st have been recorded)
What is an expense?
Costs associated with running the business (goods and services). Expenses decrease owner's equity.
What is the matching principle?
Expenses should be recorded in the period incurred to produce revenue.
What is another name for the balance sheet?
Financial Position
Where are expenses reported?
Income Statement
Where are revenues reported?
Income Statement
What principle requires the accrual basis of accounting?
Matching Principle
What is owner's equity?
O- capital stock / investment capital (money put in by owner) E- retained earnings (income generated by company / retained in company)
Give 4 examples of liabilities.
Payment to creditors Loan from bank Investment Accounts payable Accrued expenses Long-term debt
What are other names for the income statement?
Profit & Loss Statement (P&L), statement of operations, statement of income
What does an income statement show?
Profitability of a company during the time interval specified. Ultimately, the statement shows a net profit / income or net loss.
What is the benefit of using the accrual basis for accounting?
Provides better picture of company's profits during an accounting period. Revenue will reflect what is actually earned and all expenses incurred to earn that revenue.
What is the equation associated with the income statement?
Revenue - Expenses = Income (net loss or net gain)
What is the realization principle?
Revenue should be recognized at the time goods are sold / services rendered.
What are the elements of an income statement?
Revenues Expenses Gains Losses
What is the accrual basis of accounting?
Revenues are reported on the income statement when they are earned (often before cash is received) and expenses are reported on the income statement when they occur or expire (often different than when payment is made).
What does a balance sheet show?
Shows what a company owns as well as what it owes as of the date indicated.
What is an asset?
Things that the company owns. They are resources of the company acquired through transactions and have future economic value. Assets include costs paid in advance that have not yet expired (prepaid advertising, prepaid legal fees, prepaid rent, etc.).
Give an example of when: cash was received in the past / revenue recognized in current period
airplane ticket unused warranty consulting paid in advance of service
What is the equation for depreciation?
depreciation expense = cost of asset / estimated useful life
Give an example of when: cash was paid in the past / expense recognized in current period
depreciation of machine insurance "pay before use" services / goods
Give an example of when: revenue recognized in current period / cash will be collected in future
paid on credit consultancy provided to be paid accounts receivable
What is revenue?
price for goods sold and services rendered during period, increases owner's equity
The balance between revenue and expenses becomes...
retained earnings / income.
Give an example of when: expense is recognized in current period / cash to be paid in future
retirement credit card salaries