Study.com Business & Finance 276 Ch. 7

The 10 basic accounting principles

1. Economic Entity Assumption 2. Monetary Unit Assumption 3. Time Period Assumption 4. Cost Principle 5. Full Disclosure Principle 6. Going Concern Principle 7. Matching Principle 8. Revenue Recognition Principle 9. Materiality 10. Conservatism

What type of accountant must comply with GASB standards?

A government accountant

__ begins before bookkeeping starts and continues after it ends.

Accounting

Chapter 7 Lesson 3

Accounting Disciplines: Descriptions and Definitions

What are the rules and regulations that must be followed when reporting all financial data?

Accounting Principles

A Note About Technology

Accounting and bookkeeping today are made much easier through the use of accounting software. Accounting software will help you set up accounts and make journalizing entries and posting to the general ledger much easier. Most programs will also automatically pull the required data to produce a wide variety of financial statements and reports to help an accountant in his assessment of the financial position of a company. However, unless you have a firm understanding of the concepts behind the bells and whistles that we've just discussed, they will be of limited use.

Which of the following is NOT a financial statement? Statement of cash flows, balance sheet, statement of retained earnings, income statement, accounting cycle.

Accounting cycle

Lesson Summary 3

Accounting involves the collection, analysis and communication of economic data to consumers of such information. Managerial accountants focus on preparing financial documents for management decision making that is generally circulated only internally. Financial accountants prepare financial statements, such as balance sheets, income statements and cash flow statements, for release to the public. Tax accountants focus their work on tax preparation, filing and tax planning. Government and nonprofit accountants are focused on ensuring that their organizations are accountable for the funds they use. Internal, external or governmental auditors conduct audits to verify the accuracy of a company's financial, operational or compliance records.

Chapter 7 Lesson 2

Accounting vs. Bookkeeping: Differences and Similarities

Which of the following are 'assets?' Cash, Land owned by a company, inventory

All answers are correct

Which of the following is not an accounting activity?

All of the answers are accounting functions

Why is accounting important to business? It lets a business owner know what his assets are worth./It lets a business owner know how much money he is spending./It provides the information that a business needs to file taxes with the IRS/It lets a business owner know how much money he is making.

All of the answers are correct

What accounting principle states that people involved in a transaction should not be personally related?

Arm's Length Transaction

__ are items that are owned, have value, and can be turned into cash. Bank accounts, CDs, cars, property, and machinery are all examples.

Assets

__ are simply physical goods that carry monetary value. You can easily identify assets you own or assets that are owned by a business. All the cars in the lot of your local used car dealer are assets. Your computer, TV, car, home, and anything else you own are your assets.

Assets

What is the accounting formula?

Assets - Liabilities = Owners' Equity

What is the formula for the basic accounting equation?

Assets = Liabilities + Owner's Equity

What does ALOE stand for?

Assets, Liabilities and Owner's Equity

A-L-O-E stands for

Assets, liabilities, and owner's equity.

What type of accountant is hired by a company to verify the accuracy of the financial records of a company?

Auditor

Chapter 7 Lesson 4

Basic Accounting Terms and Phrases

__ __ is the amount of cash brought in and paid out during a stated period. Typically, accounting reports are generated monthly or quarterly, so a cash flow amount would reflect all the cash that came in minus all the cash that was paid out. Hopefully it's a positive number, for businesses and individuals. It's an important number, because even if a company sells a lot of inventory, if they extend credit to their customers and don't collect cash, they'll have a hard time paying out their liabilities.

Cash flow

__ is the principle that calls for potential expenses and liabilities to be recognized immediately if you are unsure whether they will actually occur or not, but potential revenue not to be recognized until it is actually received.

Conservatism

__are transactions that decrease assets or increase liabilities. So, in the transaction we just talked about - a company selling some of their inventory - they debited their cash account because they received cash from a customer, and they would credit their inventory account, since selling inventory decreases the amount of inventory available.

Credits

What must balance in a trial balance?

Credits and debits

__are transactions that increase assets or decrease liabilities. When a company sells some of their product and collects cash, that transaction includes a debit to the cash account, increasing the amount of cash. But, it also means that their inventory - another asset account - went down.

Debits

Francine works as a financial accountant for a publicly traded company. __ accounting involves preparation of financial information for public consumption. In fact, if a company is publicly traded, the law requires that certain financial information be disclosed to ensure that potential investors and shareholders have the information necessary to make informed investment decisions. And governments have a right to see what the company earned to ensure the company is meeting its tax obligations. Francine will prepare financial documents that are pretty much a reflection of how her company performed in the past. The shareholders and potential investors will often use this information to project, or predict, how the company will perform in the future. Examples of documents that Francine will prepare for public disclosure include the company's balance sheet, income statement and cash flow statement. Francine will prepare the financial disclosures in compliance with the Generally Accepted Accounting Principles (GAAP).

Financial

What type of accountant prepares financial statements for public release and consumption?

Financial accountants

Which one of the following documents is not utilized in bookkeeping?

Financial statements

What is GAAP

Generally Accepted Accounting Principles

__ __ __ __ is a specific set of guidelines that have been established to help publicly-traded companies create their financial statements. Publicly-traded companies are companies that have made stock in their organization available for sale to the public. Consists of 10 basic accounting principles

Generally Accepted Accounting Principles (GAAP)

____ means that you believe that a company is going to keep on keeping on far into the future. It makes you have faith in the financial statements that they present to you.

Going-concern

How accounting is important?

In order to even have a hope of success, a company has to know where their money is coming from and where it's going out. That's importance of accounting and of the financial statements'.

If a company sells $20,000 of their inventory for $30,000 in cash, how does owners' equity change?

Increases by $10,000 (Cash and inventory are both assets, so when inventory is sold for cash, inventory decreases and cash increases, and if cash increases more than inventory decreases, owners' equity increases by the difference.)

Lesson Summary 2

Let's review what we've learned. Bookkeeping is part of the overall accounting process. It involves the collection and entry of data of financial transactions from source documents. After the financial transactions have been recorded in the general journal and posted in the general ledger, a trial balance is prepared to ensure that the ledger balances. Accounting actually starts before the bookkeeping process and continues after the bookkeeping is complete. It involves designing and setting up an accounting system, including the development of a chart of accounts and a set of rules and procedures to follow when collecting, sorting and entering data. Accounting software is available to increase the ease and efficiency of the bookkeeping and accounting processes.

__ are what is owed. A loan to purchase an asset is a liability.

Liabilities

What type of accountant doesn't typically communicate financial information to people or entities outside his organization?

Managerial accountant

Lesson Summary 4

Many of the principles of corporate accounting can be applied on a personal financial level as well, so it's a good idea for everyone to know the fundamental terms and phrases in accounting. In this lesson, we discussed the components of the accounting formula: assets - liabilities = owners' equity. All corporate accounting is based on that formula. Debits and credits are terms used to describe different kinds of accounting entries to help keep many different asset and liability accounts organized. Finally, cash flow is an important accounting metric that reflects how much actual cash is brought in and paid out during a given period. As you organize your own finances and observe how your workplace operates, you can look for ways to apply this knowledge to further your understanding of how you can use accounting concepts to improve your own financial health and increase your skill set in the workplace.

Non-Profit Accounting

Nancy works as an accountant for a local charitable organization. Nancy's nonprofit organization is not focused on making profits for owners. Instead, it's focused on providing services to its clients. Nancy's organization provides free healthcare to the poor. Just like Gavin, Nancy uses a funds accounting system to track where her organization's money is spent. Since her nonprofit is a tax-exempt organization, part of Nancy's job is also to help make sure that the organization's financial activities do not result in losing its tax-exempt status. For example, distributing revenue as profit to the members of the organization would cause the organization to lose its tax-exempt status.

What type of accountant deals with the fund system of accounting?

Non-profit accountants

In accounting, __is having the ability to rely on documented information to record financial information. This makes you believe what you're saying when you look at the numbers in accounting. You have to believe to be a part of this whole thing.

Objectivity

What accounting principle requires having the ability to rely on documented information to record financial data?

Objectivity

__ __ is the amount of money that a person has invested into an organization. The investment may be in the form of a stock purchase or a capital investment made by buying into a company.

Owner's equity

Arthur is a certified public accountant and an auditor. There are actually three different types of auditors: internal, external and governmental. - An internal auditor is an employee of the company being audited. - Government auditors are employees of a government who perform audits to ensure that organizations are complying with the law. - External auditors are hired by companies to perform independent audits of the company. But what the heck is an audit? An __, in simplest of terms, is a process to verify the accounts and records of an organization. You can break audits down into three basic steps: 1. A financial audit seeks to verify that the financial records of the organization are accurate and in accord with GAAP. 2. An operational audit is conducted to verify that management is operating the organization in accord with established policies and procedures. 3. A compliance audit seeks to confirm that the organization is complying with the laws and regulations to which it is subject.

audit

The third statement is the __ __. It is a financial statement that lists all the assets, liabilities, and owner's equity of the company. Its important to note here that the accounting equation is also known as the balance sheet equation.

balance sheet

The __ __ __: assets=liabilities + owner's equity.

basic accounting equation

In __ __accounting, revenue is recognized when cash is placed in the hand of the seller or supplier, and expenses are realized when they are actually paid.

cash basis

__, in accounting, is the amount of cash given up to acquire a specific item.

cost

The __ __refers to the historical cost of an item that is reported on the financial statements. Historical cost is the amount of money that was paid for an item when purchased and is not changed to account for inflation.

cost principle

The __ __ __ means that any activities of a business must be kept separate from the activities of the business owner.

economic entity assumption

There are __ main financial statements that are created in the accounting cycle. That are created in a specific pattern.

four

The __ __ __ means that all information that is relative to the business be reported either in the content of the financial statements or in the notes to the financial statements.

full disclosure principle

Gavin works for the federal government as a government accountant. Gavin works for a government agency. His job is to determine the amount of funds needed for his agency's projects so a request can be made during the annual budgeting process. He also helps ensure that his agency is complying with its spending authority granted to it by the legislature. Gavin uses a system of accounting known as __accounting. The primary objective of fund accounting is to account for how money is spent rather than how it is earned. Fund accounting involves managing a set of funds. Each fund has a distinct purpose. For example, Gavin's agency may have a personnel fund, a supply fund and an operations fund. Gavin helps ensure that his agency is accountable to citizens by making sure the funds are used for their intended purposes. Gavin must also comply with the accounting standards and principles developed by the Governmental Accounting Standards Board (GASB).

fund

The __ __ __ refers to the intent of a business to continue operations into the foreseeable future and not to liquidate the business.

going concern principle

The first financial statement is the __ __, which tells how much money was made or lost in a given time period.

income statement

The __, which are the financial commitments and debts you owe. Any debt you have is a liability, as are any financial commitments you have made. Bills aren't financial commitments until you accrue them, meaning that next month's electric bill isn't a financial commitment, because you haven't used the electricity yet. The exception to this rule is when you have a contractual obligation, such as a cell phone contract.

liabilities

A __ accountant collects, analyzes and communicates financial information to people inside the organization to help them make decisions. Examples of Marvin's work include an analysis of profitability of products or ventures, budgets and development of alternative uses of organizational resources. It's important to note that Marvin's accounting work is not intended for use by people outside his company.

managerial

The __ __ refers to the manner in which a business reports income and expenses. This principle requires that businesses use the accrual form of accounting and match business income to business expenses in a given time period. For example, a sales expense should be recorded in the same accounting period that sales income was made.

matching principle

The __ __refers to the measure of importance of a misstatement in accounting records. For example, if the price of an asset is understated by $10.00, will that misstatement have enough effect on the financial statements to matter? This is a gray area in accounting standards that requires professional judgment to be used.

materiality principle

The __ __ __ concept makes you see that every single accounting action deals with money.

monetary measurement concept

The __ __ __ means that only activities that can be expressed in dollar amounts can be included in accounting records.

monetary unit assumption

For individuals, if you calculate all their assets and subtract all of their liabilities, you'll be calculating their __ __. That's basically the same number you would come up with if you sold everything you could and paid off all of your debt.

net worth

In the corporate world, that number is called __ __ and represents the value of the company's assets that the owners actually own.

owner's equity

The __ __ __ addresses the manner in which revenue, or income, is recognized. This standard requires that revenue be reported on the income statement in the period in which it is earned.

revenue recognition principle

The __ __ __ states that revenue is realized when it is earned, regardless of when it is received.

revenue recognition principle

The __ __ __ states that no matter what you do as a business owner, you must keep your personal dealings completely separate from your company dealings.

separate entity principle

For accounting, there are __ major accounting principles.

seven

The second financial statement is __ __ __ __, which tells how much money that was made was reinvested into the company.

statement of retained earnings

Terry's a __ accountant. Terry focuses on tax issues and planning. Terry works as a consultant and provides tax accounting services to many different companies of varying sizes. He helps them collect the required information for filing of taxes such as income and expenses. He determines allowable deductions and finds available tax credits. He also prepares the tax returns for filing. If the government doesn't agree with the company's return, Terry will assist in representing the company in an audit. But this is only half of Terry's job. Terry is also involved in tax planning. Terry will help his clients determine the tax implications of proposed business decisions. The goal for Terry is to minimize his client's tax liability within the bounds of tax law.

tax

The __ __ __ means that business activities can be reported in distinct time intervals. These intervals may be in weeks, months, quarters, or in a fiscal year. Whatever the time period is, it must be identified in the financial statement dates.

time period assumption

__ follow a series of steps making up a bookkeeping process. -First, collect and sort all the source documents for each financial transaction. -Second, record relevant data from each source document. Make an entry into the company's general journal, which is chronological list of financial transactions. Recording transactions in the general journal is generally done on a daily basis. -Third, at the end of each month, post the financial transactions recorded in the general journal to the general ledger. The general ledger is arranged by account. The company's accountant has set up a chart of accounts, such as payroll accounts, supplies, utilities and food and beverage accounts, just to name a few. When using double entry accounting, you make two entries for each financial transaction - a credit and a debit. -Fourth, at the end of each accounting period, such as month, quarter or year, a bookkeeper will prepare an adjusted trial balance. Ensuring the general ledger balances, which means total debits equal total credits. If they don't balance, she'll find out why and make the appropriate corrections.

Bookkeepers

__ involves the recording of financial data taken from businesses' financial transactions

Bookkeeping

__ is the collection, sorting and recording of the financial transactions of a business. Recording all the sales transactions and all the expenses incurred by the restaurant on a daily basis.

Bookkeeping

According to the American Accounting Association, __ is the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by the users of the information.

accounting

The American Accounting Association defines __ as 'the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of the information.' In other words accounting is about collecting, analyzing, and communicating financial information so other people can make decisions. Accounting can be broken down into discrete categories.

accounting

__ is that it is the act of collecting, organizing, and interpreting financial data.

accounting

The __ __ usually takes 12 months to complete, but that's not set in stone. A company can choose how long it wants its accounting cycle to be. Regardless of how long the accounting cycle is, one of the last steps in it is creating the financial statements'.

accounting cycle

Accounting is a step-by-step process that follows a specific pattern. The pattern resembles a circle and is called the __ __.

accounting cycle.

The __ __ is: assets - liabilities = owners equity

accounting equation

The most basic accounting terms can be found in what is called the __ __

accounting equation

__ __ are guidelines that must be followed when reporting financial data.

accounting principles

In __ __ accounting, which is where the revenue recognition principle comes into play, revenue is recognized when it is earned, regardless of when it is received, and expenses are recognized when a bill comes in, regardless of when it is paid.

accrual basis

An __ __ __ is one where the people involved in the transaction are not personally related. This makes it fair and just so that each party is looking out for their self and isn't being shoved around

arm's length transaction

____ accounting means that each transaction has two sides, a debit and a credit. The goal of double-entry accounting is to keep the accounting formula (assets - liabilities = owners' equity) in balance. Look at that formula carefully; with double-entry accounting, if assets increase, liabilities or owners' equity will also need to increase. These transactions and ideas will make more sense in just a minute. To help organize these transactions, accountants use the terms debits and credits.

Double-entry

What term refers to when each transaction has two sides: debit and credit?

Double-entry accounting

The most important thing to remember is that both sides of the accounting equation must be __.

Equal.

When a criminal case is tried, the stenographer writes down every word of the proceeding. How does the principle of monetary management differ?

Every single accounting action recorded deals with money.

What is the best explanation of a source document in bookkeeping?

Evidence of a financial transaction

Lesson Summary 5

Remember, the accounting principles are the rules and guidelines that companies must follow when reporting financial data. First, you have to master the art of objectivity. Remember, objectivity is having the ability to rely on documented information to record financial information. It makes you believe what you're saying when you look at the numbers in accounting. Then you have to make sure you understand arm's length transactions. Arm's length transactions are those where the people involved in the transaction are not personally related. This is important so that neither party has any undue pressure on him about the transaction. Of course, you also have to understand what part cost plays in the whole accounting thing. You see, cost is the amount of cash that you have to give up to acquire a specific item. Going-concern is another important item in your quest for success. Going-concern means that you believe a company will keep on going and going into the future. Going-concern gives you faith and belief in the financial statements that the company gives out. Now we get to talk about some of the real deal, the Benjamins - the monetary measurement concept. It tells you that all accounting actions deal with money. Along the same lines, the revenue recognition principle lets you know that revenue is realized when it is earned, regardless of when it is received, and expenses are recognized when the bills come in, regardless of when they're paid. Now, it's important for you to realize that this is true only if you decide to use the accrual basis of accounting. The last principle that you need to know to be just like me is called the separate entity principle. This means that no matter what you do as a business owner, be sure that you keep your dealings and the dealings of your company completely separate, especially if you want a clear picture of where you stand financially.

The purpose of the __was to regulate financial practices among publicly-traded companies.

SEC

The 1929 stock market crash was a precursor to one of the hardest economic times that has ever been known, the Great Depression. During this time, many people lost faith in the stock market and in the American economy. The government decided that there needed to be some way to rebuild that lost faith, and so, in the early 1930s, the __ __ __ __was created.

Securities and Exchange Commission (SEC)

Evan owns his own business running a coffee shop in a downtown area. Which principle must he remember that no matter what he does as a business owner, he must keep his personal dealings completely separate transactions?

Separate Entity

Which one of the activities is a bookkeeping activity?

Sorting source documents

The last financial statement is the __ __ __ __, which tells how much money came in and was paid out in a specific time period.

Statement of cash flows

Chapter 7 Lesson 5

The Fundamental Principles of Accounting

What does the term 'accounting' mean?

The act of collecting, organizing, and interpreting financial data

Which of the following statements best defines 'cash flow?'

The amount of incoming cash minus the amount of outgoing cash during a given period (Cash flow is the total amount of cash that is collected each month minus the amount of outgoing cash. Companies do well when this is a positive number.)

Lesson Summary 1

The first thing that we talked about is what accounting actually is. It is the act of collecting, organizing, and interpreting financial data. Next, we talked about ALOE. ALOE is the acronym for the terms used in the basic accounting equation - assets, liabilities, and owner's equity. Assets are what you own. Liabilities are what you owe. Owner's Equity is what you have personally invested in a company. In accounting, the total assets must always equal the sum of the total liabilities and owner's equity.' 'We also talked about the purpose of accounting, which is ultimately to produce the financial statements of a company. The four financial statements that are used to paint the picture of financial health for a company are the income statement, statement of retained earnings, balance sheet, and statement of cash flow. The income statement tells how much money a company made. The statement of retained earnings tells how much of the money that was made was reinvested in the company. The balance sheet lists all assets, liabilities, and owner's equity accounts and tells the balance of each account. The statement of cash flows tells the inflow and outflow of a company's cash for a given time period.' 'The last thing that we talked about was how accounting relates to business. Accounting is a business necessity for many reasons. One of the most important reasons is so that a company can know how much money they're making, where it's coming from, and where it's being spent. Another reason accounting is a business necessity is because the financial statements generated during the accounting cycle are relied heavily on by potential investors and creditors. They use these statements to tell them whether the company is operating efficiently and whether entering into a financial venture with the company would be a wise decision. The last reason that accounting is a business necessity is because the government requires reporting financial data to the IRS for tax purposes. It's very important that the dollar amount reported for both income and expenses be accurate. If you all recall, I promised that before you left class today you would all know the answers to these three questions. Now for my final question: do you?'

What is the main purpose of accounting is?

The main reason why companies use accounting is to be able to produce financial statements. In order to produce the financial statements, all the income and expenses of the company must be collected, classified, and entered into special accounting books called journals.

Chapter 7

What is Accounting? - Purpose, Importance & Relationship to Business