Accounting Principles Test #1
Types of adjusting entries
1. converting assets to expenses 2. coverting liabilities to revenue 3. Accruing unpaid expenses 4. Accruing uncollected revenue
Objectivity
Accountants' preference for using dollar amounts that are relatively factual-as opposed to merely matters of personal opinion. Objective measurements can be verified
Contra-asset account
An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset
Balance Sheet Equation/Accounting Equation
Assets =Liabilities + Owners' Equity
Statement of Owners Equity Equation
Beginning Owners' Equity + Investments + Net Income (Earnings) - Withdrawals (Dividends) = Ending Owners' Equity
Statement of Retained Earnings
Beginning Retained Earnings + Net Income - Dividends = Endings Retained Earnings
Business entity concept
Business is separate from owners and creditors and other stakeholders. Separate from personal affairs of the owners
Statement of Cash Flows
Cash in and as out over a period of time. Revenues result in cash inflows. Expenses result in cash outflows. Also, it is an activity statement
Operating Activities
Cash received or paid out. Example providing services to a customer, buying and selling a product, anything that would show up on an income statement. Anything that is not investing or financing.
Investing Activities
Cash received or paid out. Example: buying or selling long term assets such as land, furniture, cars, trucks, a building, and so on.
Financing Activities
Cash received or paid out. Example: investment by owners and dividends, also borrowing and repaying cash. This action is trying to raise money to buy stuff
Equity normal balance
Credit
Liabilities normal balance
Credit, except for dividends
Assets normal balance
Debit
Dividends normal balance
Debit
Expenses normal balance
Debit
Liabilities
Debts that represent negative future cash flows for the business
Straight-line method of depreciation
Depreciation expense per period equals the cost of the asset divided by the estimated useful life
Balance Sheet
Describes where the business stands at a point in time. A position statement because it shows where you are at a point in time.
Net income
Equals revenues minus expenses. May be positive or negative ("Net Loss"). Example: savings equals initial deposit plus deposits plus interest minus withdraws
Realization principle
Indicates that revenue should be recognized at the time goods are sold or services are rendered
Going-concern assumption
Must assume that the company is going to stay in business. So, we intend to use the assets and not sell them. We intend to pay all liabilities.
Stable-dollar assumption
Must assume that the value of the dollar is stable.
Unit of measure principle
Must record transactions in dollars or a particular currency
Owners' Equity
Owners' claims on the assets of the business. It increases with earnings and additional investments. Decreases by losses and payments to owners. .
GAAP
Provide the general framework for determining what information is included in financial statements and how this information is to be prepared and presented.
Income Statement Equation
Revenues - expenses = net income
Income statement
Revenues and expenses over a period of time. Form of activity statement. Revenue minus expenses equals net income
Matching principle
The concept of offsetting expenses against revenues on a basis of cause and effect
Book value
The net amount of which an asset appears in financial statements. For depreciable assets, it represents costs minus accumulated depreciation
Accrual basis of accounting
The policy of recognizing revenue in the accounting records when it is earned ad recognizing expenses when the related goods and services are used
Trial Balance
The proof of the equality of debits and credits. A two columned schedule listing the names and balances of all the accounts in the order in which they appear in the ledger
Materiality
The relative importance of an item or amount. Items significant enough to influence decisions are said to be material. Items lacking this importance are considered immaterial. The accounting treatment accorded to immaterial items may be guided by convenience rather than by theoretical principles.
Return of investment
The return to you at some future date of the amount that you had invested or loaned
Expenses
The use of products or services in running your business.
Adjusting entries
They are needed at the end of each accounting period to make certain appropriate amounts of revenue and expenses are reported in the company's income statement.
Cost principle
Use cost or exchange price to record transactions
General-purpose assumption
We assume that by providing information that meets the needs of investors and creditors, we also meet the information needs of other external parties. We might be able to provide superior information if we were to treat each potential group of external users separately and prepare different information for each group
Return on investment
What the company pays you for the use of your funds either as an investor or creditor
Dividends
a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits
Assets
economic resources that are owned by the business and are expected to provide positive cash flows (benefits)
Financial accounting
refers to information describing the financial resources, obligations, and activities of an economic entity. Assists investors and creditors.