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.