Accounting basic 3

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Accounting basic 3
2010-08-16 13:46:34
Measuring Business Income

Net income, measurement, matching,adjusting entry, accrual, trial balanceN
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  1. Net Income:
    Is the net increase in owner's equity resulting from the operation of the company. Net income results when revenues exceed expenses, and a net loss results when expenses exceed revenues.
  2. Revenue:
    Are the price of goods sold and services rendered during a specific period of time. Examples of revenues are Sales (the account used when merchandise is sold), Commission Earned, and Advertising Fees Earned.
  3. Describe Expenses, give examples:
    Are the cost of goods and services used in the process of earning revenues. Examples of expenses are Telephone Expense, Wages Expense, and Advertising Expense.
  4. Period Issue:
    The periodicity assumption(the solution to the accounting period issue) states that although measurements of net income for short periods of time are approximate, they are nevertheless useful. Income statmeent comparison is made possible through accounting periods of equal length. A fiscal year covers any twelve-month accounting period used by a company. Many companies use a fiscal year that corresponds to a calendar year, which is a twelve-month period that ends on December 31.
  5. Continuity issue:
    Under the going concern assumption (the solution to the continuity issue), the accountant assumes that the business will continue to operate indefinitely, unless there is evidence to the contrary.
  6. Matching issue:
    The matching issues states that revenues should be recorded in the periods in which they are actually earned, and expenses should be recorded in the period(s) in which they are used to produce revenue; the timing of cash payments or receipts is irrelevant.
  7. Cash basis of accounting:
    Under the cash basis of accounting, revenues are recorded when cash is received, and expenses are recorded when cash is paid. This method, however, can lead to distortion of net income for the period.
  8. Accrual accounting:
    The accrual accounting consist of all techniques used to apply to matching rule. Specifically, it involves (1) recognizing revenues when earned (revenue recognition) and expenses when incurred, and (2) adjusting the accounts at the end of the period.
  9. State four principal situations that require adjusting entries:
    A problem arises when revenues or expenses apply to more than one accounting period. The problem is solved by making adjusting entries at the end of the accounting period. Adjusting entries allocate to the current period the revenues and expenses that apply to that period, deferring the remainder to future periods. A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has arisen but has not yet been recorded.
  10. Accounting Cycle:
    • The accounting cycle generally consists of eight specific steps:
    • (1) journalizing (recording) transactions,
    • (2) posting each journal entry to the appropriated ledger accounts,
    • (3) preparing a trial balance,
    • (4) making end-of-period adjustments,
    • (5) preparing a adjusted trial balance,
    • (6) preparing financial statements,
    • (7) journalizing and posting closing entries, and
    • (8) preparing an after-closing trial balance.
  11. Account:
    A record used to summarize all increases and decreases in a particular asset, such as cash, or any other type of asset, liability, owner's equity, revenue, or expenses.
  12. Accountability:
    The condition of being held responsible for one's actions by the existence of an independent record of those actions. Establishing accountability is a major goal of accounting records and of internal control procedures.
  13. Accounting Cycle:
    The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements.
  14. Accounting Period:
    The span of time covered by an income statement. One year is the accounting period for much financial reporting, but financial statements are also prepared by companies for each quarter of the year and for each month.
  15. Accrual basis of accounting:
    Calls for recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred. The effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.
  16. Credit:
    An amount entered on the right side of a ledger account. A credit is used to record a decrease in an asset or an increase in a liability or in owner's equity.
  17. Debit:
    An amount entered on the left side of a ledger account. A debit is used to record an increase in an asset or a decrease in a liability or in owner's equity.
  18. Dividends:
    A distribution of resources by a corporation to its stockholders. The resource most often distributed is cash.
  19. Double-entry accounting:
    A system of recording every business transaction with equal dollar amounts of both debit and credit entries. as a result of this system, the accounting equation always remains in balance; in addition, the system makes possible the measurement of net income and also the use or error detecting devices such as a trial balance.
  20. Expenses:
    The cost of the goods and services used up in the process of obtaining revenue.
  21. Fiscal year:
    Any 12-month accounting period adopted by a business.
  22. General Journal:
    The simplest type of journal, it has only two money columns-one for credits and one for debits. this journal may be used for all types of transactions, which are later posted to the appropriate ledger accounts.
  23. Income Statement:
    A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for a particular accounting period. Shows the net income or net loss.
  24. Journal:
    A choronological record of transactions, showing for each transaction the debits and credits to be entered in specific ledger accounts. The simplest type of journal is called a general journal.
  25. Ledger:
    An accounting system includes a separate record for each item that appears in the financial statements. Collectively, these records are referred to as a company's ledger. Individually, these records are often referred to as ledger accounts.
  26. Matching Principle:
    The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The revenue earned during an accounting period is matched (offset) with the expenses incurred in generating this revenue.
  27. Net Income:
    An increase in owner's equity resulting from profitable operations. Also, the excess of revenue earned over the related expenses for a given period.
  28. Net loss:
    A drecrease in owner's equity resulting from unprofitable operations.
  29. Objectivity:
    Accountants' preference for using dollar amounts that are relatively factual-as opposed to merely matters of personal opinion. Objective measurements can be verified.
  30. Posting:
    The process of transferring information from the journal to individual accounts in the ledger.
  31. Realization principle:
    The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.
  32. Retained Earnings:
    That portion of stockholder's (owner's) equity resulting from profits earned and retained in the business.
  33. Revenue:
    The price of goods and services charged to customers for goods and services rendered by a business.
  34. Time period principle:
    To provide the users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The period of time covered by an income statement is termed the company's accounting period.
  35. Trial balance:
    A two-column schedule listing the names and the debit or credit balances of all accounts in the ledger.
  36. Purposes of accounting record keeping:
    1. Establishing accountability for the assets and/or transactions under an individual's control.

    2. Keeping track of routine business activities-such as the amounts of money in company bank accounts, amounts due from credit customer, or amounts owed to suppliers.

    3. Obtaining detailed information about a particular transaction.

    4. Evaluating the efficiency and performance of various departments within the organization.

    5. Maintaining documentary evidence of the company's business activities. (For example, tax laws require companies to maintain accounting records supporting the amounts reported in tax returns.)