Accounting Basics

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Accounting Basics
2010-09-18 14:15:17
mid term

Mid term
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  1. Assets
    Resources owned by a business. ie) cash, merch, investments, land, buildings, etc.
  2. Liabilites
    • Claims against assets, existing debts and obligations
    • ie) accounts payable -credit money owed
    • -notes payable -money borrowed ie)from bank
  3. Owner's Equity
    • -ownership claim on total assets
    • -it is equal to total assets-total liabilites
    • (+owners capital) (-owners drawings)
    • (+revenues) (-expenses)
  4. GAAP

    Cost Principle
    States that assets should be recorded at their historical orginal cost.

    -cost is definate and verifiable
  5. Going concern assumption
    the entity will continue operations for enough time to use its assets for their intended purpose, and to complete its obligations.
  6. Economic Entitiy Assumption
    -The activites of the entity to be kept separate and distince from the activites of the owner.
  7. Monetary Unit Assumption
    -only transaction data that can be expressed as an amount of money be included in the accoung records.

    -inflation is ignored over the years. ie) land in 1998 100k still 100k in 2010.
  8. 1. Proprietorship

    2. Partnership

    3. Corporation

    4. Income Trust
    1. One owner (owners equity)

    2. Two owners (partners equity)

    3. A business that is organized as a seperate legal entity under law. Ownership can be transferd without disolving corp. (shareholders equity)

    4. Special Ltd. Purpose corp. Pays out most earnings to investors. Unitholders pay income tax on cash they recieve. (unit holders)
  9. Realization Principle (revenue recognition principle)
    -revenue should be recorded in the accounting records in the period in which it is earned, not when the cash is received.

    -costs should be recorded in the accouting records in the period they are incurred, not when the cash is paid.
  10. Matching Principle
    -the costs incurred to generate revenue will be matched and recorded with the revenue, whenever possible.
  11. Income Statement
    -summarizes revenues and expenses for an entire accounting period/

    • -when revenue exceed expenses, the result is Net Income.
    • -when expenses exceed revenues, the result is a Net Loss.
  12. Statement of Owner's Equity
    -reports the changes in owner's equity for a specific period of time. Specificall the Capital and Drawings columns)
  13. Balance Sheet
    • It summarizes assets, liabilites and owner equity-it is a snapshot
    • of the resources (assets) and obligations (liabilities or debts) of the
    • business, as well as the owne's ownership of those resources, at a
    • particular point in time (ie. on November 30)
  14. Cash flow Statement
    • -gives info about cash and reciepts for a specific date, analyze a compay's cash.
    • -cash inflows and outflows from investing transactions ie) purchase of land, building, and equipment.
  15. Debit
    • Debit = Left side Positive
    • Credit=Right side Negative
  16. Double entry system
    • system that records the dual (two sided) effect
    • of each transaction in appropriate accounts. (pg. 53)
  17. General Ledger
    • -a ledger that contains accounts for all assets, liabilities,
    • equities, revenues and expenses.
  18. T account
    • - A form of account that looks like the letter T. It has the
    • title above the horizontal line. Debits are shown to the left of the vertical
    • line, credits to the right. (pg. 52)
  19. Accrual basis of accounting
    • –revenues are recorded when earned and expenses are recorded
    • in the same period as revenue they relate to.

    • b) Accrued expenses- Expenses incurred but not yet paid in
    • cash or recorded. (pg117)

    • c) Accrued
    • revenues-Revenues earned but not yet received in cash or recorded. (pg116)
  20. Matching principle
    • - expense recognition where efforts(expenses) should be
    • matched with accomplishments (revenues) (p105)
  21. Revenue recognition principle
    • revenue should be recognized in the accounting
    • period in which it is earned
  22. Time period Assumption
    • – the economic life of a business can be divided into
    • artificial time periods ie) month, quarter, year.
  23. Unearned revenues
    • –revenues received in cash and recorded as
    • liabilities before they are earned (pg. 113)
  24. Straight-line amortization method
    • -in which amortization expense is calculated as the cost
    • divided by the useful life. (pg112)

    • b) Useful life- the length of service of an
    • amortizable asset.
  25. Closing entries
    • - Entries made at the end of an accounting period to
    • transfer the balances of temporary accounts (revenues, expenses, income summary
    • and drawings) to the permanent owner’s equity account, owner’s capital.(pg.165)
  26. Closing the books
    • -the process of journalizing and posting closing
    • entries to update the capital account and prepare the temporary accounts for
    • the next periods posting.
  27. Current assets
    • - cash and other resources that are expected to
    • be realized in cash or sold or consumed in the business within one year.
  28. Current liabilities
    • - obligations that are expected to be paid from
    • current assets through the creation of other current liabilities within the
    • next year.
  29. Current ratio
    • - measure of short term debt paying ability that
    • is determined by dividing current asset by current liabilities.
  30. Income summary
    • - A temporary account that is used in closing revenue and
    • expense accounts.
  31. Liquidity
    • - The ability off a company to pay obligations as they come
    • due within the next year and to meet unexpected needs for cash.
  32. Post closing trial balance
    • -A list of debit and credit balances of the
    • permanent (balance sheet) accounts after closing entries have been journalized and posted.
  33. Reversing entry
    • - An entry made at the beginning of the next
    • accounting period that is the exact opposite of the adjusting entry made in the
    • previous period. (pg. 173)
  34. Working Capital
    -The difference between current assets and current liabilities