6 - The Accounting System: Concepts and Applications Flashcards
Why do managers, investors, creditors, and others need information about the operations of a business?
Internal and external users need information about a business’s operations to evaluate alternatives.
For instance, a manager needs this information to decide which alternative best helps the business meet its goals of remaining solvent and earning a satisfactory profit.
A banker also needs this information to decide the conditions for granting a loan.
What are the basic concepts and terms used in accounting?
- Entity concept
- Transactions
- Source documents
- Monetary unit concept
- Historical cost concept
What is the entity concept?
Separation of accounting records of a business from the records of the business’s owner or owners.
What are transactions?
Exchange of property or service by a business with another entity.
What are source documents?
Business records that are used as evidence that a transaction has occurred.
What is the monetary unit concept?
The concept that transactions are to be recorded in terms of money or currency.
What is the historical cost concept?
The concept that a business records its transactions based on the dollars exchanged at the time the transaction occurred.
What is prepaid insurance?
The cost paid for the right to insurance protection.
What are creditors?
External parties to whom a business owes debts
What are wages and salaries payable?
Amounts owed to employees for work they have done
What are loans payable?
Amounts owing to financial institutions for money lent to the business.
What are assets?
Assets are a business’s economic resources that will provide future benefits to the business.
What are liabilities?
Liabilities are the economic obligations (debts) of a business.
What is partner’s equity?
The partner’s current investment in the assets of the business.
What is residual equity?
The term is used to refer to owner’s equity because creditors have the first legal claim to a business’s assets.
What is owner’s equity?
The owner’s equity of a business is the owner’s current investment in the assets of the business.
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
What is a balance?
The amount in an account column at the beginning of the period plus the increases and minus the decreases recorded in the column during the period.
What is the dual effect of transactions?
A business must make at least two changes in its assets, liabilities, or owner’s equity when it records each transaction.
What is the expansion of the accounting equation?
Assets = Liabilities + Owner’s Capital + Net Income
Owner’s Equity = Owner’s Capital + Net Income
Net Income = Revenues - Expenses
What are revenues?
Prices charged to a business’s customers for the goods or services the business provides to them.
What are expenses?
Costs a business incurs to provide goods or services to its customers during an accounting period.
What is the accounting period?
Timespan for which a business reports its revenues and expenses
What is the earning process?
Purchasing (or producing) inventory, selling the inventory (or services), delivering the inventory (or services), and collecting and paying cash.
What is the recording process?
A business does this during the accounting period in which the revenues are earned and are collectable (or collected).
What is the matching principle?
To determine its net income for an accounting period, a business computes and deducts the total expenses from the total revenues earned during the period.
What is going concern?
An assumption that an entity is able to continue as a viable entity for the foreseeable future.
What is accrual accounting?
Recording revenues and related expense transactions in the same accounting period that goods or services are provided, regardless of when cash is received or paid.
What is a withdrawal?
A payment from the business to the owner
What are end-of-period adjustments?
Increases or decreases to account balances at the end of the period to reflect the costs of providing goods or services that are not supported by source documents.
What is depreciation?
The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life
What is the relationship between the income and balance sheet?
There is a connection between the balance sheet and income statement when double-entry accounting is used.
In essence, increases in revenue and gains as reported on the income statement cause stockholders’ equity to increase on the balance sheet. In addition, increases in expenses and losses as reported on the income statement cause stockholders’ equity to decrease on the income statement.
In addition, the write-down of an asset on the balance sheet causes a loss to appear on the income statement.
Assets = Liabilities + Owner’s Capital + Net Income
Net Income = Revenues - Expenses
