Accounting Flashcards
Accounting
Accounting is an art
Accounting involves interconnected phases
Concerned with transaction and events having financial character
Business transactions are expressed in money
Interpreting the results
Purpose of accounting
provide information to different users. The users utilize the information in making economic decisions.
Users of financial statement
Owners Andie esters Managers Lenders Suppliers Government Public
Types of accounting
Financial accounting Managerial accounting Cost accounting Auditing Tax accounting Forensic accounting
Areas of accounting
Private accounting
Public accounting
Government accounting
Types of business
Service business
Merchandising business
Manufacturing business
Hybrid business-restaurant
Forms of business organization
Sole partnership
Partnership
Corporation
Limited liability company
Elements of accounting
Assets
Liability
Capital
Assets
assets are properties or rights owned by the business.
Types of assets
1 Current. - useful for a period of 12 months
Cash , accounts receivable,inventories
2Non current-useful for a period of more than 12 months
Long term investment ,land ,building
Liabilities
Liabilities are economic obligations or payables of the business.
Types of liabilities
Current —due within 12 months
Ex -accounts payable ,interest payable,rent payable
Non current-not due within next 12months
Ex -mortgage
Capital
capital is equal to total assets minus total liabilities.
Capital also known as equity
Income
Income refers to an increase in economic benefit during the accounting period in the form of an increase in asset or a decrease in liabili
Expense
decrease in asset or an increase in liability that result in decrease in equity,
Basic accounting equation
Asset=liability+Capital
GAAP generally Accepted Accounting Principle
Primary purpose of GAAP is to ensure usefulness of financial information
Principles of GAAP
1Business entity principle
Every business accounted separately from its owner
2cost constraint principle(GAAP)
All transactions are recorded based on actual cash
3going concern assumption principle(GAAP)
Business will continue operating instead closed
Currency (GAAP)
Transactions and events must expressed in money
Revenue recognition principle(GAAP)
Revenue is recognized at the time it is earned
Measurement (GAAP)
Key methods of recording financial transactions Historical cost Current cost Realizable value Present value
Single entry book keeping
The single entry bookkeeping system does not explicitly record the two-fold effect of transactions. Under this method, separate books are maintained for the company’s basic accounts such as cash, receivables, and payables. Therefore, the accounting records are incomplete.
Double entry bookkeeping
Under the double entry method, every transaction is recorded in at least two accounts.
All accounts have a debit and a credit side. Debit means left and credit means right.
Now, here is the rule: To increase an asset, you debit it; to decrease an asset, you credit it. The opposite applies to liabilities and capital. To increase a liability or a capital account, you credit it; to decrease a liability or capital account, you debit it. Expenses are debited when incurred and income is credited when earned.
Accounting cicycle
Identifying and analyzing business transactions and events Recording transactions in the journals Posting journal entries to the ledger Preparing an unadjusted trial balance Recording and posting adjusting entries Preparing an adjusted trial balance Preparing the financial statements Recording and posting closing entries Preparing a post-closing trial balance
Financial statement
Financial statements refer to a specific set of reports produced in an entity’s accounting system
Components of financial statement
1 Income statement
Information about revenues and expense(total revanue-total expanse=profit or loss)
2Statement of changes in equity
Capital is affected by contributions and withdrawals of owners, income, and expenses.
3Balance Sheet
Both side of the accounting equation must equal
Account
An account is a storage unit that stores similar items or transactions.
Three parts of an account
1Account title
2Debit(left)
3Credit (Right)
Debit and credit
Let us take Cash. Cash is an asset account. Again, asset accounts normally have debit balances. Therefore, to increase Cash you debit it. To decrease Cash, you credit it.
Another example – let’s take Accounts Payable. It is a liability account. Liability accounts normally have credit balances. Thus, if you want to increase Accounts Payable, you credit it. If you want to decrease Accounts Payable, you debit it.
The same rules apply to all asset, liability, and capital accounts.
To Sum It Up
Here’s a table summarizing the normal balances of the accounting elements, and the actions to increase or decrease them. Notice that the normal balance is the same as the action to increase the account.
