Accounting Basics Flashcards
What are the basic accounting terms one should learn?
Revenues, Expenses, Assets, Liabilities, Income Statement, Balance Sheet, Statement of Cash Flows
What are the two basic accounting principles that assure a company’s income statement reports profitability?
Revenue Recognition Principle, Matching Principle
Fill in the blank: An income statement shows how _______ a company has been during a specific time interval.
profitable
What does the term ‘revenues’ refer to in accounting?
The amount earned for delivering services or goods
Under which accounting method are revenues recorded when they are earned?
Accrual Basis of Accounting
True or False: Expenses are recorded when they are actually paid, regardless of when they are incurred.
False
What is the purpose of the matching principle in accounting?
To match expenses with the revenues they help generate
What is a balance sheet?
A financial statement that reports a company’s assets, liabilities, and stockholders’ equity at a specific point in time
What are assets?
Things that a company owns and uses in its operations
Fill in the blank: The unexpired portion of prepaid expenses is reported as an asset on the _______.
Balance Sheet
What is the cost principle in accounting?
Assets are recorded at their original cost and not adjusted for fair market value increases
What is depreciation?
The allocation of the cost of an asset over its useful life
Fill in the blank: An income statement does not report cash coming in but rather reports _______ and expenses incurred.
revenues earned
What is the difference between net income and net loss?
Net income is when revenues exceed expenses; net loss is when expenses exceed revenues
What is Accounts Receivable?
An asset representing money owed to a company for services delivered but not yet paid for
True or False: The balance sheet provides a ‘snapshot’ of a company’s financial position at a specific moment.
True
What types of items might be included under assets on a balance sheet?
Cash, Vehicles, Supplies, Equipment, Accounts Receivable, Prepaid Insurance
What should Joe do if the net realizable value of his inventory is less than the original recorded cost?
Report the lower amount as the asset’s value on the balance sheet
Fill in the blank: The bottom line of an income statement is labeled as either _______ or Net Loss.
Net Income
What is an example of a prepaid expense?
Insurance premium paid in advance
What kind of costs should be matched with revenues according to the matching principle?
Expenses necessary to earn the revenues
What is the carrying amount of an asset when its expected useful life is zero?
Zero
How are long-term assets reported on the balance sheet?
At their cost minus accumulated Depreciation Expense
True or False: The balance sheet shows assets at their fair market value.
False
What is the market value of land on the balance sheet?
Reported at its original cost
Short-term assets are likely to be close to what value?
Their market values
What does the balance sheet report regarding a company’s reputation?
It is not listed as an asset
What are liabilities?
Obligations of the company; amounts owed to others
Give an example of a liability.
- Notes Payable
- Accounts Payable
- Wages Payable
What is Unearned Revenue?
Money received in advance of earning it
What accounts are involved when Direct Delivery receives $600 in advance for deliveries?
- Cash (increased)
- Unearned Revenue (increased)
How does stockholders’ equity relate to assets and liabilities?
It is the difference between asset amounts and liability amounts
What accounts might you find in the Stockholders’ Equity section?
- Common Stock
- Retained Earnings
- Preferred Stock
What does the Statement of Cash Flows show?
How cash amounts have changed during a specific time interval
What is the double-entry system in accounting?
Each transaction results in an amount recorded in at least two accounts
What is a chart of accounts?
A detailed listing of account names useful for reporting transactions
Name one type of account found on the balance sheet.
- Asset accounts
- Liability accounts
- Stockholders’ Equity accounts
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ Equity
In the accounting equation, which side do assets appear on?
(debit side)
What happens to the Cash account when a company receives cash?
The Cash account is debited
What happens to the Cash account when a company pays cash?
The Cash account is credited
Fill in the blank: To increase an asset account’s balance, you ______ the account.
debit
Fill in the blank: To decrease a liability or equity account, you ______ the account.
debit
What is a general journal entry?
Format used to indicate accounts and amounts for debits and credits
What occurs in Sample Transaction #1 when Joe invests $20,000?
- Cash increases by $20,000
- Common Stock increases by $20,000
After Joe’s investment, how does the balance sheet reflect this transaction?
Assets = Liabilities + Stockholders’ Equity remains balanced
In Sample Transaction #2, what does Direct Delivery do with the delivery van?
Purchases it for $14,000 by writing a check
What accounts are affected in Sample Transaction #2?
- Vehicles (debited)
- Cash (credited)
What happens to the balance sheet after the vehicle transaction?
Assets remain balanced at $20,000
What is the accounting equation?
Assets = Liabilities + Stockholders’ Equity
What happens to the Cash account when Direct Delivery pays for insurance?
Cash is credited.
When a company pays cash for an asset that does not expire in the current month, which account is debited?
Prepaid Insurance or another asset account.
What principle states that revenues are recorded when earned, regardless of cash receipt?
Revenue recognition principle.
In a transaction involving a service fee earned but not yet received, which account is debited?
Accounts Receivable.
What is the journal entry format for receiving cash for services rendered?
Debit Cash, Credit Service Revenues.
True or False: Expenses are almost always debited.
True.
What happens to Stockholders’ Equity when net income increases?
Stockholders’ Equity increases.
What is the journal entry for incurring an expense with a payable?
Debit Temporary Help Expense, Credit Accounts Payable.
Fill in the blank: When a company receives cash for a service not yet performed, the account to be credited is ______.
Unearned Revenue.
What is the cost principle in accounting?
Assets are shown at original cost or less, not current value.
What is recorded as Service Revenues?
Revenue earned from services performed.
What does the matching principle state regarding expenses?
Expenses are matched with revenues in the same period they are incurred.
What is the balance sheet equation?
Total Assets = Total Liabilities + Total Stockholders’ Equity.
What account is credited when cash is received from a customer for a previously delivered service?
Accounts Receivable.
How is prepaid insurance treated in the accounting records?
It is treated as an asset.
What happens to the revenue accounts at the end of the year?
They are closed and their balances transferred to Retained Earnings.
When a company pays cash for an expense that will expire in the current month, which account is debited?
An expense account.
What type of account is ‘Accounts Payable’?
A liability account.
What is the effect on the balance sheet when a temporary help expense is incurred but not paid?
Increase in Accounts Payable and increase in Temporary Help Expense.
Which account reflects the company’s obligation to pay for services received but not yet paid?
Accounts Payable.
