Accounting Definitions

Question 1

Debt Financing

Answer 1

Borrowed resources/capital. It must be repaid at a specific future date, usually has interest. Debt is temporary financing.

Question 2

Equity Financing

Answer 2

Investors contribute resources/capital in exchange for ownership interest in a business which grants the following rights: 1. a right to vote or have a say in the affairs of the business 2. a right to share in any profits of the business. 3. a right to share in any remaining resources after the business has been terminated.

Question 3

What are the “General Purpose Financial Statements”?

Answer 3

1. Balance Sheet / Statement of Financial Position
2. Income Statement / Statement of Operations
3. Statement of Cash Flows

Question 4

GAAP

Answer 4

Generally Accepted Accounting Principles: Ate the rules and Standards of accounting used to create comparable information between businesses financial statements.

Question 5

SEC

Answer 5

Securities and Exchange Commission: Government run program that has legal authority to determine GAAP for publicly held companies also they regulate the capital transactions of publicly held companies.

Question 6

AICPA

Answer 6

American Institute of Certified Public Accountants: Originally had the responsibility of determining GAAP. They also Certify and License CPA’s

Question 7

FASB

Answer 7

Financial Accounting Standards Board: A private organization that was formed in 1973 to assume the responsibility of determining GAAP.

Question 8

Proprietorship

Answer 8

One owner, no red tape except if employees are hired, No separation of business and personal legal liability. No separate income taxation.

Question 9

Partnership

Answer 9

More than one owner, no red tape except if employees are hired, No separation of business and personal legal liability, No separate income taxation, a formal partnership agreement is recommended but not required.

Question 10

Corporation

Answer 10

A separate legal entity apart form it’s owners, lots of red tape, one or more owner, separation of liabilities, separation of business and personal taxation (double taxation)

Question 11

Who is responsible for a corporations accounting system and the preparation of the financial statements?

Answer 11

Management

Question 12

Describe Corporate ownership, governance, and management

Answer 12

Share holders (Invest Capital) Elect Board of directors (Advise for a fee) Who hires top management personnel (Manage for a salary) Who hires other employes (Work for a salary/wage) Which produces profits for owners.

Question 13

Balance Sheet or Statement of Financial Position

Answer 13

Reflect resources and how they have been provided

Question 14

Income Statement or Statement of Operations, Statement of Earnings, Statement of Profit and Loss, P&L Statement

Answer 14

Shows whether or not the business made a profit.

Question 15

Statement of Cash Flows

Answer 15

Shows the major sources and use of cash. An option al Financial statement (not required under GAAP but typically provided)

Question 16

Assets

Answer 16

(Resources) PROPERTY OR RIGHTS that are owned or controlled by a company and provide PROBABLE FUTURE ECONOMIC BENEFIT.

Question 17

Liabilities

Answer 17

PROBABLE FUTURE OBLIGATIONS to pay assets (usually cash) or provide services to another entity. LIABILITIES ARE A COMPANY’S DEBTS.

Question 18

What are the two components of Owners Equity?

Answer 18

Capital Stock and Retained Earnings

Question 19

Retained earnings

Answer 19

Any increase in assets arising from profitable operations to be retained in the business rather than distributed to owners as a dividend .

Question 20

Revenues

Answer 20

The amount of INFLOWING assets FROM THE SALE OR PROVIDING OF GOODS OR SERVICES TO CUSTOMERS.
revenues are not the asset received but simply a description of why we received the asset.

Question 21

Expenses

Answer 21

The amount of outflowing assets representing A COST OF PROVIDING GOODS OR SERVICES FOR SALE.
expense is a term which describes why an asset is given up or will be given up in the future.

Question 22

What is a General Ledger

Answer 22

A book or software file that that has a separate record of every account (assets, liability, or owner’s equity as well as each kind of revenue, expense, and dividend) so that you can easily understand what the total balance of that account is at any given time.

Question 23

What is a Trial Balance?

Answer 23

A listing of all assets, Liabilities, and owner’s equity ( capital stock, retained earnings, revenues, expense, and dividends) nothing their ending general ledger balances. It tells you you have an equal debits and credits. It’s really a way to do some self checking.

Question 24

Retained Deficits

Answer 24

Expenses exceed revenues
If a company incurs losses from operations rather than profits retained earnings is reduced and may actually become a deficit or debit balance.

Question 25

Real Accounts

Answer 25

All accounts which appear on a balance sheet are referred to as real accounts, meaning that the balance of the account is a cumulative running balance reflecting all transactions affecting that account since the inception of the business.

Question 26

Nominal Account

Answer 26

All income statement accounts (revenues and expenses and even the dividends) do not maintain a cumulative running balance from inception, but instead accumulates amounts period by period (usual year by year) and as a result are referred goal as nominal rather than real accounts. Nominal accounts are closed at the end of an accounting period and their amounts are transferred to retained earnings.

Question 27

What are Net Sales Revenue?

Answer 27

Net Sales less any Contra-revenue sales / sales discounts.

Question 28

Gross Margin

Answer 28

Mark up

Question 29

What does the Aging method find and why?

Answer 29

The Aging method will give you the ending balance in your Allowance for Bad Debt Expense account This is a

Question 30

Matching Principle

Answer 30

The matching principle requires the cost of operating a company to be recorded as expresses in the period in which those cost provide benefits to the company, not necessarily when those cost are actually paid in cash. It often requires adjusting entries to be made.

Question 31

Allowance Method

Answer 31

Uses estimation of uncollectible A/R to reflect bad debt expense in the proper period and is required under GAAP