Accounting Exam Review Flashcards
What is the basic accounting equation
Assets - Liabilities = Owners Equity
What is the expanded Accounting equation
Assets = Liabilities + Owner’s Capital - Drawings + profit or (- for loss)
What is the matching principle
According to the matching principle, expenses should be recognized in the same period in which they help to generate revenue.
What is the revenue recognition principle
According to this principle, revenue should be recognized when it is earned and realizable, regardless of when the payment is received
What is the time period assumption
The time period assumption in accounting is the idea that a business’s financial activities can be divided into specific time periods, such as months, quarters, or years. This assumption allows companies to create financial statements that provide useful information for decision-making.
Why are adjusting entries needed?
Adjusting entries are necessary in accounting to ensure that financial statements accurately reflect a company’s financial position and operating results. These entries are made at the end of an accounting period, typically before the preparation of financial statements, and serve several important purposes:
What are prepayments
Accounting prepayments, also known as prepaid expenses, refer to payments made by a company for goods or services that will be received or used in the future. These payments are made in advance of actually receiving the benefits associated with them.
What are unearned revenues
epresents payments that a company has received in advance for goods or services that it has not yet delivered or earned. In simple terms, it’s money that a business has received but has not yet recognized as revenue because it owes something in return.
What are accrued revenues
Accrued revenues in accounting represent revenues that a company has earned but has not yet received payment for. In simple terms, it’s the recognition of revenue before actually receiving the cash.
What are accrued expenses
Accrued expenses in accounting refer to costs or expenses that a company has incurred but has not yet paid. In simple terms, these are expenses that have been accrued or accumulated but have not been settled with a cash payment.
What is depreciation
Depreciation in accounting is a method used to allocate the cost of a long-term asset over its useful life. In simpler terms, it represents the gradual decrease in the value of an asset over time. This decrease reflects the wear and tear, obsolescence, or other factors that affect an asset’s ability to generate economic benefits.
What is the contra account for depreciation
A contra account, specifically “Accumulated Depreciation,” is used in accounting to offset the value of an asset on the balance sheet. It represents the total depreciation expense recognized on an asset over its useful life.
What is net book value
Net book value in accounting refers to the remaining value of an asset on a company’s balance sheet after deducting its accumulated depreciation. It represents the original cost of the asset minus the total depreciation recognized up to a specific point in time.
What is the purpose of closing entries
Closing entries serve the purpose of resetting temporary accounts in a company’s accounting records at the end of an accounting period. These temporary accounts include revenue, expense, and dividend accounts. The primary goals of closing entries are to prepare the accounts for the next accounting period and to accurately measure the net income or loss for the current period.
What are the accounts you close and in what order
REID
Revenues
Expenses
Income summary
Drawings
What are permanent Accounts
Permanent accounts, in accounting, are the accounts that carry over from one accounting period to the next and do not get closed at the end of each period. Unlike temporary accounts (such as revenue, expense, and dividends accounts), which are reset to zero to measure performance for a specific period, permanent accounts maintain their balances continuously.
What are temporary accounts
Temporary accounts in accounting are those that record specific financial activities for a limited period, typically within a single accounting cycle. These accounts include revenue accounts, which capture income generated from sales and services, and expense accounts, which track the costs incurred to operate the business.
What are some examples of Permanent Accounts
Asset Accounts:
Cash
Accounts Receivable
Inventory
Property, Plant, and Equipment (e.g., buildings, machinery)
Investments
Liability Accounts:
Accounts Payable
Loans Payable
Accrued Liabilities
What are some examples of Temporary Accounts
Revenue Accounts:
Sales
Service Revenue
Interest Income
Rental Income
Expense Accounts:
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
what is the differences between a trial balance, an adjusted trial balance, and post-closiing trial balance
Trial Balance:
Purpose: A trial balance is a list of all the accounts in a company’s general ledger and their respective balances. It is created at the end of the accounting period to ensure that the total debits equal the total credits, serving as an initial check on the accuracy of the accounting records.
Timing: Prepared before any adjustments are made.
Adjusted Trial Balance:
Purpose: An adjusted trial balance is created after adjusting entries have been made to the accounts. Adjustments are necessary to recognize accruals, prepayments, and other adjustments to ensure that financial statements reflect the true financial position of the company.
Timing: Prepared after adjusting entries are applied.
Post-Closing Trial Balance:
Purpose: A post-closing trial balance is compiled after the closing entries have been made. Closing entries involve resetting temporary accounts (revenue, expense, and dividends) to zero, and the post-closing trial balance ensures that only permanent accounts (assets, liabilities, equity) are considered. It serves as a starting point for the next accounting period.
Timing: Prepared after closing entries are applied.
What is the current ratio and how can it be calculated
The current ratio is a financial metric used to assess a company’s short-term liquidity or its ability to cover its short-term liabilities with its short-term assets. It provides a snapshot of a company’s ability to meet its short-term obligations.
The formula for calculating the current ratio is:
Current Ratio = Current Assets/Current Liabilites
What is liquidity
In accounting, liquidity refers to the ability of a company to meet its short-term financial obligations or, in simpler terms, how easily it can convert its assets into cash to cover its immediate liabilities.
How should physical inventory be taken
- the counting should be done by employees who are not responsible for custody of the inventory, or keeping the records
- Each counter should confirm that each inventory item actually exists, how many there are of it, and what condition each item is in
- There should be a second count by another employee to ensure that all inventory items are counted, and only once
How is ownership determined?
By answering the follwing questions:
- Do all the goods included in the count belong to the company?
- Does the company own any goods that were not included in the count?
