Accounting Fundamentals Flashcards
Three Types of Depreciation Methods
Straight-Line Depreciation, Double Declining Balance, Units of Production
Rules of Debit and Credit
Debit what comes in, credit what goes out
Debit all expenses and losses, Credit all incomes and gains
Debit the receiver, Credit the giver
Debit and Credit Rule for ASSET ACCOUNTS
Asset Accounts - a debit increases the balance and a credit decreases the balance
Debit and Credit Rule for LIABILITY ACCOUNTS
LIABILITY ACCOUNTS - a debit decreases the balance and a credit increases the balance
Debit and Credit Rule for EQUITY ACCOUNTS
Equity Accounts - a debit decreases the balance and a credit increases the balance
Debit and Credit Rule for REVENUE ACCOUNTS
Revenue Accounts - a debit decreases the balance and a credit increases the balance
DEBIT AND CREDIT in the BALANCE SHEET for Assets? Liabilities?
In the asset side, DEBIT entries increases the balance while CREDIT entries reduces the balance
In the asset side, DEBIT entries increases the balance while CREDIT entries reduces the balance
Three Key Financial Statements
Balance Sheet, Income Statement, Cash Flow Statement
What is a Balance Sheet?
A statement of financial position that displays the company’s total assets and how the assets are financed, either through either debt or equity
ASSETS = LIABILITIES + EQUITY
Shows what the company owns, what it owes, and what it’s worth
What is an Income Statement?
- A statement of profit or loss
- The statement displays the company’s revenue, costs, gross profit, selling, and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner
- Shows what the company has earned, what it has paid, and what’s the resulting profits or losses over a certain period of time
What is a Cash Flow Statement?
- The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how cash moved in and out of the business
- Shows how much cash the company has brought it, and how much it has paid out
Cash flows can be from:
Operating Activities
Investing Activities
Financing Activities
Two types of assets that comprises the company’s Total Assets
Total ASSETS = Current Assets + Non-Current Assets
What are Current Assets?
Assets that are used within one year
Example: Cash, Inventory, Accounts Receivable
What are assets?
It is what the company owns
What are Non-Current Assets?
Assets that last more than a year
Example: Property, Plant and Equipment, Technology, Patents, Trademarks
Non-Current Assets can be grouped into two:
Tangible Assets - physical
Intangible Assets - not physical such as trademarks, patents, etc.
What are Liabilities?
What the company owes
Two types of Liabilities that comprises Total Liabilities
Current Liabilities and Non-Current Liabilities
Current Liabilities?
Liabilities that are due within a year
Example: Accounts Payable
Non-Current Liabilities
Liabilities that are due in more than a year
Example: Long-term debt
What is Shareholder’s Equity
- known as Share Capital
- Refers to the owner’s claim on the assets of a company or the worth of the business after debt has been settled or after all liabilities has been taken off
Two components of Share Capital or Shareholder’s Equity?
- First is the money invested in the company through common or preferred shares and other investments made after the initial payment
- Second is retained earnings which includes net earnings that have not been distributed to shareholders over the years
What are retained earnings?
A running balance of how much the company is earning less the losses and dividends that have been paid out
What is Double-Entry Accounting?
a method of recording transactions where for every business transaction, an entry is recorded in at least two accounts as a debit or credit
What are Accounts Receivable?
Amounts owed by customers to the company
What are Accounts Payable?
Amounts owed by the company to the suppliers
What are the line items found in the Income Statement in order?
Revenue
Direct Operating Cost
Gross Profit
Indirect Operating Cost
Operating Income
Cost of Debt Financing
Tax
Net Income
What is the other term for Direct Operating Cost?
Cost of Goods Sold
What is Gross Profit in an Income Statement?
Gross Profit is the first subtotal line in an Income Statement. It is the result after COGS/Direct Operating Cost is deducted from Revenue
What costs may comprise Indirect Operating Cost?
R&D, Administration, Selling, Distribution, SG&A (Selling, General, and Administrative)
What is Operating Income in an Income Statement?
It is the second subtotal line in an income statement after Indirect Operating Costs are deducted from the Gross Profit
What is the more common terms used for Operating Income?
Earnings before Income and Taxes (EBIT)
What may comprise Cost of Debt Financing?
Interest from Debt, Bank Charges
What is Net Income in the Income Statement?
Net Income is the bottom line of the Income Statement (hence the name) showing the amount of remaining income after Tax and Cost of Debt Financing is deducted from the Operating Income
Does an income statement includes the revenues and expenses related from historical years? or just the current related accounting year?
Only the related accounting year, all expenses made in
So for example situations:
Example 1: During the last month of the year, the company buys insurance for 12 months at a cost of 12,000. How much insurance will be included in the income statement?
One month of Insurance Expense worth 1,000 will be recorded in the income statement
The remaining 11,000 will be recorded in the balance sheet as a “Current Asset” line item under “Prepaid Expense” line item
Prepayments result if payments are made in advance
Example 2: 2,000 worth of office supplies were used in the current year but were not paid for until the following year. How much of this expense should be included in the income statement for the current year?
The full expense of 2,000 as this is the value of the office supplies used in the current year
Since we haven’t paid for the office supplies, how do we record the second half of the transaction?
It will be recorded in the balance sheet under “Current Liabilities” line item as “Accrued Expense”
Accrued expenses have been reflected on the income statement, but not yet paid for
How is a depreciation expense generally calculated?
Depreciation expense is generally calculated by taking the purchase price, deducting the scrap value and dividing the different by its useful life?
What is the difference between Straight-Line Depreciation, Double-Declining Balance, Units of Production?
In straight line depreciation, an equal amount of depreciation is applied every year for the asset’s useful life. It is the most commonly used depreciation method and assumes that an asset will lose the same amount of value for the duration of its service life
Double Declining balance - A form of accelerated depreciation where the depreciation expense is greater in the first few years and smaller in the later years. The double-declining balance method is frequently used when an asset’s economic value is being consumed at a more rapid rate early on in its useful life (for example a vehicle). Because depreciation is higher in the early years, this could result in a deferral of income taxes
Depreciation expense varies each year and is based on the output that the assets produce. This method may be appropriate when usage of an asset varies over time and is dependent on the asset’s output. It is often the most accurate method of depreciation since it reflects the actual wear and tear of an asset.
Cash Flow Statement are organized based on:
Cash Flow from Operating Activities (Operating Cash Flow)
Cash Flow from Investing Activities (Investing Cash Flow)
Cash Flow from Financing Activities (Financing Cash Flows)
Bottom line: Net Cash Movement
What is the Accrual Concept?
Recognizes revenues and costs as the business earns or incurs them, not as it receives or pays money
Accrual Accounting vs Cash Accounting
Accrual Accounting method is based on matching revenues and expenses in the period which the transaction took place, instead of when the payment is processed
Cash Accounting is recording revenue and expense transactions when the payments are physically received or paid out. Advantage of this is that the business can account all the physical money it has but this is disadvantageous for business doing credit transactions
