Accounting Fundamentals Flashcards
To review basic terms and concepts in accounting
What do accountants want?
Accountants want to see both sides of financial transactions - the give and take.
Why do we need accounting?
Accounting is needed because all economic activity requires information. The more developed the economic system, the more the system depends on information. Much of the information comes from accounting systems
What question does a balance sheet answer?
The balance sheet answers “Where do we stand at the end of the period?”
What financial report shows where a business stands at the end of a period?
The balance sheet.
What are other names for the balance sheet?
The Statement of Financial Condition / The Statement of Financial Position
What values are recorded in the balance sheet?
Business assets and their sources. Assets come from two different sources, creditors or owners. Assets that come from creditors are liabilities of a business.
What is the accounting equation?
Total Assets = Liabilities + Owners’ Equity
What equation does the balance sheet record?
Assets=Liabilities+Owners’ Equity
What are alternate names for Owners’ Equity?
Capital and Net Worth
What is retained profit?
Business earnings that have been reinvested in the business. Retained profit is accounted for in Owners’ Equity on the balance sheet.
What is accounted for in Owners’ Equity on the Balance Sheet?
Capital investment + retained profit.
Business Owners
Investors who contribute capital (usually money) to the business.
What is Profit?
The sum total of Revenue for the Period minus all expenses for the Period. Profit is not a transaction, but a calculated amount that depends on how revenue and expenses are recorded.
Bookkeeping / Recordkeeping system
The information source for financial statements.
The reliability and accuracy of the bookkeeping system and the integrity of the company’s managers determine the reliability and accuracy of its financial statements.
The financial information must be timely, complete, accurate, and reliable.
Sales Revenue
Total income from the sales of products and services during the period before the expenses accrued in the period are deducted.
Creditors
Lenders of goods advanced on credit or money in the form of interest-bearing loans that have to be paid back at a later date.
Business Stakeholders
A business is the hub of transactions involving its customers, employees, independent contractors, vendors and suppliers, government entities, sellers of long-term operating assets, debt sources of capital (banks, moneylenders), and equity sources of capital (shareholders)
Debt
Borrowed money on which interest is paid.
Equity
Ownership capital.
The payment for using equity capital depends on the ability of the business to earn profit and have the cash flow to distribute some or all of the profit to its equity shareholders.
How is Cost of Goods Sold (COGS) determined?
From inventory cost at the beginning of year, purchases during the year, cost of labour during the year (for manufacturers), other costs, and inventory cost at year-end.
What is the first expense deducted from sales revenue, if the main revenue stream of the business is from selling products?
Cost of Goods Sold (COGS)
Business Events
Are not based on give-and-take bargaining but they have an economic impact on the business and are recorded.
Examples of events include losses from lawsuits, natural disasters, downsizing resulting in increased severance liability.
How are business events recorded?
At year end the accountant conducts a special survey to ensure that all events and developments during the year that should be recorded have been captured, so that financial statements and tax returns for the year are complete and correct.
What are Financial Reports?
Financial reports are made up of financial statements that are collected together and packaged with information such as explanatory footnotes and a letter from top management.
What is the purpose of Financial Reports?
They are the only source of financial information outsiders get directly from a business or organization.
What is financing?
Financing refers to raising capital and paying for the use of the capital.
What do businesses need assets for?
Businesses need assets to carry on operations, such as cash, inventory, and long-term operating assets.
What are the two sources of capital for businesses?
The two sources of capital are debt and equity.
What is Gross Margin?
Gross Margin, also known as Gross Profit, is sales revenue less COGS (Cost of Goods Sold).
What are internal controls?
Internal controls are quality controls built into recordkeeping systems to ensure financial information is complete, accurate, and timely.
What is the purpose of data entry controls?
Data entry controls are designed to minimize errors and detect theft, embezzlement, fraud, and other dishonest behavior.
What do investing transactions refer to?
Investing transactions refer to the acquisition and disposal of long-term operating assets, such as buildings and machinery.
What are liabilities?
Liabilities are assets that can be traced to a business’s creditors.
What are operating activities?
Operating activities are profit-making transactions that occur frequently.
How are operating earnings calculated?
Operating Earnings = Profit before interest and income tax expenses.
What does bookkeeping focus on?
Bookkeeping focuses on transactions which are economic exchanges between a business and other parties.
What are valuation methods?
Valuation methods are how accountants measure value in a business, including profit and loss and valuing assets and liabilities.
How does a business generate investment income?
Some businesses also invest in financial assets such as bonds, for example, which generate investment income for the business.
What is a Statement of Financial Position or a Positional Statement?
A Balance Sheet
What is a Statement of Financial Condition?
A Balance Sheet
