Accounting Fundamentals Flashcards
All companies must follow a set of rules that standardises the reporting and recording of their financial data.
US companies follow Generally Accepted Accounting Principles (GAAP), and everyone else uses International Financial Reporting Standards (IFRS)
The balance sheet gives
a glimpse into the health and composition of a business
Double-entry bookkeeping:
A transaction requires at least two entries to keep the balance sheet balanced
Balance sheet equation:
Assets = Liabilities + Equity
Dual-aspect concept:
If there is a change in the total amount of assets, there needs to be a resulting change in liabilities, equity, or both.
Money-measurement concept:
Only items expressed as monetary amounts can go on a balance sheet
Entity:
A business, company, or organisation
Entity concept:
A business’ finances are separate from its owner’s finances
Going-concern concept:
Accounting assumes that an entity will operate indefinitely
Assets:
Items owned and controlled by an entity, valuable to the entity, and acquired at a measurable cost
Assets consist of:
Current assets and Noncurrent assets
Current assets:
assets expected to be converted into cash or used up by the business within one year
Noncurrent assets:
assets that will not be used up or converted into cash for at least one year
Current assets contain:
Cash, Accounts Receivable, Inventory, Prepaid Expenses
Accounts receivable:
Where a company records credit purchases by its customers. The company expects these customers to pay them in cash in the near future
Inventory:
Goods an entity intends to sell
Prepaid Expenses:
Monies paid in advance for pending expenses - e.g paying rent in advance
Noncurrent assets contain:
Property,Plant and Equipment (PP&E)
Property,Plant and Equipment:
Tangible assets that depreciate, or lose value, over time due to wear and tear.
Creditor:
Anyone who lends money or extends credit
Liabilities:
Debts owed to outside entities (creditors) in return for borrowed goods, services, or monies.
Liabilities contain:
Current liabilities, Long-term liabilities, Bank loans payable, accounts payable, estimated tax liability
Current liabilities:
Obligations that will be paid within one year
Long-term liabilities:
Obligations that won’t be paid until at least a year has passed
Bank Loans (Bank Loans Payable):
can be recorded under both current and long-term liabilities
Accounts Payable:
Obligatory monies owed by an entity for goods and services. The opposite of Accounts Receivable.
Estimated Tax Liability:
The estimated amount of what will be due in taxes per year
Equity:
Money (capital) either supplied by equity investors or collected in the form of an entity’s retained earnings
Equity contains:
Paid-in Capital and Retained Earnings
Paid-in Capital:
Money supplied by investors
Retained Earnings:
Income generated by an entity’s successful operations that is reinvested in the entity
Proprietorship:
An entity with one sole owner and investor
T accounts:
Charts used to record increases and decreases of individual accounts found on the balance sheet.
Debits:
an entry recording a sum owed, listed on the left-hand side or column of an account.
represent an increase in an asset, but a decrease in a liability or equity.
Asset accounts will normally have debit balances
Credits:
represent a decrease in an asset, but an increase in a liability or equity
Liability and Equity accounts will normally have credit balances
Revenue and Expenses are temporary accounts:
Revenues are increases in equity and usually have a credit balance
Expenses are decreases in equity and usually have a debit balance
Revenues are debited and credited like equity accounts, but Expenses are debited and credited like asset accounts.
Income statements are used…
to calculate net income
Net income:
The difference between total revenues and total expenses. It’s calculated as follows:
Net income = Total revenues - total expenses
Balance sheets record
one point in history and show a company’s financial position
Income statements measure
a company’s financial performance over a period of time
General journal:
The chronological record of every transaction. A journal entry uses the same rules as a T-account
General ledger:
The collection of all T-accounts
Revenues and expenses are temporary accounts. At the end of a period,
they are closed out and their balances are transferred to the income statement.
Other asset, liability, and equity accounts are permanent accounts.
They are not closed out, and their balances are transferred to the balance sheet.
