Accounting Fundamentals

Question 1

All companies must follow a set of rules that standardises the reporting and recording of their financial data.

Answer 1

US companies follow Generally Accepted Accounting Principles (GAAP), and everyone else uses International Financial Reporting Standards (IFRS)

Question 2

The balance sheet gives

Answer 2

a glimpse into the health and composition of a business

Question 3

Double-entry bookkeeping:

Answer 3

A transaction requires at least two entries to keep the balance sheet balanced

Question 4

Balance sheet equation:

Answer 4

Assets = Liabilities + Equity

Question 5

Dual-aspect concept:

Answer 5

If there is a change in the total amount of assets, there needs to be a resulting change in liabilities, equity, or both.

Question 6

Money-measurement concept:

Answer 6

Only items expressed as monetary amounts can go on a balance sheet

Question 7

Entity:

Answer 7

A business, company, or organisation

Question 8

Entity concept:

Answer 8

A business’ finances are separate from its owner’s finances

Question 9

Going-concern concept:

Answer 9

Accounting assumes that an entity will operate indefinitely

Question 10

Assets:

Answer 10

Items owned and controlled by an entity, valuable to the entity, and acquired at a measurable cost

Question 11

Assets consist of:

Answer 11

Current assets and Noncurrent assets

Question 12

Current assets:

Answer 12

assets expected to be converted into cash or used up by the business within one year

Question 13

Noncurrent assets:

Answer 13

assets that will not be used up or converted into cash for at least one year

Question 14

Current assets contain:

Answer 14

Cash, Accounts Receivable, Inventory, Prepaid Expenses

Question 15

Accounts receivable:

Answer 15

Where a company records credit purchases by its customers. The company expects these customers to pay them in cash in the near future

Question 16

Inventory:

Answer 16

Goods an entity intends to sell

Question 17

Prepaid Expenses:

Answer 17

Monies paid in advance for pending expenses - e.g paying rent in advance

Question 18

Noncurrent assets contain:

Answer 18

Property,Plant and Equipment (PP&E)

Question 19

Property,Plant and Equipment:

Answer 19

Tangible assets that depreciate, or lose value, over time due to wear and tear.

Question 20

Creditor:

Answer 20

Anyone who lends money or extends credit

Question 21

Liabilities:

Answer 21

Debts owed to outside entities (creditors) in return for borrowed goods, services, or monies.

Question 22

Liabilities contain:

Answer 22

Current liabilities, Long-term liabilities, Bank loans payable, accounts payable, estimated tax liability

Question 23

Current liabilities:

Answer 23

Obligations that will be paid within one year

Question 24

Long-term liabilities:

Answer 24

Obligations that won’t be paid until at least a year has passed

Question 25

Bank Loans (Bank Loans Payable):

Answer 25

can be recorded under both current and long-term liabilities

Question 26

Accounts Payable:

Answer 26

Obligatory monies owed by an entity for goods and services. The opposite of Accounts Receivable.

Question 27

Estimated Tax Liability:

Answer 27

The estimated amount of what will be due in taxes per year

Question 28

Equity:

Answer 28

Money (capital) either supplied by equity investors or collected in the form of an entity's retained earnings

Question 29

Equity contains:

Answer 29

Paid-in Capital and Retained Earnings

Question 30

Paid-in Capital:

Answer 30

Money supplied by investors

Question 31

Retained Earnings:

Answer 31

Income generated by an entity's successful operations that is reinvested in the entity

Question 32

Proprietorship:

Answer 32

An entity with one sole owner and investor

Question 33

T accounts:

Answer 33

Charts used to record increases and decreases of individual accounts found on the balance sheet.

Question 34

Debits:

Answer 34

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

Question 35

Credits:

Answer 35

represent a decrease in an asset, but an increase in a liability or equity Liability and Equity accounts will normally have credit balances

Question 36

Revenue and Expenses are temporary accounts:

Answer 36

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.

Question 37

Income statements are used...

Answer 37

to calculate net income

Question 38

Net income:

Answer 38

The difference between total revenues and total expenses. It's calculated as follows: Net income = Total revenues - total expenses

Question 39

Balance sheets record

Answer 39

one point in history and show a company's financial position

Question 40

Income statements measure

Answer 40

a company's financial performance over a period of time

Question 41

General journal:

Answer 41

The chronological record of every transaction. A journal entry uses the same rules as a T-account

Question 42

General ledger:

Answer 42

The collection of all T-accounts

Question 43

Revenues and expenses are temporary accounts. At the end of a period,

Answer 43

they are closed out and their balances are transferred to the income statement.

Question 44

Other asset, liability, and equity accounts are permanent accounts.

Answer 44

They are not closed out, and their balances are transferred to the balance sheet.