Accounting Fundamentals Flashcards by April Holmstrom

What is the double-entry system?

15th century Italy by Luca Pacioli involving debits and credits

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What is accounting?

Academic discipline involving the reporting, interpretation, and organization of a financial structure for a business.

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What is the Sarbanes-Oxley (SOX) law?

This law requires additional work and investigation surrounding the accuracy of financial reporting. It also forces management to be individually responsible for the accuracy of their financial information.

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What is GAAP?

Who does it apply to?

What is it’s objective?

Generally Accepted Accounting Principles

Represents the accounting standards for U.S. companies. Publicly traded U.S. companies are required to use U.S. GAAP; many privately held companies, although not required to use it, still do.

Help financial statements achieve three things:

Relevance. Is the information relevant to the message we are trying to send through our financial statements?
Reliability. Can we rely on the information?
Comparability. Can we compare the financial statements of two different entities?

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What is IRFS?

Who does it apply to?

What is it’s objective?

International Financial Reporting Standards

Represents the accounting standards for all international companies. This means that if you are doing business any any countries outside of the U.S., you would use IFRS.

Standardized the accounting procedures across all nations.

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What is the AICPA?

American Institute of Certified Public Accountants

Established in 1887

It is the main professional association for CPAs and develops additional guids that assist them when they are implementing U.S. GAAP.

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What is the GASB?

Governmental Accounting Standards Board

Established in 1984

This board is in place to develop standards of financial reporting for state as well as local governments.

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What is the FASB?

Financial Accounting Standards Board

Established in 1973

Likely the most important governing body. Has a critical role relating to developing U.S. GAAP. The FASB develops new standards and controls the implementation of previous standards, as well as new standards that are coming out.

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What is the SEC?

Securities and Exchange Commission

Established in 1934

Rule enforcer: develop rules and enforce securities law.

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What is the GAO?

Government Accountability Office

Established in 1921

Government watchdog: work for Congress and play a very important role in investigating program spending related to the use of public funds.

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What is the IRS?

Internal Revenue Service

Established in 1862

Tax Man: deal with collecting taxes and enforcing the IRS code.

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What is managerial accounting?

A branch of accounting that is focused on internal reporting to assist internal management with decisions, structure, and goals.

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What is financial accounting?

A branch of accounting that is focused on external reporting of financial status to provide information to decision-makers and interested parties.

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What is the role of the shareholder?

An individual or organization that legally owns one or more shares in a company.

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What is the role of the investor?

An individual who has dedicated capital to a company with an expectation of a return on that investment.

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What is the role of the bookkeeper?

An individual who documents an organization’s monetary transactions.

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What is the role of the accountant?

A practitioner with acquired skills in the field of accountancy.

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What is the role of the controller?

An individual within an organization accountable for all aspects of financial reporting and accounting.

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What is the role of the auditor?

An individual who conducts an objective appraisal of accounting processes and data within an organization.

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What is a sole proprietorship?

A type of company that is owned by a single individual, where the individual and the business are legally treated the same.

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What is a Limited Liability Company (LLC)?

A type of company where owners are not held personally responsible for the organization’s liabilities.

What is a Limited Liability Partnership (LLP)?

A type of company where only one of the partners is liable for the amount invested in the organization and is not accountable for the behavior of the other partners.

What is a Private Corporation (PC)?

A type of company whose shares are not purchased or traded publicly.

What is a Nonprofit?

A type of company that reinvests its profit into the goals of the company instead of distributing to owners and shareholders.

What is a Corporation (Inc.)?

A type of company that exists as a separate unit from owners and shareholders, thereby protecting each individual from liability that exceeds the original investment.

Explain a C Corp and what they file.

Files form 1120 Corporate income tax is paid by the corporation, so the corporation itself pays taxes. There is double taxation, meaning any distributions made by that C Corp to owners are also taxed. Not only does the corporation pay tax, but so do the individual owners.

Explain an S Corp and what they file.

Also files form 1120, however, it is the 1120s Pays no income tax Considered a pass-through entity, all the activity of the organization passes through to the owners.

What form does an LLC file?

Form 1065 LLC pays no taxes Considered a pass-through entity

What form do nonprofits file?

Form 990 Exempt from taxation Include organizations like charities or fundraising organizations

What is an account?

A record that provides information about a given asset, liability, equity, revenue, or expense.

What are the two types of accounts and what does each encompass?

Permanent Accounts: assets, liabilities, and equity Temporary Accounts: revenue and expenses

Define Assets

Physical or non-physical resources owned by an organization that have economic value: cash, inventory, equipment.

Define Liabilities

Debts and other financial responsibilities of an organization: accounts payable, loans payable, if money is owed to the bank

Define Equity

The remaining value, once liabilities are subtracted from assets: owner's capital accounts, retained earnings, owner's draw.

Define Revenues

Earnings from interest, or from the sale of goods or services

Define Expenses

Costs associated with operating or maintaining a business

What are the 6 steps of the accounting cycle?

``` Analyzing Journalizing Posting Adjusting Reporting Closing ```

What is the Analyzing step?

Identify business events - internal and external - that need to be documented in the accounting or financial system and assess the impact of those events.

What is the Journalizing step?

Use the general journal to record those events.

What is the Posting step?

Move transactions from the general journal into the general ledger, thereby officially transferring them into the accounting system. The general ledger is then used to review and track activity throughout the period.

What is the Adjusting step?

Adjustments take place at the end of the period.

What is the Reporting step?

The reporting step is the final product of the cycle - the financial statements

What are the four main financial statements?

Income Statement Statement of Retained Earnings (or Statement of Changes in Owner's Equity) Balance Sheet Statement of Cash Flows

What is the Closing step?

Temporary accounts get closed to the owner's equity or retained earnings. We close these accounts because they are intended to track activity only for a specific period, and must be reset before the beginning of the next period.

What is the basic accounting equation?

Assets = Liabilities + Owner's Equity This equation MUST ALWAYS balance.

Which accounts fall under the Asset Account Group?

Cash Accounts Receivable Supplies Long Term Assets

Which accounts fall under the Liability Account Group?

Accounts Payable Notes Payable Utilities Payable

What account falls under the Equity Group?

Equity Owner's Withdrawals

What accounts fall under the Revenue Group?

Service Revenue | Rent Revenue

Which accounts fall under the Expense Group?

Wages Expense Utilities Expense Advertising Expense

Know the impact of a debit or a credit on each of the account groups.

``` Asset = Debit+, Credit- Liability = Debit-, Credit+ Equity = Debit-, Credit+ Revenue = Debit-, Credit+ Expense = Debit+, Credit- ```