Accounting Principles and Practices Flashcards
What are the key assumptions of financial accounting?
They are the set of rules that ensures the business operations of an organization are conducted efficiently and professionally.
What is the Economic Entity Assumption?
The business is a sperate entity so the activities of a business must be kept separate from any other financial activities of it’s business owners.
What is the Reliability Assumption?
Requires companies to record only accounting transactions that can be verified through invoices, billing statements, receipts, and bank statements.
What is the Full disclosure principle?
All information that is relative to the business and is important to a lender or investor must be disclosed in financial statements or in the notes of the statements.
What is the Conservatism Assumption?
When bookkeepers or accountants are uncertain and need to determine how to report an item, conservatism guides them to choose the option that shows less income or asset benefit. Potential losses can be recorded while potential gains cannot
What is the Materiality Principle?
It states that an accounting standard can be ignored if the impact has such a small effect on financial statements that it would not be misleading
What is the Consistency Principle?
It states that when a business adopts a specific accounting method, it will enter all similar items in the exact same way in the future; Only change an accounting principle or method if the new version improves reporting
What is the Monetary Unit Assumption?
It states that one currency is used throughout all accounting activities.
What is the Going Concern Assumption
Refers to a business that is stable enough to operate and meet its obligations for the foreseeable future.
What is the Periodicity Assumption?
It is also known as the time period assumption and states that an organization can report its financials within certain designated periods of time. (Financials are reported on a monthly, quarterly, or annual basis).
What is the Revenue Recognition Principle
It requires that revenues are recognized on the income statement in the period when realized and earned – not necessarily when cash is received.
What is the Matching Principle
It directs a company to report an expense on its income statement in the period in which the related revenues are earned
What are the three types of accounting methods?
Cash basis accounting
Accrual accounting
Hybrid accounting
What is cash-basis accounting?
It is the accounting method in which revenue is recognized when payment is received and expenses are recognized when paid out; there is no A/P or A/R.
What is Accrual accounting?
Accounting method in which revenues are reported when they are earned and expenses are reported when they are incurred.
