Accounting Terms CH1-4

Question 1

Definition of Gain

Answer 1

In accounting, a gain is the result of a peripheral activity, such as a retailer selling one of its old delivery trucks. A gain occurs when the cash amount (or its equivalent) received is greater than the asset’s carrying amount, which is also referred to as the asset’s book value. For example, if the company receives $3,000 for the old delivery truck, and the truck’s carry amount (book value) at the time of the sale was $600, the company will have a gain of $2,400.

Question 2

IASB

Answer 2

International Accounting Standards Board

Question 3

IFRS

Answer 3

International Financial Reporting Standards

Accounting guidelines, formulated by the IASB

Question 4

management accounting

Answer 4

the branch of accounting that generates information for the internal decision makers of a business, such as top executives

Question 5

materiality

Answer 5

the importance or significance of information that may change the user’s final assessment of a situation

The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled.

(In a big company the balance sheet does not have to be accurate on the penny; rounding to millions might be okay)

Question 6

net earnings

Answer 6

also called net income or net profit

Question 7

operating activities

Answer 7

Activities that create revenue or expense in the entity’s major line of business

Question 8

paid-in capital

Answer 8

The amount shareholder’s equity that shareholders have contributed to the corporation

Question 9

proprietorship

Answer 9

a business with a single owner

Question 10

share capital

Answer 10

The part of the capital of a company that comes from the issue of shares.

Portion of a firm’s equity that has been obtained by the issue of shares to a shareholder, usually for cash.

Question 11

accrued (German)

Answer 11

angesammelt

Question 12

accrued liability

Answer 12

a liability for an expense that has not yet been paid by the company

Question 13

chart of accounts

Answer 13

list of a company’s accounts and their account numbers

Question 14

ledger

Answer 14

The book of accounts and their balances

Question 15

account

Answer 15

the record of the changes that have occurred in a particular asset, liability, or shareholder’s equity during a period.

Question 16

posting

Answer 16

copying the amounts from the journal to the respective ledger accounts

Question 17

prepaid expenses

Answer 17

=Prepayments;

paying expenses in advance before actual consumption.

Question 18

PPE

Answer 18

Property, Plant and Equipment

Assets that are expected to be used for more than one period.

Question 19

Trail balance

Answer 19

a list of all the ledger accounts and their balances

Question 20

accrued expense

Answer 20

an expense incurred but not yet paid in cash

Question 21

accrued revenue

Answer 21

a revenue that has been earned but not yet received in cash

Question 22

accumulated depreciation

Answer 22

the cumulative sum of all depreciation expenses from the date of acquiring a PPE

Question 23

adjusted trail balance

Answer 23

a list of all the ledger accounts with their adjusted balances

Question 24

carrying amount (of a PPE)

Answer 24

The asset’s cost minus accumulated depreciation

Question 25

closing entries

Answer 25

entries that transfer the income, expense, and dividends balances from these respective accounts to the Retained Earnings Accounts

Question 26

contra account

Answer 26

an account that always has a companion account and whose normal balance is opposite that of the companion account

Question 27

deferral

Answer 27

an adjustment for which the business paid or received cash in advance. Examples include prepaid rent, prepaid insurance, and supplies.

Question 28

accounting adjustments

Answer 28

an accounting adjustment is a business transaction that has not yet been included in the accounting records of a business of a specific date.
Most transactions are eventually recorded through the recordation of a supplier invoice, a customer billing, or the receipt of cash.

Question 29

matching concept

Answer 29

matching expenses to revenue. Directs accountants to identify all expenses incurred during the period, the measure the expenses, and to match them against the revenues earned during the same period.

Question 30

permanent accounts

Answer 30

asset, liability, and shareholders’ equity accounts that are not closed at the end of the period

Question 31

prepaid expense

Answer 31

a category of miscellaneous assets that typically expire or get used up in the near future. Examples include prepaid rent, prepaid insurance, and supplies.

Question 32

unearned revenue

Answer 32

also called deferred revenue

a liability when a business collects cash from customers in advance of earning the revenue. The obligation is to provide a product or a service in the future.

Question 33

board of directors

Answer 33

shareholder representatives elected to oversee the company and its management team

Question 34

chairmen / president

Answer 34

head of a board of directors

Question 35

unqualified opinion

Answer 35

an auditor’s opinion that the financial statements fairly represent the financial position and performance of the audited entity

Question 36

What happens if Revenues are earned?

Answer 36

There is an increase in current assets (cash or accounts receivable) and an increase in the retained earnings component of stockholders’ equity

Question 37

Does the adjusting entry affect the cash account?

Answer 37

No. Normally the credit and debit are unaffected.

Question 38

How do you account for accrued expenses?

Answer 38

(Expense that has been incurred but not yet paid; salaries)

The expense account is debited
A payable account in liabilities is credited

Question 39

How is accumulated depreciation classified?

Answer 39

(Grand total of all depreciation expense that has been recognized to date on a fixed asset.)

Is is neither a normal asset nor a liability.
No economic value is produce, thus no asset.
Not a liability because there is no obligation to pay a third party.

It is a contra asset account. It has a credit balance. It reduces assets.

Question 40

Which accounts are permanent and thus are not closed?

Answer 40

The balance sheet accounts are permanent accounts.

Accounts of assets liabilities and equity

Question 41

Who is responsible for the preparation of financial statements?

Answer 41

Management

Question 42

What is a provision?

Answer 42

A liability
The purpose of a provision is to make a current year’s balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year. These costs that distinctly belong to a specific year could be misleading if accounted for in the future.

A provision is not a form of saving, even though it is an amount that is put aside for a future plausible cost or obligation. Provisions resulting impact is a reduction in the company’s equity.

Question 43

What is other comprehensive income?

Answer 43

Other comprehensive income is those revenues, expenses, gains, and losses that are excluded from net income on the income statement. This means that they are instead listed after net income on the income statement.

Revenues, expenses, gains and losses appear in other comprehensive income when they have not yet been realized. Something has been realized when the underlying transaction has been completed, such as when an investment is sold. Thus, if your company has invested in bonds, and the value of those bonds changes, you recognize the difference as a gain or loss in other comprehensive income. Once you sell the bonds, you have then realized the gain or loss associated with the bonds, and can then shift the gain or loss out of other comprehensive income and into a line item higher in the income statement, so that it is a part of net income.

Question 44

Which current assets are there?

Answer 44

Current assets=C+CE+I+AR+MS+PE+OLA
where:
C=cash
CE=cash equivalents
I=inventory
AR=accounts receivable
MS=marketable securities
PE=prepaid expenses
OLA=other liquid assets

Question 45

5 common types of adjusting entries

Answer 45

Accrued Revenue
Accrued Expense
Unearned Revenue
Prepaid Expense
Depreciation

Question 46

How to record accrued revenue as an adjusting entry?

Answer 46

If you perform a service for a customer in one month but don’t bill the customer until the next month.

The adjusting entry shows the revenue in the month you performed the service.

debit accounts receivable
credit service revenue.

Question 47

How to record accrued expense as an adjusting entry?

Answer 47

For example wages paid to employees. When a business firm owes wages to employees at the end of an accounting period, they make an adjusting journal entry

debiting wages expense
crediting wages payable.

Question 48

How to record unearned revenue as an adjusting entry?

Answer 48

Unearned revenues refer to payments for goods to be delivered in the future or services to be performed.

Unearned revenue is money received by an individual or company for a service or product that has yet to be fulfilled. During the month which you made the purchase, the company would make an adjusting entry

debiting unearned revenue
crediting revenue.

Question 49

How to record prepaid expense as an adjusting entry?

Answer 49

assets that are paid for and gradually get used up during the accounting period. A common example of prepaid expenses is office supplies. A company buys and pays for office supplies. Gradually, during the accounting period, the office supplies are used up. As they are used up, they become an expense. During the month when the office supplies are used, an adjusting entry is made to

debit office supply expense
credit prepaid office supplies.

Question 50

How to record depreciation as an adjusting entry?

Answer 50

The accumulated depreciation account on the balance sheet is called a contra-asset account, and it is used to record depreciation expense. Increases are recorded as credits in contra-asset accounts. When an asset is purchased, it depreciates by some amount every month. For that month, an adjusting entry is made to

debit depreciation expense - equipment
credit accumulated depreciation

Question 51

What accounts are there for equity?

Answer 51

Most common:

• Common and preferred stocks
• Contributed Surplus or Additional Paid-in Capital
• Retained Earnings
• Other Comprehensive Income
  (Contra Equity Account: Treasury Stock)

Question 52

Unearned Service Revenue in income statement?

Answer 52

No it is recorded in the balance sheet only

Question 53

How is the issuance of share accounted for?

Answer 53

Cash debited
Share capital or Issued capital is credited

In this case both increase.

Question 54

How does a trial balance look like?

Answer 54

It has debits on the left side and credits on the right.

The bottom line sums up all the debits on the left and all the credits on the right.

Question 55

What Is a General Ledger?

Answer 55

The general ledger groups the transactions recorded in the journal

record-keeping system with debit and credit account records validated by a trial balance. The general ledger provides a record of each financial transaction that takes place during the life of an operating company.

Question 56

How do you make a journal?

Answer 56

Date left, then debit, credit

+ Transaction description for the date

Question 57

Parts of an annual report

Answer 57

annual report has the following structure:
■  corporate information
■  analysis and commentaries
■  other statements or disclosures
■  financial statements

Question 58

corporate information

Answer 58

For example, they could include information related to the history of the company, members of the board of directors and key management personnel, organizational structure of key subsidiaries or affiliates, key markets and products, major events during the financial period (such as mergers and acquisitions, or disposal of business units), awards and accolades received, operating statistics, financial highlights, and any other general information about the company that may be useful to a reader’s understanding of the company.

Question 59

Analysis and Commentaries

Answer 59

Letter from the Chairman of the Board of Executive Directors

Management analysis
It describes its view of the trends in the global economy and the industries it oper-
ates in, the performance of its business segments and geographical regions. It also describes the firms corporate social responsibility to its employees and the society, and its commitment to the environment and overall safety. It even provides the management’s outlook for the future.

Question 60

Other Statements and Disclosures

Answer 60

disclosures related to corporate governance. Corporate governance refers broadly to a set of principles adopted or practiced by organizations in order to ensure a clear corporate direction, responsibility, and accountability of those managing the organization.

Question 61

Financial Statements

Answer 61

Typically the financial statement section starts with an acknowledgement by directors and management that they are responsible for the financial statements, followed by an auditor’s report and the full set of financial statements.

Question 62

EITHER in a single statement i.e. Statement of Comprehensive Income;

Answer 62

Statement of Comprehensive Income

Question 63

OR in two separate statements

Answer 63

Income Statement

Statement of other Comprehensive Income

Question 64

Income Statement

Answer 64

With components of profit and loss recognized. This statement includes regular line items which in the language of IASs are known as profit and loss items.

Question 65

Statement of other Comprehensive Income

Answer 65

Statement of other Comprehensive Income: This statement starts with the profit or loss as calculated under Income statement and contains components of other comprehensive income. Simply this statement contains such line items which are not recognized in profit or loss and if disclosed under Income Statement then it might mislead users of financial statements as they may consider them as regular line items.

Question 66

unqualified opinion

Answer 66

It is the highest statement of assurance that an independent auditing firm can express

Question 67

A qualified opinion

Answer 67

As a whole, the financial statements are fairly presented, except for disagreement on how to treat a particular transaction

Question 68

adverse opinion

Answer 68

This opinion is the opposite of an unqualified opinion, i.e., the financial statements, as a whole, do not fairly represent the company’s financial position

Question 69

payment on account

Answer 69

A payment, often relating to taxes, that is based on a prior period’s liability.
cash is credited for the amount
accounts payable is debited for the amount (since it decreases)

Question 70

Received Cash on Account Journal Entry

Answer 70

A received cash on account journal entry is needed when a business has received cash from a customer and the amount is not allocated to a particular customer invoice or the customer has not yet been invoiced.

debit cash
credit accounts receivable

Question 71

Example of “Received Cash on Account”

Answer 71

suppose a business provides design services and has received cash of £4,000 from a customer. The cash receipt needs to be credited to the customers accounts receivable account.