AFM 191 - Chp 2.3 accural accounting + double-entry system

Question 1

How does a company recognize economic activity?

Answer 1

cash vs accural accounting

Question 2

define cash accounting (cash basis accounting)

Answer 2

a method of recognizing economic activity when cash is exchanged

revenue is recognized when cash is received and expenses are recognized when payment is made

Question 3

what are the problems with cash accounting approach

Answer 3

doesn’t reflect the actual usage if bills are paid not frequently eg quarterly vs monthly

Question 4

define accrual accounting

Answer 4

recognizing economic activity when revenue is earned and when expenses are incurred.

it follows the matching principle and required estimation and juedgement

Question 5

define the matching principle

Answer 5

required expenses to be recognize in the same period in which the related revenue was earned

Question 6

what’s the accounting equation

Answer 6

assets = liabilities + equity

Question 7

define double-entry accounting

Answer 7

every entry must have at least 1 debit and 1 credit

Question 8

what’s the process of the accounting equation

Answer 8

1. debiting an asset account will increase its balance
2. crediting a liability account will increase its balance
3. crediting a revenue account will increase its balance
4. debiting an expense account will increase its balance
5. crediting an equity account will increase its balance