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ACCT1501 > Basic Accounting Definitions > Flashcards

Basic Accounting Definitions Flashcards

1
Q

Financial Accounting

A

Periodic financial statements for external decision makers (e.g. investors, creditors)

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2
Q

Management Accounting

A

Frequent financial statements for internal decision makers (e.g. Executives, the board)

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3
Q

Accrual vs Cash Accounting

A

The impact of transactions is recognised in the time period the transactions and expenses occur, rather when the cash is received or paid

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4
Q

Revenue

A

Sales of goods/services

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5
Q

Expenses

A

The cost of generating revenue

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6
Q

Balance Sheet

A

Shows an entity’s financial resources and obligations on resources at a particular point in time

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7
Q

Income statement

A

Measures financial performance of an entity over a specific period

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8
Q

Cash Flow Statement

A

Shows the sources and uses of cash during the defined period

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9
Q

Retained Profits note/Statement of Retained Earnings

A

The accumulated net income of the corporation that is retained at a particular point in time

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10
Q

Assets (+3 characteristics)

A

A present economic resource
Characteristics: Controlled by the entity; as a result of past events; has the potential to produce future economic benefits

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11
Q

Liabilities (+3 characteristics)

A

What the company owes
Characteristics: Present obligation of the entity to transfer an economic resource; as a result of past events; will result in an outflow from the entity’s economic benefits

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12
Q

Equity

A

What belongs to the owners (Share capital + Retained earnings)

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13
Q

Balance Sheet Equation

A

Assets = Liabilities + Equity

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14
Q

Current vs Non-current

A

Current: Expected to realise the benefits/costs in the next 12 months
Non-current: Long term (expected to realise benefits/costs over a longer period)

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15
Q

Income Statement Equation

A

Profit (Net Income) = Revenue - Expenses

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16
Q

Relationship between Balance sheet and Income Statement

A

Net profit on the income statement contributes to the retained profits in the equity on the balance sheet

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17
Q

Fundamental (2) and enhancing (4) qualitative characteristics that make accounting information useful to users

A

Fundamental: Relevance, faithful representation (reliability)
Enhancing: Comparability, verifiability, timeliness, understandability

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18
Q

Accounting assumptions (6)

A

Accrual basis; Accounting entity; Accounting period; Monetary; Historical cost; Going concern

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19
Q

Why is accounting important?

A

Financial reports are used to mitigate information asymmetry (between investors and managers) & agency problems (managers don’t always act in the interests of shareholders)

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20
Q

Recognition criteria of assets & liabilities (2) in addition to definition criteria

A
  1. Probable that any future economic impact associated with the item will flow to/from the entity
  2. The item has a cost or value that can be measured
    reliably
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21
Q

Revenue (definition)

A

Gross inflows of economic benefits during the period arising in the ordinary activities (recognised when it is ‘earned’)

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22
Q

Expense (definition)

A

Decreases in assets or increases in liabilities, that result in decreases in equity (excluding payments/returns to owners - as considered distribution of net profit)

23
Q

Transactions (definition)

A

Events that affect the operations or finances of an entity

24
Q

The extended equity accounting equation

A

Assets = Liabilities + Share Capital + Opening Retain Profits + Revenue - expenses - dividends

25
Q

Economic Benefit (definition)

A

The potential for an asset to contribute either directly or indirectly to the flow of an entity’s cash

26
Q

Debit (defintion + components)

A

Represent the flow of economic benefit to a destination - Normal Balance of debits include Dividends + Expenses + Assets

27
Q

Credits (definition)

A

The flow of economic benefit from a source - Normal balance of credits include Liabilities + shareholder’s Equity + Revenue

28
Q

Double Entry Accounting (Why is it called this)

A

A transaction must affect at least two accounts so the equation balances (A + Exp = L + E + Rev)

29
Q

Journal Entries (definition + how to format)

A

A record of a financial transaction (shorthand version of transaction analysis) - Debits first, then credits on the next line (indented once) - debits and credits must be equal

30
Q

Depreciation (definition - how is it recorded)

A

Allocation of the cost of a non-current asset to expense over the life of an asset - Dr. Depreciation Expense (+expense) + Cr. Accumulated depreciaton (-Assets)

31
Q

Main asset accounts

A

Cash, Accounts receivable, Inventory, Land, Buildings, Equipment, Prepaid expenses

32
Q

Main liabilities accounts

A

Loans payable, Accounts payable, Wages payable, Loans payable, Income Tax payable, Interest payable

33
Q

Main equity accounts

A

Share capital, retained earnings

34
Q

Judgement needed to be made about transactions (2)

A

Relevant events to record

When and how events enter the accounting system

35
Q

Characteristics of transactions external (4)

A

Exchange of items of economic value
Involves a party external to business
Evidence (documentation) exists
Measurable in monetary units

36
Q

Examples of source documents

A

Invoices, receipts, cheques, bank statements, goods received advice, notice of direct debits + credits

37
Q

Acronym to remember which sides accounts go on in credits and debits

A

Dividends, Expenses, Assets - Liabilities, Equity, Revenue

38
Q

What do you use to determine how much you have and to record transactions in an account?

A

A ledger/T account

39
Q

What is the chart of accounts and what does it contain>

A

Represents listing of all accounts in the general ledger - includes a specific number for each account

40
Q

What is a trial balance?

A

An initial check to see if any mechanical errors have occurred - does debits = credits

41
Q

What errors will the trial balance not pick up?

A

Not posting the journal entry; Incorrect amounts on both sides

42
Q

What are the temporary accounts and what happens to them?

A

Include revenue, expenses and dividends - they are reset to 0 at the end of each accounting period

43
Q

What is the temporary account named when doing closing entries?

A

Profit and Loss (P&L) Summary

44
Q

What happens to the P&L Summary Account?

A

P&L Summary is debited to 0 and Retained Profits is credited

45
Q

Principles of Accrual account means it records: (rev, exp, items)

A

Revenues when they are earned, not received
Expenses when they are incurred, not paid
Items with no cash flow (e.g. depreciation)

46
Q

What is the purpose of closing entries?

A

Used to transfer financial performance to the financial position * reset the entries to 0 for the next period

47
Q

Why do we need accrual adjusting journal entries?

A

Revenues and expense may arise before or after cash flow or at the same point in time
Record accounting transaction to the appropriate time period
Capture the ‘real’ picture of accounts

48
Q

What are internal transactions with example?

A

Adjustments made to records that introduce new data or alter existing data - e.g. adjusting entries

49
Q

Assets which are adjusted accounts:

A

Prepaid expense, Accrued revenue

50
Q

Liabilities which are adjusted accounts:

A

Unearned revenue, Accrued expense

51
Q

What is a Contra Account and examples?

A

An account used in a general ledger to reduce the value of a related account (CR/DR is opposite of the balance on the related account)
e.g. PPE - Accumulated depreciation; Accounts receivable - allowance for doubtful debts (ADD)

52
Q

Why Contra Accounts are useful?

A

Allows users to have more information on exactly what the account contains - e.g. for ADD it shows collection policies + problems; for Acc. Depr. it shows future cash outflows

53
Q

What is a worksheet and what does it contain?

A

An optional tool to help prepare financial statements by listing all accounts vertically down the page (DEALER)

ACCT1501 (1 decks)

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