Basic Transactions & Accounting Equation Flashcards
What are Transactions?
Events that impact the financial position of a business
Examples of Transactions
sales, purchases, loans
Cash Transactions
writing checks, electronic transfers from bank accounts
Non-cash transactions
buying and selling goods on credit
Impact On accounting equation when company takes a loan
(Assets)Cash increases, (Liabilities)Loans payable increases
Impact On accounting equation when company makes initial investment
(Assets) Cash increases, (Owners Equity) increases
Impact On accounting equation when company purchases equipment
(Assets)Cash decreases, (Assets)PP&E increases
Impact On accounting equation when company buys inventory in cash
(Assets)Cash decreases, (Assets)Inventory increases
What is Revenue?
Revenue is the money a business receives from its ordinary activities, such as providing goods or services to a customer.
What is operating revenue?
Revenue obtained from the main activity of the business
What is non-operating revenue?
Revenue earned from secondary activities such as interests on loan
A company is profitable when…
Cost of running the business < revenue of the business
When a sale is made
cash(asset) increases and the owner’s equity increases
What is Retained earnings?
1) Account that increases when a company recognizes revenue.
2) Amount of resources a business generates by running its operations and keeps for interna purposes instead of distributing to owners
What are expenses?
Cost of resources used by the company to provide good or services to the customer.
How do expenses affect owner’s equity?
Decrease owner’s equity because resources are no longer available to the business
What is COGS?
Cost of products sold to the customer (Cost of items + other expenses needed to get items ready for sale and placed in inventory.
When inventory is sold, how does it affect the accounting equation?
Inventory decreases, cash increases, owners equity(Retained Earnings) decreases to recognize COGS
What happens when the company buys on credit?
Liability called accounts payable is created that represent the obligation to pay the supplier in the future
Purchase of inventory on credit, how does it affect the accounting equation?
- Inventory(Assets) increase, and Accounts Payable(Liabilities) increase
- When paying off, Accounts Payable decreases and cash decreases.
Methods Of accounting for Revenues and expenses
- Cash Accounting 2. Accrual accounting
Cash Method
- Used for small businesses 2. Transactions are recorded when cash exchanges hands
Accrual Accounting
Revenue is recognized when its earned through delivery of goods and services and payment is assured. Expenses are recorded when business used a resource or when they are incurred. Not waiting for cash to exchange hands.
Accounting Period
The time frame for which the results are being reported, timing of when revenue and expenses paid are recognized. Could be monthly, quarterly or yearly.