Basic Transactions & Accounting Equation

Question 1

What are Transactions?

Answer 1

Events that impact the financial position of a business

Question 2

Examples of Transactions

Answer 2

sales, purchases, loans

Question 3

Cash Transactions

Answer 3

writing checks, electronic transfers from bank accounts

Question 4

Non-cash transactions

Answer 4

buying and selling goods on credit

Question 5

Impact On accounting equation when company takes a loan

Answer 5

(Assets)Cash increases, (Liabilities)Loans payable increases

Question 6

Impact On accounting equation when company makes initial investment

Answer 6

(Assets) Cash increases, (Owners Equity) increases

Question 7

Impact On accounting equation when company purchases equipment

Answer 7

(Assets)Cash decreases, (Assets)PP&E increases

Question 8

Impact On accounting equation when company buys inventory in cash

Answer 8

(Assets)Cash decreases, (Assets)Inventory increases

Question 9

What is Revenue?

Answer 9

Revenue is the money a business receives from its ordinary activities, such as providing goods or services to a customer.

Question 10

What is operating revenue?

Answer 10

Revenue obtained from the main activity of the business

Question 11

What is non-operating revenue?

Answer 11

Revenue earned from secondary activities such as interests on loan

Question 12

A company is profitable when…

Answer 12

Cost of running the business < revenue of the business

Question 13

When a sale is made

Answer 13

cash(asset) increases and the owner’s equity increases

Question 14

What is Retained earnings?

Answer 14

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

Question 15

What are expenses?

Answer 15

Cost of resources used by the company to provide good or services to the customer.

Question 16

How do expenses affect owner’s equity?

Answer 16

Decrease owner’s equity because resources are no longer available to the business

Question 17

What is COGS?

Answer 17

Cost of products sold to the customer (Cost of items + other expenses needed to get items ready for sale and placed in inventory.

Question 18

When inventory is sold, how does it affect the accounting equation?

Answer 18

Inventory decreases, cash increases, owners equity(Retained Earnings) decreases to recognize COGS

Question 19

What happens when the company buys on credit?

Answer 19

Liability called accounts payable is created that represent the obligation to pay the supplier in the future

Question 20

Purchase of inventory on credit, how does it affect the accounting equation?

Answer 20

1. Inventory(Assets) increase, and Accounts Payable(Liabilities) increase
2. When paying off, Accounts Payable decreases and cash decreases.

Question 21

Methods Of accounting for Revenues and expenses

Answer 21

1. Cash Accounting 2. Accrual accounting

Question 22

Cash Method

Answer 22

1. Used for small businesses 2. Transactions are recorded when cash exchanges hands

Question 23

Accrual Accounting

Answer 23

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.

Question 24

Accounting Period

Answer 24

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.

Question 25

Deferred Revenue/ Unearned revenue

Answer 25

Company receives pre-payment/cash before goods or services are delivered. Its a liability. Which later converts to revenue.

Question 26

Realization Principle

Answer 26

Revenues are recognized when they are earned and realizable, meaning if business is not confident that it will receive cash then revenue is not recognized.

Question 27

Matching Principle

Answer 27

Expenses are recognized in the period in which the revenue they helped generate are recognized.

Question 28

Impact of selling inventory on credit on the accounting equation

Answer 28

1) Recognize revenue: Revenue(Owners Equity) increases when sold, Accounts receivables (Assets) increases
2) Recognize expense: Decrease Inventory, Decrease Owner’s equity because expected benefit of the resource decreased (COGS)

Question 29

Impact on Accounting equation when Cash is received after selling inventory on credit

Answer 29

Accounts receivable decreases, Cash increases

Question 30

Receiving Advance payments

Answer 30

1) Cash increases, Deferred/Unearned Revenue (Liability) increases
2) Incase of prepaid gym or any other subscriptions revenue recognized over time
3) When customer pays , revenue is recognized - owners equity increases and liability decreases

Question 31

Sale Of Gift Card

Answer 31

Increases Cash (Assets), Increases Deferred Revenue(Liabilities)

Question 32

Pre-paid expenses

Answer 32

Businesses pre-pay for goods or services that provide benefit in the future. Prepaid expenses are recorded as asset. Asset is reduced and expense is recorded over time.

Question 33

Impact of Pre-paid expenses on accounting equation

Answer 33

1) Cash decreases, prepaid assets increase.

2) Every month, expenses are recognized =>decrease owners equity & decrease asset to reflect using up the resource.

Question 34

Why do we need accounting standards?

Answer 34

Set of rules and standards to guide companies to make similar decisions in simiar situations