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.
Deferred Revenue/ Unearned revenue
Company receives pre-payment/cash before goods or services are delivered. Its a liability. Which later converts to revenue.
Realization Principle
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.
Matching Principle
Expenses are recognized in the period in which the revenue they helped generate are recognized.
Impact of selling inventory on credit on the accounting equation
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)
Impact on Accounting equation when Cash is received after selling inventory on credit
Accounts receivable decreases, Cash increases
Receiving Advance payments
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
Sale Of Gift Card
Increases Cash (Assets), Increases Deferred Revenue(Liabilities)
Pre-paid expenses
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.
Impact of Pre-paid expenses on accounting equation
1) Cash decreases, prepaid assets increase.
2) Every month, expenses are recognized =>decrease owners equity & decrease asset to reflect using up the resource.
Why do we need accounting standards?
Set of rules and standards to guide companies to make similar decisions in simiar situations
