Basics Flashcards
What is accounting?
The process of identifying, recording, and communicating financial information to help users make informed decisions.
What is the Accounting Equation?
Assets = Liabilities + Equity
Define Accrual Basis Accounting.
An accounting method that recognizes revenues when they are earned and expenses when they are incurred.
What are accrued expenses?
Expenses that have been incurred during a period but have not yet been paid or recorded.
What are accrued revenues?
Revenues that have been earned during a period but have not yet been recorded or received in cash.
What is the Acid-Test Ratio?
(Cash + Short-Term Investments + Receivables) / Current Liabilities
What is an adjusting entry?
An entry made at the end of an accounting period to update account balances to reflect the correct amounts for the period.
What is the Allowance for Doubtful Accounts?
A contra-asset account used to reduce the carrying amount of accounts receivable.
What is the Allowance Method?
An accounting method for bad debts that estimates and records bad debts expense in the same period when the related sales are recorded.
Define amortization.
The process of allocating the cost of an intangible asset over its useful life.
What are assets?
Resources owned by a company that have future economic value.
What is a Balance Sheet?
A financial statement that presents a company’s assets, liabilities, and equity at a specific point in time.
What is Bad Debts Expense?
The expense recognized when it is estimated that some accounts receivable will not be collected.
True or False: The Banker’s Rule uses a 360-day year for interest calculation.
True
What is the Business Entity Assumption?
The accounting principle that assumes that the business is a separate entity from its owner and other businesses.
Define Cash Basis Accounting.
An accounting method that recognizes revenues when cash is received and expenses when cash is paid.
What is a Chart of Accounts?
A list of all the accounts used by a company in its accounting system.
What is a Classified Balance Sheet?
A balance sheet that groups assets and liabilities into categories such as current and non-current.
What are Closing Entries?
Entries made at the end of an accounting period to transfer the balances of temporary accounts to the owner’s capital account.
Define Commercial Substance.
Exists if the company’s future cash flows are expected to change as a result of an exchange of plant assets.
Who is a Consignee?
The party who receives goods on consignment from the consignor to sell on their behalf.
Who is a Consignor?
The owner of goods who delivers them to a consignee to sell on their behalf.
What is the Consistency Principle?
The accounting principle that requires a company to use the same accounting methods from period to period.
What is a Contra Asset Account?
An account that is offset against an asset account to reduce its value.
What is the Cost Principle?
The accounting principle that requires assets to be recorded at their historical cost.
Define Credit in accounting.
An entry on the right side of a T-account.
What are Current Assets?
Assets that are expected to be converted to cash or used up within one year.
What are Current Liabilities?
Liabilities that are expected to be paid within one year.
What is the Current Ratio?
Current Assets / Current Liabilities
Define Debit in accounting.
An entry on the left side of a T-account.
What is the Debt Ratio?
Total Liabilities / Total Assets
What is the Declining-Balance Depreciation Method?
An accelerated depreciation method that depreciates an asset at a faster rate in the early years of its life.
What is Depletion?
The process of allocating the cost of a natural resource over its estimated useful life.
What is Depreciation?
The process of allocating the cost of a tangible, long-lived asset over its useful life.
What is the Direct Write-Off Method?
A method of accounting for bad debts that recognizes bad debt expense only when a specific account is deemed uncollectible.
What is a Dishonored Note?
A note receivable that the maker fails to pay at maturity.
Define Double-Entry Accounting.
A system of accounting in which every transaction is recorded in at least two accounts.
What is Equity?
The residual interest in the assets of a company after deducting liabilities.
What is Ethics in accounting?
Beliefs that distinguish right from wrong and guide behavior.
What are Expenses?
Costs incurred by a company in the process of generating revenue.
What are Financial Statements?
Formal reports that communicate a company’s financial information to stakeholders.
What is First-In, First-Out (FIFO)?
An inventory costing method that assumes that the first goods purchased are the first ones sold.
What does FOB Destination mean?
The seller bears the cost of shipping and ownership transfers to the buyer when goods reach their destination.
What does FOB Shipping Point mean?
The buyer bears the cost of shipping and ownership transfers when goods leave the seller’s shipping point.
What is the Fraud Triangle?
A model describing the three factors that contribute to fraudulent behavior: opportunity, pressure, and rationalization.
What is the Full Disclosure Principle?
The principle that requires companies to disclose all information that is relevant and material to users of financial statements.
What are Generally Accepted Accounting Principles (GAAP)?
The set of accounting standards, conventions, and rules that guide the preparation of financial statements.
What is a General Ledger?
A record containing all of a company’s accounts, organized by account number.
What is the Going-Concern Assumption?
The principle that assumes that the business will continue to operate in the foreseeable future.
What are Goods in Transit?
Goods that have been shipped but not yet received by the buyer.
Define Goodwill.
An intangible asset representing the excess of the purchase price of a business over the fair market value of its identifiable net assets.
What is the Gross Margin Ratio?
Gross Profit / Net Sales
What is an Income Statement?
A financial statement that reports a company’s revenues and expenses over a period.
What are Installment Accounts Receivable?
Amounts owed by customers for purchases made on credit, with payments made in installments.
What are Intangible Assets?
Long-term assets that lack physical substance but have value based on the rights or privileges they confer.
What is Internal Control?
A system of policies and procedures designed to safeguard assets and ensure the accuracy of financial records.
What does the International Accounting Standards Board (IASB) do?
Sets International Financial Reporting Standards (IFRS).
Define International Financial Reporting Standards (IFRS).
A set of global accounting standards becoming increasingly prevalent worldwide.
What is Inventory?
Goods held by a company for sale to customers.
What is Inventory Turnover?
Cost of Goods Sold / Average Inventory
What are Investing Activities?
Activities that involve acquiring and disposing of long-term assets.
What is a Journal?
A chronological record of a company’s transactions.
What is Journalizing?
The process of recording transactions in a journal.
What is Last-In, First-Out (LIFO)?
An inventory costing method that assumes the last goods purchased are the first ones sold.
What are Liabilities?
Obligations or debts that a company owes to others.
Define Liquidity.
A measure of a company’s ability to meet its short-term obligations.
What are Long-Term Investments?
Investments that are expected to be held for more than one year.
What are Long-Term Liabilities?
Liabilities that are not expected to be paid within one year.
What does Lower of Cost or Market (LCM) mean?
A rule that requires inventory to be reported at the lower of its cost or its market value.
What is a Lump-Sum Purchase?
The purchase of multiple assets for a single price.
What is the Matching Principle?
The principle that requires expenses to be recognized in the same period as the revenues they helped generate.
What is Materiality?
The concept that information is material if omitting it could influence decisions.
What is a Maturity Date?
The date when a note receivable is due and payable.
What is Merchandise Inventory?
Goods that a merchandising company purchases to resell.
What is the Modified Accelerated Cost Recovery System (MACRS)?
An accelerated depreciation method allowed for tax purposes in the United States.
What is the Monetary Unit Assumption?
The principle that assumes transactions are measured in a common monetary unit.
What is a Multiple-Step Income Statement?
An income statement format that presents various subtotals.
What are Natural Resources?
Assets that are physically extracted from the environment.
What is Net Income?
The excess of revenues over expenses for a period.
What is Net Realizable Value?
The estimated selling price of an asset, less estimated costs.
What are Notes Payable?
Formal written promises to pay a specific amount of money.
What are Notes Receivable?
Formal written promises to receive a specific amount of money.
What are Operating Activities?
Activities that comprise the company’s primary business operations.
What is the Operating Cycle?
The time it takes for a company to convert cash into inventory.
What is Owner’s Capital?
The owner’s investment in the company.
What are Owner’s Withdrawals?
Distributions of cash or other assets from the business to the owner.
What is Partial-Year Depreciation?
Depreciation calculated for the portion of the year an asset is owned.
What are Patents?
Exclusive rights granted by the government to an inventor.
What is the Periodic Inventory System?
An inventory system where the cost of goods sold is determined only at the end of a period.
What is a Perpetual Inventory System?
An inventory system that keeps a continuous record of the cost of each item.
What are Plant Assets?
Long-lived, tangible assets used in the operations of a business.
What does Pledging Receivables mean?
Using accounts receivable as collateral for a loan.
What is a Post-Closing Trial Balance?
A trial balance prepared after closing entries have been posted.
What are Prepaid Expenses?
Expenses paid in advance that benefit future periods.
What is the Profit Margin?
Net Income / Net Sales
What is a Promissory Note?
A written promise to pay a specified amount of money.
What is a Purchase Allowance?
A reduction in the purchase price granted by a supplier.
What is a Purchase Discount?
A reduction in the purchase price for paying an invoice early.
What is a Purchase Return?
Merchandise returned to a supplier for credit or a refund.
What are Receivables?
Amounts due from individuals or companies.
What is Relevant Information?
Information capable of making a difference in decisions of users.
What is Reliable Information?
Information free from error and bias.
What is Revenue?
Increases in assets or settlements of liabilities from delivering goods.
What is the Revenue Recognition Principle?
Determines when revenue should be recognized.
What are Reversing Entries?
Optional entries made at the beginning of an accounting period to reverse certain adjusting entries.
What is Return on Assets (ROA)?
Net Income / Average Total Assets
What are Sales?
Revenues from selling goods or services.
What is a Sales Allowance?
A reduction in the selling price due to defects.
What is a Sales Discount?
A reduction in the selling price for early payment.
What are Sales Returns and Allowances?
A contra-revenue account used to record reductions in sales revenue.
What is Salvage Value?
The estimated amount expected from selling or disposing of an asset at the end of its useful life.
What is the Sarbanes-Oxley Act (SOX)?
Legislation passed in 2002 to enhance corporate governance and financial reporting.
What does Selling Receivables mean?
Transferring ownership of accounts receivable to another company for cash.
What is a Service Company?
A company that primarily earns revenue by providing services.
What is a Single-Step Income Statement?
An income statement format that lists all revenues and all expenses together.
What are Source Documents?
Original documents that provide evidence of transactions.
What is the Specific Identification Method?
An inventory costing method that tracks the cost of each individual item.
What is a Statement of Cash Flows?
A financial statement that reports cash inflows and outflows from activities over a period.
What is a Statement of Owner’s Equity?
A financial statement showing changes in the owner’s equity account over a period.
What is the Straight-Line Depreciation Method?
A method that allocates an equal amount of depreciation expense to each year.
What is a T-Account?
A simplified representation of a ledger account.
What are Temporary Accounts?
Accounts that are closed at the end of each accounting period.
What is the Time Period Assumption?
The principle that assumes the economic life of a business can be divided into artificial time periods.
What is Total Asset Turnover?
Net Sales / Average Total Assets
What is a Trade Discount?
A reduction in the list price of goods.
What is a simplified representation of a ledger account?
A representation showing debits on the left side and credits on the right side.
What are Temporary Accounts?
Accounts that are closed at the end of each accounting period, including revenue, expense, and withdrawal accounts.
Define the Time Period Assumption in accounting.
The principle that assumes the economic life of a business can be divided into artificial time periods, such as months, quarters, and years.
What does Total Asset Turnover measure?
An efficiency ratio that measures how effectively a company utilizes its assets to generate sales.
How is Total Asset Turnover calculated?
Net Sales / Average Total Assets.
What is a Trade Discount?
A reduction in the list price of an item offered to customers who buy in large quantities.
What is a Trial Balance?
A list of all the accounts in the general ledger and their balances at a particular point in time, used to ensure total debits equal total credits.
Define Unearned Revenue.
A liability account representing payments received in advance for goods or services not yet delivered or rendered.
What is the Units-of-Production Depreciation Method?
A depreciation method that allocates depreciation expense based on the actual usage of the asset.
What is Useful Life in accounting?
The estimated period over which an asset is expected to provide economic benefits to a company.
Define the Weighted-Average Inventory Method.
An inventory costing method that calculates the average cost of all units available for sale and assigns that cost to both cost of goods sold and ending inventory.
What is a Worksheet in accounting?
An informal tool used to organize information needed to prepare financial statements, aiding in the preparation process.
