CH11 - Accounting Flashcards
Accounting
comprehensive information system for collecting, analyzing, and communicating financial information
-> measures business performance and translates the findings into information for management decisions
bookkeeping
process of keeping records of transactions such as taxes paid, income received, and expenses incurred
accounting information system
organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. The system includes all the people, reports, computers, procedures, and resources for compiling financial transactions
the accounting equation
most basic tool of accounting
assets = liabilities + owner’s equity
asset and liability def
Asset = any economic resource that is expected to benefit a firm or an individual who owns it (ex. land, buildings, equipment, inventory, and payments due to the company (accounts receivable))
Liability = debt that the firm owes to an outside party
owner’s equity def
The amount of money that owners would receive if they sold all the company’s assets and paid all its liabilities.
the 3 basic financial statements
balance sheets, income statements, and statements of cash flows
balance sheet def
they supply detailed information about the accounting equation factors: assets, liabilities, and owners’ equity
current asset vs fixed asset vs intangible asset
current = cash, money in the bank and assets that can be converted to cash within a year (that conversion is called liquidating)
fixed = they have long-term use or value (land, buildings, equipment) - but value can depreciate over time
intangible = hard to set monetary value, cost of obtaining rights or privileges such as patents, trademarks, copyrights, and franchise fees (Goodwill is the amount paid for an existing business beyond the value of its other assets)
current vs long-term liabilities
current = must be paid within a year, includes accounts payable (unpaid bills to suppliers for materials, as well as wages and taxes that must be paid in the coming year)
long-term = debts that are not due for at least one year. These normally represent borrowed funds on which the company must pay interest
retained earnings
net profits minus dividend payments to shareholders
income statement def
description of revenues and expenses that results in a figure showing the firm’s annual profit or loss, shows financial condition during a period of time instead of at a specific point in time like balance sheets
revenues - expenses = profit
revenue recognition
formal recording and reporting of revenues in the financial statements (Although all firms earn revenues continuously as they make sales, earnings are not reported until the earnings cycle is completed)
matching principle
states that expenses will be matched with revenues to determine net income for an accounting period.
-> important because it permits the user of the statement to see how much net gain resulted from the assets that had to be given up to generate revenues during the period covered in the statement
gross profit (or gross margin)
gp = revenues - cost of goods sold (how much it cost to make them)
