Chapter 1 Flashcards
What is Accounting?
Accounting is the recording of past transactions. It is system that identifies, measures, records, and communicates relevant information that objectively and correctly represents an organization’s economic activities
What is Recordkeeping or Bookkeeping?
This is the recording of financial transactions, either manually or electronically, for the purpose of creating a bank of data that is complete, neutral, and free from error.
What is Managerial Accounting?
Main Definition: Managerial Accounting serves the needs of internal users by providing special-purpose reports. These special purpose reports are the results of general accounting, cost accounting, budgeting, internal auditing, and management consulting
Managerial Accounting is the management side of accounting. They are insiders. They work for the organization.
This is the type of accounting that is done for the managers to make decisions that supports the organization in reaching their goals.
What is Financial Accounting?
Financial Accounting serves the needs of external users by providing standardized financial reports referred to as financial statements.
external users are people who do not work for the organization e.g people who lend money to the organization, sell to the organization
What is an audit?
An audit is an independent review of an organization’s accounting systems and records. It is performed to add credibility to the financial statements.
External auditors perform the audit at the request of the board directors to protect investor interests
What are Financial Statements?
These are accounting reports that summarize a business’s activities over a period of time.
Four Major Financial Statements (Reports)
- Income Statement
- Statement of changes in equity
- Balance sheet
- Statement of cash flows
The income statement, statement of changes in equity, and statement of cash flows report on performance over a period of time.
The balance sheet reports on an organization’s financial position at a point in time.
Financial Statements
Transactions occur over a period of time, or during the accounting period, and are reported on the income statement, statement of changes in equity, and statements of cash flows. These transactions result in a new balance sheet at the end of the period
What is an Income Statement?
An income statement is the summary of a business’s revenues and expenses over a period of time.
Revenues are the money a company earns from the sale of its products and services before any expenses are taken out.
Expenses - This is money spent to acquire something — expenses includes daily transactions everyone encounters (like paying a phone bill) and big purchases made by companies (like buying a new piece of machinery).
What is a Balance Sheet?
A Balance Sheet is a financial report that gives us a snapshot of a business’s assets, liabilities and equity at a single point in time.
Assets - Assets are are the properties or economic resources controlled
by a business as a result of past events - like cash, equipment, buildings, and land.
Liabilities - Liabilities are debts or obligations of a business to transfer cash or another
economic resource as a result of past events
Types of Balance Sheet Assets
- Cash is an asset that business can easily exchange for goods and services
- Accounts Receivable is an asset created by selling products or services to customers on credit, meaning in advance of collecting cash from the customer. It reflects amounts owed to businesses by its credit customers.: In simple terms, accounts receivable represents money owed to your business by customers.
- Merchandize inventory held for sale
- Supplies
- Equipment
- Buildings
- Land
Type of Balance Sheet Liabilities
- Accounts payable is a liability created by buying products or services on credit. It reflect amounts owed to others.: In simple terms, accounts payable represents money that your business owes to suppliers
- Notes payable is a liability expressed by a written promise to make a future payment at a specific time.
- Salaries and Wages owed to employees
- Interest payable
- Money collected from customers in advance of providing a service called UNEARNED REVENUES
What is a Cash Flow Statement?
This summarizes the amount of cash flowing into and out of a company for a period of time.
What are Retained Earnings?
These are the business’s accumulated profits held for future use. This is what’s left over after we add up all the profits that the business has generated and takeaway what’s been withdrawn by the owners.
What is the Statement of Changes in Equity or Statement of Retained Earnings?
- Equity is equal to total assets minus liabilities
- It represents how much of the assets belongs to the owner
- Equity increases with owner investments and profits
Equity decreases with owner withdrawals and losses.
