Chapter 1: Accounting Concepts and Procedures Flashcards
What is accounting?
The recording, analyzing, and interpreting of financial transactions
What are the 4 main types of business organizations?
Sole proprietorship, partnership, corporation, and limited liability corporation (LLC)
What is a sole proprietorship?
A business owned by one person that is liable for company losses. This business ends with the death of the owner or the closing of the business
What is a partnership?
A business owned by at least 2 people that are liable for company losses. This business ends with the death of a partner, the closing of the business, or when a partner leaves
What is a corporation?
A business owned by stockholders that requires registering in each state in which it does business. Stockholders’ loss is limited to their investment in the company. A corporation can continue indefinitely
What is a limited liability corporation?
A business owned by a limited number of members who are liable only to the extent of their investment in the firm (unlike a corporation, these investors can also run the firm). LLCs must register in each state in which it does business. An LLC ends with the death of a member.
What are the 3 main types of businesses, on the basis of how they earn money?
Service company, merchandise company, and manufacturing company
What’s the difference between a merchandise company and a manufacturing company?
A manufacturing company produces and sells its own goods, whereas a merchandise company is a manufacturing company or a company that sells the goods of a manufacturing company
What is a creditor?
Someone with a claim to a company’s assets through a liability
What is the basic accounting equation?
Assets = Liabilities + Equity
What is the difference between supplies and equipment?
Equipment (e.g. desks) last longer than supplies (e.g. pens)
What is a balance sheet?
A document that provides a snapshot of a firm’s financial transactions in the format of the basic accounting equation
What is a cash basis system?
An accounting system in which costs and earnings are only recognized in cash transactions
What is an accrual basis system?
An accounting system in which costs and earnings are only recognized in cash and loan transactions
What is accounts receivable?
A type of asset in which products are given for a future payment
How are withdrawals accounted for in a balance sheet?
They are subtracted from assets and subtracted from equity
What is the difference between a withdrawal and an expense?
A withdrawal concerns a personal cost and an expense concerns a business cost
What is another name for capital?
Owner’s equity
What is the expanded accounting equation?
Assets = Liabilities + Initial Capital - Withdrawals + Revenue - Expenses
What is an income statement?
An accounting document that summarizes gross and net profits. The accounting period is no longer than a year
In what order are balance sheets, statements of equity, and income statements prepared in?
(1) Income statement, (2) statement of equity, and (3) balance sheet
What is an accounts payable?
A type of liability in which products are received and paid for at a later date
What is a cash basis system?
An accounting system in which costs and earnings are only recognized in cash transactions
What is an accrual basis system?
An accounting system in which costs and earnings are only recognized in cash and loan transactions
What is accounts receivable?
A type of asset in which products are given for a future payment
How are withdrawals accounted for in a balance sheet?
They are subtracted from assets and subtracted from equity
What is the difference between a withdrawal and an expense?
A withdrawal concerns a personal cost and an expense concerns a business cost
What is another name for capital?
Owner’s equity
What is the expanded accounting equation?
Assets = Liabilities + Initial Capital - Withdrawals + Revenue - Expenses
What is an income statement?
An accounting document that summarizes gross and net profits. The accounting period is no longer than a year
In what order are balance sheets, statements of equity, and income statements prepared in?
(1) Income statement, (2) statement of equity, and (3) balance sheet
What is an accounts payable?
A type of liability in which products are received and paid for at a later date
