exam 1 Flashcards
accounting
financial information system that provides accounting info to users
Generally Accepted Accounting Principles (GAAP)
common set of standards for accounting in the US
historical cost principle
record assets at cost
fair market principles
assets or liabilities reported at current market price
monetary unit assumption
should only include data that can be expressed in money terms; allows accountants to quantify economic events
economic entity assumption
activities at the entity should be separate from its owner
accounting equation
assets = liabilities + stockholders’ equity
assets
resources a business owns like cash, buildings, equipment, inventory
liabilities
claims against assets like accounts payable, notes payable, wages payable
stockholders’ equity
ownership claim on a corporation’s total assets like common stock and retained earnings
retained earnings
revenues - expenses - dividends
analyzing business transactions
1) identify the specific items affected
2) identify the amount of the change
debits & credits
if debits > credits -> account has a debit balance
if debits < credits -> account has a credit balance
for every entry, total debits = total credits
cash basis accounting
revenue is recognized when cash is received, expenses are recognized only when paid, leaves out revenues that have been earned but not received and expenses that have been incurred but not paid
accrual basis accounting
recognize revenues when earned, not necessarily when cash is received; recognize expenses when incurred, not necessarily when cash is paid
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
expenses recognition (matching) principle
requires that companies recognize expenses in the period in which they make efforts (consume assets or incur liabilities) to generate revenue, regardless of when cash is paid
adjusting entries
need to follow the revenue recognition and expense recognition principles; needed to record revenues and expenses in their proper time period
types of adjusting entries
- deferrals: prepaid expenses, unearned revenue
- accruals: accrued revenues, accrued expenses
trial balance
a list of accounts and their balanced at a given time, used to prove the mathematical equality of debits and credits after posting
adjusted trial balance
prepared after all adjusting entries have been journalized and posted; shows the ending balance of all accounts, including there that have been adjusted at the end of the accounting period
multi-step income statement
net sales = revenue - sales returns & allowances - sales discounts
sales returns
contra-revenue account; accept the goods back or give a reduction in the purchase price
sales discounts
contra-revenue account; incentive offered for prompt payment on credit salesr
gross profit
net sales - cost of goods sold
current assets
assets the company expects to convert to cash or use up within one year (or its operating cycle if longer)
long term investments
investments in stocks and bonds of other companies that are held for many years
property, plant, and equipment
assets with long useful lives that a company uses in its operations
intangible assets
assets without physical substance
current liabilities
obligations the company expects to pay within one year (or its operating cycle if longer)
long term liabilities
obligations the company expects to pay after one years
stockholders equity
content varies with organizational form
closing entries
entries that transfer net income/loss and dividends to retained earnings; temporary accounts are closed
