HBX- Accounting 1 Flashcards
To study for the HBX final exam
What is the main accounting equation?
Assets = Liabilities + Owners’ Equity
What is Owner’s Equity?
Owners’ Equity = Assets – Liabilities Contributions made by the owner (This is more flexible! Payments are discretionary not obligatory. Also- owners make decisions!) Essentially, owners’ equity is the difference between what a business has and what a business owes to others. The amount that would be left over after a business settles all its obligations is owners’ equity, or the amount that belongs to the owners of the business.










What are the TWO separate equations for a customer buying an item?
- 1- REVENUE: When someone buys something: Assets increase (Cash) & Owners equity increases
- 2- EXPENSE: When you RECORD the expenses for what it took to pay for that item/service: Assets Decrease (inventory decreases) & Owners Equity Decreases (What you paid for the item)
What are the TWO parts to buying on credit?
1- When asking for credit- money, inventory, etc: Assets Increase & Liabilities increase!
2- When the credit is paid off: Assets Decrease and Liabilities Decrease


2 primary methods of accounting
CASH
Used by very small businesses
ACCRUAL
Revenue is recognized when the merchandise is delivered
Realization Principle
if a business has delivered a good it can recognize revenue! Or at the time they sell the goods- if they receive them!
Matching Principle
One of the principles behind Accrual Accounting which states that expenses should be recognized in the same period in which the related revenue is recognized rather than when the related cash is paid.
Also- notes from the lesson: When cash is actually received from the sale 2 adjustments are made to assets
What happened here. (Most likely)

- the customer paid $500 for the item
- it cost the store $250 to stock
- Since you can count revenue BEFORE you receive it… to edit the equation when you get the $$, you + the amount $500 ($ you received from customer ) and - the amount $500 from assets (Because you can no longer receive that $ from the customer.
What is this an example of:
$1200 for a yearly membership of Bikram Yoga. Payment is recorded THROUGHOUT THE YEAR not at the time of payment. ($100 for each month) The studio is required to repay this debt through services, so this is a liability!
Advance Payment/Deferred Revenue

What does a sold gift card transaction look like?

Prepaid Expense
A prepaid expense is an asset that represents the right to receive goods or services in the future. Some common examples are prepaid rent or prepaid insurance, where a company pays for rent or insurance in advance of the coming month or year. At the time of the payment, the transaction is recorded as an asset, and as time passes, the asset is reduced and the expense is recognized. Remember that prepaid expenses are NOT expenses.

What’s the name of the AMERICAN board & the INTERNATIONAL board?
America:
- Financial Accounting Standards Board
- GAAP- Generally Accepted Accounting Principles
Everyone else
- International Accounting Standards Board
- IFRS- International Financial Reporting Standards
Conservatism
This principle recognizes that there are some estimates involved in accounting and says that accounting should reflect the more cautious estimated valuation rather than the more optimistic one. For assets it means recording the lower valuation while for liabilities it means recording the higher possible valuation. For revenues and gains it means recording them when they are reasonably certain but for expenses and losses it means recording them when they are reasonably possible.
The entity concept
The entity concept refers to the fact that a business is a separately identifiable entity. Thus, the accounts of a business should be separate and distinct from the accounts of the owners and managers of the business. In addition, financial records should be kept and reported for each separate entity, especially in the case of multi-national companies and large companies with subsidiaries.
Relevance
Relevance means that the information is useful and capable of influencing the decision of the users of the financial statements.
Reliability
Reliability means that the information faithfully represents the underlying economics. The three dimensions of reliability are:
- validity
- verifiability
- and unbiasedness.
Suppose you are CEO of a pharmaceutical company and there are early reports of potential bad reactions to one of your drugs. This information would be regarded as more:
Relevant OR Reliable
RELEVANT
Depending on the severity of the reactions, this may be relevant for both financial and health reasons.
It’s not the other because…Without knowing the source of these early reports, this information would not necessarily be considered reliable.
The historical cost principle
The historical cost principle refers to the fact that transactions are recorded at the cost that existed at the time the transaction occurred. In the case of assets, it means that their value in the financial records is shown at historical cost, rather than current market value. When combined with the principle of Conservatism, it means that an asset’s value may be reduced if it is deemed to have permanently lost value but it cannot be increased if it is deemed to have gained value.
EX: Real estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad’s office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it.