Introduction to Accounting Vocabulary Terms Flashcards
What is an Asset?
An asset provides future economic benefit and is controlled by the business.
1) Future economic benefit 2) Arise from a past transaction 3) Controlled by the entity
What is a Liability?
A liability is an obligation or debt that the business needs to settle in the future.
1) Future economic harm/disadvantage 2) Arise from a past transaction or event 3) Responsibility of the entity
What is Equity?
Equity represents the owner’s claim upon the business after liabilities are settled.
What is Revenue?
Revenue is the inflow of economic resources earned from selling goods or services.
What is an Expense?
An expense is an outflow of economic resources needed to run a business and generate revenue.
What is the Accounting Formula?
Assets = Liabilities + Owner’s Equity.
What does Accounting Rule #2 state?
Debits must always equal credits on journal entries.
What is Book Value?
The value of an asset after subtracting depreciation or reductions like allowances.
What are Closing Entries?
Temporary accounts are closed at the end of the period to prepare for the next period.
R.E.I.D. Revenue, expenses, income summary, drawings
What is a Credit (CR)?
A credit is a right-hand entry that increases liabilities, equity, and revenue, and decreases assets and expenses.
What is a Debit (DR)?
A debit is a left-hand entry that increases assets and expenses, and decreases liabilities, equity, and revenue.
What is Gross Profit?
Gross profit is calculated as Revenue - Cost of Goods Sold (COGS).
What is the Historical Cost Concept?
Assets are recorded at what was paid for them, not their current market value.
What is the Matching Principle?
Expenses should be recorded when they help generate revenue.
What does Materiality refer to?
Materiality indicates that something is significant enough to impact financial decisions.
What are the Names of Financial Statements?
The four main financial statements are Income Statement, Statement of Owners Equity, Balance Sheet, and Statement of Cash Flow.
What is Net Income?
Net income is calculated as Revenue - Expenses.
What is Owner Equity?
Owner equity shows how much of the business is owned by the shareholders after paying off liabilities.
What is the Purpose of Accounting?
The goal of accounting is to provide useful financial information for decision making.
What is the Revenue Recognition Principle?
Revenue should be recorded when goods or services are delivered.
What is the Entity Principle?
Transactions are recorded from the perspective of the business, separate from the owner’s personal affairs.
