Lesson 3 Flashcards
What is meant by the term ‘entity?’
Separation of accounting records of a business from the records of the business owner or owners.
What is a transaction?
A transaction is the exchange of property or service by a business with another entity.
What is a source document?
A source document is a business record used as evidence that a transaction has occurred.
What is a monetary unit concept?
A concept that transactions are to be recorded in terms of money or currency.
What is the historical cost concept?
The concept that a business records its transactions based on the dollars exchanged at the time the transaction occurred.
What is an asset?
An asset is a business’s economic resources that will provide future benefits to the business.
What is a liability?
Liabilities are the economic obligations of a business.
What is owner’s equity?
The owner’s equity of a business is the owner’s current investment in the assets of the business.
What is the accounting equation?
Assets = Liabilities + Owners Equity
What is the duel effect of transactions?
To keep the accounting equation in balance, a business must make at least two changes in its assets, liabilities, or owner’s equity when it records each transaction.
Why do managers, investors, creditors and others need information about the operations of a business?
Internal and external users need information about a business’s operations to evaluate alternatives.
What are the basic concepts and terms that help identify the activities recorded by the accounting records of a business?
- The entity concept
- Transactions
- Source documents
- The monetary unit concept
- The historical concept
What are the accounting principles and concepts related to net income?
- The accounting period
- Earning and recording revenues
- The matching principle
- Accrual accounting
Why are adjustment entries necessary at the end of a financial period?
End-of-period adjustments are necessary to record any expense that a business has incurred (or any revenue that the business has earned) during the accounting period but that it has not yet recorded. Adjustments ensure that these expenses (and revenue) are included in the business’s net income calculation.
Is it possible to prepare basic financial reports for a business from the running totals of the accounting equation?
We use the total totals for revenue and expenses in the owner’s equity section of the equation to calculate net income. We use the totals in teh assets section to find total assets and relate this to total liabilities plus owner’s equity total after adding or subtracting the net income (profit) or loss.
