LU2 Flashcards
What is the fundamental purpose of accounting?
to provide accurate, useful, and timely financial information in the form of financial statements, forecasts, budgets and many types of reports
What is bookkeeping?
the initial phase of accounting; the primary function is to record business transactions in the accounting records
Why are financial statements necessary?
- Managers need timely and accurate information to make intelligent decisions if their businesses are to succeed
- Investors need financial statements to analyze the quality of a potential investment or current stock holding
- Banks need financial statements to identify any risk involved doing business with customers on an open line of credit
Who are the users of financial statements?
- External users are those outside of the business, such as investors, banks, and suppliers
- Internal users are the management of the company, such as the board of directors, the president and other officers, and the managers of the business
What is financial accounting?
it is primarily concerned with recording and accumulating accounting information to be used in the preparation of financial statements for external users. Involves the basic accounting processes of recording, classifying, and summarizing business transactions
What is managerial accounting?
it has to do with recording and accumulating information to prepare financial statements and reports for internal users. it provides performance reports that compare the results of the operations with the budget plans.
What is a business transaction?
the exchange of merchandise, property, or services for cash or promise to pay
What is a double-entry system?
it is a business transaction that creates events that affect two or more bookkeeping accounts in the accounting records
What are the FIVE classifications in accounting systems?
- Assets = cash, possessions, and purchased rights
- Liabilities = the debts of the business; claims on assets by outsiders
- (Owner’s) Equity = the owner’s financial interest in the business; claims on assets by owners
- Revenue
- Expenses
What is the accounting equation?
Assets = Liabilities + Equity
Name types of financial statements
- Balance Sheet (the statement of financial position)
- Income Statement (the statement of operations)
- The Equity Statement (reflect changes in equity that occurred during an accounting period )
- The Statement of Cash Flows
- The Statement of Retained Earnings (Its purpose is to compute the amount of earnings retained by the corporation. Retained Earnings represents the lifetime profits of the business that have not been declared as dividends to the shareholders)
What does GAAP stand for?
Generally Accepted Accounting Principles
What is the realisation principle?
states that revenue resulting from business transactions should be recorded only when a sale has been made and earned. For instance, an advance deposit of $500 for a wedding banquet to be held in 2 months cannot be classified as a sale, because it has not been held and “earned”. In this case receiving cash creates a liability account called “unearned revenue”.
What is the matching principle?
states that all expenses must be recorded in the same accounting period as the revenue they helped to generate
What is the cash accounting method?
records the results of a business transaction only when cash is received or paid out (does not comply with GAAP), used by small businesses