Principles

Question 1

Accounting equation

Answer 1

A = L+OE
Assets = liabilities + owners equity

Question 2

Balance sheet

Answer 2

Reveals the financial condition of a business entity by showing the status of its assets, liabilities, and ownership equity on the specific ending date of an operating period

Question 3

Income statement

Answer 3

Reports the economic results of the business entity by matching sales revenue inflows and expense outflows to show the results of operations NET INCOME & NET LOSS

Question 4

Capital stock

Answer 4

Financing provided by stock holders (shareholders) with ownership represented by shares or corporate stock. Each share of stock represents one ownership claim

Question 5

Retained earnings

Answer 5

Earnings of the corporation that have been kept in the business after dividends are paid

Question 6

Double Entry Accrual

Answer 6

Analysis of accounting transaction, the recording, positing,adjusting and reporting economic results and financial condition of a business entity is the heart of double entry accrual accounting ! Statement elements must be created or changed!!

Question 7

Business entity principle

Answer 7

Operating as a proprietorship, partnership, or corporation are considered to be separate and distinct from all personal transaction of its owner. Only changes to assets, liabilities, ownership and other transactions of business entity are entered to the organization accounting records. The ownership personal assets , debts , and expenses are not part of the business entity

Question 8

Monetary unit principle

Answer 8

Used for recording numerical values of business exchanges and operating transactions

Question 9

Going concern principle

Answer 9

Makes the assumption that a business entity will remain in operation indefinitely

Question 10

Cost principle

Answer 10

Requires the value of business transaction be recorded at the actual or equivalent cash cost

Some exceptions are made with valuation of inventories for resale, and also to express certain balance sheet and income statement items in terms of current, rather than dollars

Question 11

Time period principle

Answer 11

Requires a business entity to complete an analysis to report financial condition and profitability of its business operation over a specific operating time period

Question 12

Conservatism principle

Answer 12

Conservatism in this situation increases the cost of sales and decreases the gross margin ( gross profit). The cost of long lived assets ( other than land) are systematically recovered through depreciation expense and should be higher rather than lower

Question 13

Consistency principle

Answer 13

To ensure comparability and consistency of the procedures and techniques used in the preparation of financial statements from one accounting period to the next

Question 14

Materiality concept

Answer 14

Allows immaterial small dollar amounts items to be treated in an expedient although incorrect manner

Question 15

Full disclosure principle

Answer 15

States that any future event that may occur or will occur, and that will have a material economic impact on the financial position of the business, should be disclosed to probable and potential readers of the statements

Question 16

Objectivity principle

Answer 16

Requires a transaction to have a basis in fact. Some form of objective evidence or documentation must exist to support a transaction before it can be entered into the accounting records

Question 17

Bad debt

Answer 17

If payment of a receivable becomes uncollectible, it may be written off as bad debt expense ( income statement method for income tax purpose)

Question 18

Matching principle

Answer 18

Reinforces the accrual basis of accounting. It requires that for each accounting period all sales revenues earned must be recognised, whether payment is received or not. It also requires the recognition of all operating expenses incurred, whether paid or not paid during the period