Week 1 Key Concepts

Question 1

accounting

Answer 1

system for measuring a firm’s performance, financial position and cash flows

language of business

Question 2

double-entry bookkeeping

Answer 2

requires that whenever a business event changes an asset,
liability or owner’s equity amount, at least one other balancing change is made. When the
rules of double-entry bookkeeping are followed the change in owner’s equity will equate
to the sum of all the changes in the net assets (assets minus liabilities).

Double-entry bookkeeping is a method of recording financial transactions where every entry has two corresponding parts: a debit and a credit. This system ensures accuracy and maintains balance in accounting records.

Question 3

accounting transaction

Answer 3

n is a business activity or event that affects any element in the
balance sheet equation (Assets = Liabilities + Owners’ Equity). Recording a transaction
changes at least two accounts to keep the equation always balanced.

Question 4

assets formula

Answer 4

assets = liabilities + owner’s equity

Question 5

cash accounting

Answer 5

To determine net income (Revenue - Expenses) revenue is recognized
when cash is collected and expenses are recognized when goods and services are paid for.

Question 6

the account

Answer 6

the individual record of increases and decreases in specific assets, liabilities, owner’s equity, revenue and expenses is the basic component of the formal double-entry accounting system

Question 7

journals

Answer 7

Journals contain chronological records of accounting activities:
- It is the first place an accounting transaction gets recorded
- General journal describes accounting events with debits and credits using journal entries
- The B/S equation is inviolate… every transaction must confirm

Question 8

Ledger

Answer 8

Collection of accounts

posting to the general ledger is to transcribe the debits and credits in each journal entry to the
appropriate general ledger accounts.

Question 9

assets

Answer 9

probable future economic benefits

Question 10

liabilities

Answer 10

probable future economic sacrifices

Question 11

owner’s equity

Answer 11

what you invest in the firm

increased by further investment (decreased by divestment)

increased by net income (decreased by net loss)

Question 12

4 financial statements (in sequence)

Answer 12

1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Cash Flow Statement

Question 13

Income statement

Answer 13

Net Income = Revenues - Expenses

matching principle is applied to know operating performance for a period

Question 14

Statement of Retained Earnings

Answer 14

A detailed accounting of Owner’s Equity

Shows the increase in equity from profits and investments and distribution of assets to its owners

Are owners withdrawing resources or investing resources

(how this equity balance has been changed over a period of time)

Question 15

Balance Sheet

Answer 15

A list of assets and liabilities and owners residual interest at end of reporting period.

Need: Will the firm do well in the future? What are its assets and liabilities

Question 16

Cash Flow Statement

Answer 16

account of cash position and cash activities over a period of time. Reports the change in cash inflows and outflows from operating financing and investing activities.

Objective: enhance informativeness of financial reporting

further breakdown of cash balance

Need: does the firm generate enough cash to be self-sustaining? If not where does it get cash to survive? What happens to excess cash?

Question 17

Annual report

Question 18

Cash Basis

Answer 18

“cheque book” accounting

What you have been doing with your personal finances

Question 19

Accrual Basis

Answer 19

accounting method which payments are credited or debited when earned or incurred

Question 20

Accounting comes in 2 types

Answer 20

Cash Basis
Accrual Basis

Question 21

Accrual Accounting

Answer 21

Recognizes revenue when goods and services are delivered (and not when cash received)

Recognizes expenses when incurred (and not when cash disbursed)

Question 22

Revenue

Answer 22

an economic benefit generated from the normal course of business

Question 23

Expenses

Answer 23

an economic sacrifices caused due to the normal course of business

Question 24

equity

Answer 24

owner’s/shareholder’s interests (claim) into the business

Question 25

Balance Sheet Equation

Answer 25

Assets = Liabilities + Owner’s Equity (shareholder’s equity)

Question 26

Accounting Cycle

Answer 26

1. Analysis of Business Transactions
2. Make Journal Entries
3. Post to Ledger Accounts
4. Prepare Trial Balance
5. Make Adjusting Entries
6. Adjusted Trial Balance
7. Prepare Financial Statements
8. Close Accounts
9. Post-closing Trial Balance

Question 27

Net Income

Answer 27

Synonyms = Net Profit
NI = Revenues = Expenses [Income Statement]

Question 28

Matching

Answer 28

applies to expenses and another application of accrual accounting

• Getting specific costs of generating a specific revenue stream in the same income statement
• Results in accurate profit measurement

basically the expense u paid in a specific timeframe

Question 29

Basis of matching

Answer 29

manufacturing and merchandishing industry:
- units sold for matching cost that are directly connected to the items sold (known as cost of goods sold)
- other operating and non operating exp: periodicity

Service industry:
- No goods, no cost of good sold matching
- Other operating and non operating exp: periodicity

Question 30

Separate entity (assumption)

Answer 30

Keep business money separate from personal money.

• business is separate from owner or other businesses
• to ensure clarity and accuracy in financial reporting

Question 31

Time Period/Periodicity (assumption)

Answer 31

economic activities of a business can be divided into specific time periods for the purpose of financial reporting

• it allows for the preparation of timely and meaningful financial statements, monthly, quarterly, or annual, enabling a comparison and analysis overtime.

Question 32

Historical Cost (principle)

Answer 32

Record things in the books at the price they were bought for.

• assets recorded at their original cost when acquired by the business
• assets are initially recorded at the price paid for the fair market value at the time of acquisition.
• Subsequent changes in market value are not reflected in the financial statements until the asset is sold or disposed of

Question 33

Monetary unit (assumption)

Answer 33

Use the same currency for all financial transactions.

Question 34

Cost benefit (constraints)

Answer 34

Make sure the cost of financial information is worth the benefits.

Question 35

Materiality (assumption)

Answer 35

Include only important information in financial reports.

Question 36

Full disclosure (principle)

Answer 36

Give out all important details about the business’s finances.

Question 37

Going concern (assumption)

Answer 37

Assume the business will keep operating unless there’s a good reason to think otherwise.

Question 38

In manual accounting systems

Answer 38

account balances are computed after each transaction is recorded

Question 39

In computerized accounting systems

Answer 39

account balances are computed from the transactional data at the time financial information is displayed or printed.

Question 40

Trial Balance

Answer 40

a list of all debits and credits so make sure at a point in time all debits are equal to credit

Question 41

A SPECIAL LINKAGE: B/S AND I/S

Answer 41

In technical terms: expired vs unexpired costs and the “cost allocation” process

Balance Sheet = unexpired costs

Income Statement = expired costs

A major task of the accountant: deciding how
and when to move a cost from B/S to I/S

Question 42

Dividends

Answer 42

Dividends are payments that companies make to shareholders, sharing a portion of their profits.

Question 43

Controller

Answer 43

Head of accounting department

Question 44

ASB

Answer 44

Accounting Standards Board