Accounting Basics Quiz

Accounting & Business

• Accounting is the process of identifying, measuring, and communicating financial information about an organization.
• Financial accounting focuses on reporting financial information to external users such as investors, creditors, and regulators.
• Managerial accounting provides internal reports for decision-making, including budgets and performance evaluations.

The Accounting Equation

• The accounting equation is: Assets = Liabilities + Owner's Equity
• This equation must always balance, meaning every transaction affects both sides.

Double-Entry Accounting

• Double-entry accounting means each transaction affects at least two accounts.
• One account is debited while another is credited.
• Debits increase assets or decrease liabilities and equity, and are recorded on the left.
• Credits decrease assets or increase liabilities and equity, and are recorded on the right.

Journal and Ledger

• The journal is where transactions are initially recorded in chronological order.
• The ledger is a collection of all accounts where journal entries are posted.

Adjusting Entries

• Adjusting entries are crucial for ensuring accurate financial statements.
• They ensure that the financial statements reflect real-time data even when transactions haven't been formally recorded.
• Prepaid expenses represent payments made in advance for expenses, for example prepaid insurance.
• Unearned revenue is money received before goods or services are provided.
• Accruals are revenues earned or expenses incurred but not yet recorded.

Completing The Accounting Cycle

• The accounting cycle is a series of steps that begin with a transaction and end with the preparation of financial statements and closing of temporary accounts.

Key Formulas:

• Income Statement: Net Income = Revenues - Expenses
• Balance Sheet: Assets = Liabilities + Owner's Equity
• Statement of Retained Earnings: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

Closing Entries

• Closing entries are the process of closing out temporary accounts – such as revenues, expenses, and withdrawals – to the owner’s equity at the end of the period.
• They ensure that only permanent accounts (assets, liabilities, and equity) remain after closing entries are made.

Test your knowledge of fundamental accounting concepts including financial and managerial accounting, the accounting equation, and double-entry accounting. This quiz will help reinforce your understanding of how transactions are recorded and reported.