Accounting in Business Overview
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Questions and Answers

What is the effect on Cash and Accounts Payable when $900 is paid to CalTech Company?

  • Cash increases, Accounts Payable decreases
  • Cash increases, Accounts Payable increases
  • Cash decreases, Accounts Payable increases
  • Cash decreases, Accounts Payable decreases (correct)

What does the Accounting Equation represent?

  • Assets = Liabilities + Equity (correct)
  • Assets - Liabilities = Equity
  • Assets + Liabilities = Equity
  • Liabilities = Assets + Equity

The Accounting Equation states that Liabilities = Assets + Equity.

False (B)

What are the four steps in the basic accounting cycle?

<p>Analyze Transactions, Record Transactions, Post Journal Information, Prepare Trial Balance</p> Signup and view all the answers

Financial accounting primarily serves internal users.

<p>False (B)</p> Signup and view all the answers

Define 'Assets' in accounting.

<p>Resources owned or controlled by a company.</p> Signup and view all the answers

An increase in liabilities and a decrease in assets affects the accounting equation such that the total __________ remains balanced.

<p>equity</p> Signup and view all the answers

The principle that recognizes revenue when it is earned, regardless of when cash is received, is known as the ______ Principle.

<p>Revenue Recognition</p> Signup and view all the answers

Match the following financial statements with their primary purpose:

<p>Income Statement = Reflects revenues and expenses during a period Statement of Owner's Equity = Reports changes in equity during a period Balance Sheet = Displays assets, liabilities, and equity at a point in time Cash Flow Statement = Shows cash inflows and outflows for a period</p> Signup and view all the answers

Which of the following accounts is classified as an equity account?

<p>Owner’s Capital (C)</p> Signup and view all the answers

Match the accounting terms with their definitions:

<p>Assets = Resources owned by a company Liabilities = Creditors' claims on assets Equity = Owner's claims on assets Expenses = Costs incurred to generate revenue</p> Signup and view all the answers

Which of the following is NOT a form of business entity?

<p>Limited Liability Company (B)</p> Signup and view all the answers

The trial balance ensures that total debits always equal total liabilities.

<p>False (B)</p> Signup and view all the answers

What is the main purpose of the balance sheet?

<p>To describe a company’s financial position at a specific point in time (A)</p> Signup and view all the answers

What is the primary purpose of preparing financial statements?

<p>To summarise financial information for reporting</p> Signup and view all the answers

The Matching Principle requires that expenses be recorded when they are incurred, regardless of revenue recognition.

<p>True (A)</p> Signup and view all the answers

The income statement shows the financial position of a company at a specific date.

<p>False (B)</p> Signup and view all the answers

List the four characteristics of relevant information according to GAAP.

<p>Relevant, Reliable, Comparable, Consistent</p> Signup and view all the answers

What do you subtract from the total of investments and net income to calculate ending capital?

<p>Owner withdrawals</p> Signup and view all the answers

Total assets must equal total liabilities plus _____ in the balance sheet.

<p>owner's equity</p> Signup and view all the answers

Which of the following is included in the income statement?

<p>Total revenues (D)</p> Signup and view all the answers

Match the financial statements with their primary focus:

<p>Income Statement = Performance over a period Balance Sheet = Financial position at a specific date Statement of Owner’s Equity = Changes in owner’s capital Statement of Cash Flows = Cash inflows and outflows</p> Signup and view all the answers

How do you calculate net income using the income statement?

<p>Total Revenues - Total Expenses</p> Signup and view all the answers

The statement of cash flows is essential for understanding a company's liquidity.

<p>True (A)</p> Signup and view all the answers

Flashcards

Accounting Equation

Assets equal Liabilities plus Equity

Asset Account

Represents a company's resources (e.g., cash, equipment).

Liability Account

Represents a company's obligations or debts.

Equity Account

Represents the owner's investment in the company.

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Journal Entry

A record of a transaction, showing debits and credits.

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Trial Balance

A report that shows total debits equal total credits.

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Income Statement

Reports revenues and expenses over a period, showing profit or loss.

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Owner's Equity

Represents the owner's stake in the business.

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What is Accounting?

Accounting is a system that identifies, records, and communicates economic events using financial statements.

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What is the purpose of GAAP?

GAAP provides guidelines for financial accounting to ensure consistency and reliability of financial information.

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What is the Cost Principle?

The Cost Principle records assets at their original cost, providing an objective measure.

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What is the Revenue Recognition Principle?

Revenue is recognized when it is earned, regardless of whether cash is received.

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What is the Expense Recognition Principle?

Expenses are recorded in the same period as the revenue they helped generate.

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What is the Monetary Unit Assumption?

Transactions are recorded in a stable monetary unit (e.g., US Dollar), assuming its value stays relatively constant over time.

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What is the Business Entity Assumption?

A business is distinct from its owners and other entities, so financial records are kept separate.

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What is the Time Period Assumption?

A business's life can be divided into periods (e.g., months, years) to measure its performance.

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Financial Position

A company's financial health at a specific point in time, showing what it owns, owes, and the owner's investment.

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Statement of Cash Flows

A summary of a company's cash inflows (money coming in) and outflows (money going out) over a period.

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Statement of Owner's Equity

Tracks changes in the owner's investment in the company over a period.

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Balance Sheet Equation

The fundamental accounting equation: Assets = Liabilities + Owner's Equity.

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Assets

A company's resources that have value and are expected to provide future benefits.

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Liabilities

A company's obligations or debts that must be paid back.

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Study Notes

Accounting in Business

  • Accounting is an information and measurement system
  • Identifies transactions (sales, purchases)
  • Records transactions chronologically in dollars
  • Communicates economic events through reports (financial statements)
  • Requires interpretation and analysis

Users of Accounting Information

  • External Users:
    • Lenders
    • Shareholders
    • Governments
    • Consumer Groups
    • External Auditors
    • Customers
  • Internal Users:
    • Managers
    • Officers/Directors
    • Internal Auditors
    • Sales Staff
    • Budget Officers
    • Controllers

Financial vs. Managerial Accounting

  • Financial Accounting: Provides financial statements to external users
  • Managerial Accounting: Provides information for internal decision-making

Generally Accepted Accounting Principles (GAAP)

  • Governs financial accounting practice
  • Characteristics of Relevant Information:
    • Relevant: Affects user decisions
    • Reliable: Trusted by users
    • Comparable: Helpful for contrasting organizations

Principles and Assumptions of GAAP

  • Cost Principle: Based on actual cost, considered objective.
  • Revenue Recognition Principle: Revenue is recognized when earned
  • Proceeds need not be in cash (includes credit sales)
  • Measure revenue by cash received plus cash value of items received.
  • Expense Recognition (Matching) Principle: Records expenses incurred to generate reported revenue
  • Full Disclosure Principle: Report details behind financial statements affecting user decisions.
  • Monetary Unit Assumption: Expresses transactions in monetary units.
  • Business Entity Assumption: A business is separate from its owners and other entities.
  • Time Period Assumption: Divides the life of a company into time periods (months, years).
  • Going Concern Assumption: Assumes the business will continue operating.

Forms of Business Entities

  • Sole Proprietorship
  • Partnership
  • Corporation

Transaction Analysis

  • Accounting Equation: Assets = Liabilities + Equity
  • Assets: Resources owned or controlled by a company (e.g., land, equipment, cash).
  • Liabilities: Creditors' claims on assets (e.g., accounts payable, notes payable).
  • Equity: Owner's claims on assets (Net Assets = Assets - Liabilities).
  • Increases in Owner's Equity:
    • Investments by Owner
    • Revenues
  • Decreases in Owner's Equity:
    • Withdrawals by Owner
    • Expenses

Key Concepts - Accounting in Business

  • Accounting Equation: Assets = Liabilities + Equity
  • Assets: Resources owned or controlled by a company (land, equipment, cash)
  • Liabilities: Obligations or debts of a company (taxes payable, wages payable, notes payable, accounts payable).
  • Equity: Owner's claims on the assets of the business
  • Increases in equity: Investments by the owner; revenues generated by the business
  • Decrease in equity: Withdrawals by the owner; expenses incurred by the business

Transaction Analysis

  • Each transaction affects at least two accounts and keeps the accounting equation balanced.

Lecture 3: Analyzing and Recording Transactions

  • Analyze Transactions and Source Documents
  • Record Transactions in a Journal
  • Post Journal Information to Ledger Accounts
  • Prepare and Analyze the Trial Balance
  • Prepare Financial Statements

Types of Accounts

  • Asset Accounts: Cash, Accounts Receivable, Equipment, Land, Supplies, Prepaid Accounts
  • Liability Accounts: Notes Payable, Accounts Payable, Accrued Liabilities, Unearned Revenue
  • Equity Accounts: Owner's Capital, Owner's Withdrawals, Revenues, Expenses

The Accounting Equation

  • Assets = Liabilities + Equity

Recording Transactions

  • Identify the transaction from source documents
  • Specify the accounts affected
  • Apply debit/credit rules
  • Record the transaction with a description

Lecture 4: Financial Statements Preparation

  • Income Statement: Reflects a company's revenues and expenses over a specific period. Calculates net income or loss.
  • Statement of Owner's Equity: Reports changes in equity during a specific period. Includes beginning capital, investments by the owner, net income and withdrawals.
  • Balance Sheet: Describes a company's financial position at a specific point in time. Lists assets, liabilities, and owner's equity.
  • Statement of Cash Flows: Summarizes cash inflows and outflows over a period.

Steps in Preparing Financial Statements

  • Prepare the Income Statement
  • Prepare the Statement of Owner's Equity
  • Prepare the Balance Sheet

Key Financial Statements Formats

  • Income Statement
  • Statement of Owner's Equity
  • Balance Sheet

Lecture 5: Adjusting Accounts for Financial Statements

  • Time Period Assumption: The economic life of a business can be divided into artificial time periods (months, quarters, years). Financial statements are prepared for those periods to provide timely information.
  • Accrual Basis of Accounting: Revenues are recognized when earned and expenses are recognized when incurred, regardless of cash flow.
  • Need for Adjusting Entries: Adjusting entries ensure revenues and expenses are recorded in the period they are earned or incurred. Necessary to adhere to the revenue recognition and matching principle.

Types of Adjusting Entries

  • Prepaid (Deferred) Expenses: Expenses paid in advance and recorded as assets until they are incurred
    • Example: Prepaid insurance
  • Unearned (Deferred) Revenues: Cash received before services are performed; recorded as liabilities until earned
    • Example: Advance payments for services
  • Accrued Expenses: Expenses incurred but not yet paid or recorded
    • Example: Salaries payable
  • Accrued Revenues: Revenues earned but not yet received or recorded
    • Example: Service revenues earned but not billed

Preparing Adjusting Entries

  • Accrued Revenues: Debit an asset account, and credit a revenue account
  • Accrued Expenses: Debit an expense account, and credit a liability account
  • Deferred Revenues: Debit a liability account, and credit a revenue account
  • Deferred Expenses: Debit an expense account, and credit an asset account

Lecture 6: Prepayments or Deferrals

  • Prepayments (Deferrals): Prepayments are assets that represent goods or services paid for in advance. Prepayments are initially recorded as assets and then gradually converted into expenses as benefits are consumed.
  • Prepaid Expenses: Expenses paid in advance and recorded as assets until they are incurred (e.g., prepaid rent, prepaid insurance, supplies)
  • Unearned Revenues: Cash received before services are performed and recorded as liabilities until earned (e.g., advance payments for services)
  • Prepaid Expenses Adjusting Entries: Recognize the portion of prepaid expenses that have expired or been used. Adjusting entries: Debit an expense account and credit a prepaid asset account.
  • Unearned Revenues Adjusting Entries: Recognize revenue when the service or product is delivered. Adjusting entry: Debit an unearned revenue liability account and credit a revenue account.

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Description

This quiz covers the fundamentals of accounting in business, including how transactions are identified and recorded, the distinction between financial and managerial accounting, and the role of Generally Accepted Accounting Principles (GAAP). You'll also explore the different types of users who rely on accounting information, both external and internal. Test your knowledge on these essential concepts!

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