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Questions and Answers
What is the effect on Cash and Accounts Payable when $900 is paid to CalTech Company?
What is the effect on Cash and Accounts Payable when $900 is paid to CalTech Company?
What does the Accounting Equation represent?
What does the Accounting Equation represent?
The Accounting Equation states that Liabilities = Assets + Equity.
The Accounting Equation states that Liabilities = Assets + Equity.
False
What are the four steps in the basic accounting cycle?
What are the four steps in the basic accounting cycle?
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Financial accounting primarily serves internal users.
Financial accounting primarily serves internal users.
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Define 'Assets' in accounting.
Define 'Assets' in accounting.
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An increase in liabilities and a decrease in assets affects the accounting equation such that the total __________ remains balanced.
An increase in liabilities and a decrease in assets affects the accounting equation such that the total __________ remains balanced.
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The principle that recognizes revenue when it is earned, regardless of when cash is received, is known as the ______ Principle.
The principle that recognizes revenue when it is earned, regardless of when cash is received, is known as the ______ Principle.
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Match the following financial statements with their primary purpose:
Match the following financial statements with their primary purpose:
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Which of the following accounts is classified as an equity account?
Which of the following accounts is classified as an equity account?
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Match the accounting terms with their definitions:
Match the accounting terms with their definitions:
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Which of the following is NOT a form of business entity?
Which of the following is NOT a form of business entity?
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The trial balance ensures that total debits always equal total liabilities.
The trial balance ensures that total debits always equal total liabilities.
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What is the main purpose of the balance sheet?
What is the main purpose of the balance sheet?
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What is the primary purpose of preparing financial statements?
What is the primary purpose of preparing financial statements?
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The Matching Principle requires that expenses be recorded when they are incurred, regardless of revenue recognition.
The Matching Principle requires that expenses be recorded when they are incurred, regardless of revenue recognition.
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The income statement shows the financial position of a company at a specific date.
The income statement shows the financial position of a company at a specific date.
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List the four characteristics of relevant information according to GAAP.
List the four characteristics of relevant information according to GAAP.
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What do you subtract from the total of investments and net income to calculate ending capital?
What do you subtract from the total of investments and net income to calculate ending capital?
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Total assets must equal total liabilities plus _____ in the balance sheet.
Total assets must equal total liabilities plus _____ in the balance sheet.
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Which of the following is included in the income statement?
Which of the following is included in the income statement?
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Match the financial statements with their primary focus:
Match the financial statements with their primary focus:
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How do you calculate net income using the income statement?
How do you calculate net income using the income statement?
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The statement of cash flows is essential for understanding a company's liquidity.
The statement of cash flows is essential for understanding a company's liquidity.
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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!