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What is the definition of accounting?
What is the definition of accounting?
Accounting is an information system that identifies, records, and communicates the economic events of an organization to the interested parties.
What are the three types of financial statements mentioned in the text?
What are the three types of financial statements mentioned in the text?
Which of the following are examples of interested parties who use accounting data? (Select all that apply)
Which of the following are examples of interested parties who use accounting data? (Select all that apply)
What does the cost principle state?
What does the cost principle state?
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What does the revenue recognition principle state?
What does the revenue recognition principle state?
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What is the monetary unit assumption?
What is the monetary unit assumption?
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What does the economic entity assumption state?
What does the economic entity assumption state?
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What does the going concern assumption state?
What does the going concern assumption state?
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What does the time period assumption state?
What does the time period assumption state?
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Match the following accounting professionals with their primary responsibilities:
Match the following accounting professionals with their primary responsibilities:
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What are assets?
What are assets?
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What are liabilities?
What are liabilities?
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What is owner's equity?
What is owner's equity?
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What are revenues?
What are revenues?
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Which of the following is classified as an asset?
Which of the following is classified as an asset?
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Which of the following is classified as a liability?
Which of the following is classified as a liability?
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The accounting equation is Assets = Liabilities + Owner's Equity.
The accounting equation is Assets = Liabilities + Owner's Equity.
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What is the purpose of the trial balance?
What is the purpose of the trial balance?
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What is the basic accounting equation?
What is the basic accounting equation?
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Study Notes
Accounting Introduction
- Accounting is an information system that identifies, records, and communicates economic events of an organization to interested parties.
- An information system provides information in accounting reports called financial statements (Balance Sheet, Income Statement, and Cash Flow Statement).
- Identifying economic activities involves picking out the relevant economic activities of a particular organization and measuring them using monetary units.
- Records systematically track these economic activities with monetary values.
- Communicating financial information is presenting the organized financial data through financial statements to parties interested in the data.
- Interested parties use the data to make decisions. These include creditors and investors, auditors, management, government bodies, customers, labor, and suppliers.
Generally Accepted Accounting Principles (GAAP)
- GAAP are accounting standards commonly used to report economic events in financial reports.
- This acts as a guide for reporting economic events.
Cost principle
- Assets are recorded at their cost when acquired.
- Cost principle ensures reliable, objective, and verifiable reporting.
Revenue recognition
- Revenue is recognized in the accounting period it is earned.
Accounting Assumptions
- Accounting Assumptions are made when developing GAAP to provide a foundation for the accounting process.
- Monetary unit assumption requires that only transactions measured in monetary units be included in accounting records.
- Economic entity assumption requires that the activities of a business entity be kept separate from personal or other business entities.
- Going concern assumption assumes that an entity will be able to continue its activities long enough to meet its objectives.
- Time period assumption divides the entity's economic life into specific time periods (usually a calendar year), allowing for regular reporting on financial performance.
Accounting Profession
- Financial accountants record daily transactions and prepare financial statements, related information.
- Government accountants record daily transactions and prepare financial statements of local, state, and federal governments, for legislative and public use.
- Cost accountants determine the production costs of specific products.
- Managerial accountants assist management in determining revenues, costs of goods sold, and operating expenses.
- Tax accountants prepare tax returns and do tax planning.
Assets, Liabilities and Owner's Equity
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Assets: Resources used by an entity in carrying out its activities, providing future services or benefits.
- Tangible assets like land, buildings, machinery (fixed assets)
- Current assets, used in daily operations for shorter periods (cash, inventory, accounts receivable).
- Intangible assets, nonphysical (trademarks, copyrights)
-
Liabilities: Existing debts or obligations.
- Current liabilities (debts paid off shortly)
- Long-term liabilities (debts to be paid in the future)
- Owner's equity: Owner's investment in the entity.
Accounting Cycle
- Identification, analysis, and reporting.
- Recording process like journalizing and posting to accounts.
- Communicating financial data to outside parties in a presentation form for public and private use.
Withdrawals by the Owner
- Withdrawals by the owner occur when the owner takes cash or other assets from the business for personal use.
Basic Accounting Equation
- Assets = Liabilities + Owner's equity
- Assets must equal the sum of liabilities and owner's equity because resources are financed by liabilities and the owner's equity.
Accounting Cycles
- Accounting cycle is a step-by-step process of recording, analyzing, summarizing, and reporting the transactions that occurred in an accounting period.
- Identification
- Recording Process
- Communication
Debit and credit theory
- Assets normally have debit balances, except when decreasing it turns to a credit.
- Liabilities normally have credit balances, except when decreasing it turns to a debit.
- Owner's equity normally has credit balances, except when decreasing it turns to a debit.
- Expenses normally have debit balances, except when decreasing it turns to a credit.
- Revenue normally has credit balances, except when decreasing it turns to a debit.
Recording Transactions in the Journal
- Journalizing means entering transaction data in a journal.
- This uses a double-entry system (equal debits and credits) for every transaction.
Trial Balance
- A list of accounts and their balances at a point in time.
- A summary of balances from ledger accounts.
- Debits should be equal to credits for accounts.
Financial Statements
- Reports on financial performance and position. Includes Balance Sheet, Income Statement, and Cash Flow Statement.
Adjusting Entries
- Entries made at the end of an accounting period to update accounts.
- Used to account for revenues earned or expenses incurred but not yet recorded.
Prepayments and Accruals
- Prepayments: - Prepaid expenses: paid in cash before consumption. Treated as assets in the balance sheet initially. - Unearned revenues: cash received before service, initially shown as liabilities in the balance sheet.
- Accruals: - Accrued expenses: incurred but unpaid costs (e.g., salaries, interest). Recorded as liabilities in the balance sheet. - Accrued revenues: earned but not yet collected revenues (e.g., interest, service fees). Recorded as assets (accounts receivables) in the balance sheet.
Depreciation
- Depreciation is the allocation of an asset's cost over its useful life.
- It's an estimate, not a precise measure, as the useful life depends on factors like obsolescence, actual use, and deterioration.
- It's a prepayment of services for which the company intends to use.
Unearned Revenue
- Unearned revenue is cash received before services are performed.
- Initially recorded as a liability until the revenue is earned.
- Adjusting Journal Entry accounts for the earned portion of the revenue.
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Description
This quiz covers the basics of accounting, including the role of information systems in financial reporting. It discusses components such as financial statements and the Generally Accepted Accounting Principles (GAAP) that standardize the reporting of economic events. Enhance your understanding of how economic activities are identified, recorded, and communicated.
