Accounting Principles Overview

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Questions and Answers

Which definition best describes a fiscal year?

A time frame based solely on the company's operational needs.

A 12-month period that can start at any point during the year. (correct)

A period specifically synchronized with quarterly reports.

A period beginning on January 1 and ending on December 31.

What principle dictates that expenses should be recognized when incurred rather than when paid?

Accrual Principle (correct)

Cash Basis Principle

Revenue Recognition Principle

Matching Principle

What does the going concern assumption imply for businesses?

The business will cease operations in the near future.

The business will continue operations for the foreseeable future. (correct)

The business should halt any long-term investments.

The business is expected to liquidate its assets quickly.

In bookkeeping, what does the term 'debit' refer to?

An obligation or amount owed. Signup and view all the answers

What occurs when an advance payment is made by a client for future services?

The payment is recorded as a liability until services are rendered. Signup and view all the answers

Which type of entry involves multiple debits or credits?

Compound entry Signup and view all the answers

What best explains the cash basis principle in accounting?

Revenues and expenses are recorded when money changes hands. Signup and view all the answers

What is the main focus of the matching principle in accounting?

Aligning revenues with their corresponding expenses. Signup and view all the answers

Who among the following is classified as an internal user of accounting information?

Employees Signup and view all the answers

Which of the following best describes the role of creditors as users of accounting information?

They assess the company’s ability to meet debt obligations. Signup and view all the answers

What is the primary purpose of the Generally Accepted Accounting Principles (GAAP)?

To ensure businesses follow acceptable accounting practices. Signup and view all the answers

Which group is specifically concerned about whether a company can provide retirement benefits?

Employees Signup and view all the answers

Among the following options, which is not typically considered an external user of accounting information?

Owners Signup and view all the answers

Which of the following uses of accounting information is primarily for regulatory purposes?

Government Signup and view all the answers

What do the existing investors in a company primarily assess through accounting information?

The potential for additional financial contributions. Signup and view all the answers

Which of the following statements is true regarding academes or researchers as users of accounting information?

They use financial data for educational advancements and research. Signup and view all the answers

What is the Business Entity Concept primarily focused on?

The separation of the business from its owner Signup and view all the answers

What does the Objectivity Principle require in accounting?

Support by verified evidence Signup and view all the answers

Which statement best describes the Accrual Principle regarding income recognition?

Income is recognized at the time it is earned Signup and view all the answers

According to the Periodicity Concept, financial accounting information should be provided for what?

A specific time period Signup and view all the answers

What is the significance of recording assets and liabilities at historical cost according to basic accounting principles?

It ensures consistency and reliability Signup and view all the answers

In accounting, the Entity Concept primarily serves to distinguish between which two parties?

The business organization and its owners Signup and view all the answers

Why is it important for accountants to obtain verified evidence for transactions?

To ensure the accuracy and reliability of information Signup and view all the answers

What is the implication of treating a business as a separate economic unit?

It limits the owner's liability under debts Signup and view all the answers

What is the purpose of the Chart of Accounts in accounting?

To serve as a guide for the bookkeeper with account titles Signup and view all the answers

In the context of a T-account, what does 'footing' refer to?

The adding process in a T-account Signup and view all the answers

Which of the following correctly states the normal balance for Assets?

Debit Signup and view all the answers

What does the accounting equation A = L + P represent?

The relationship between assets, liabilities, and proprietorship Signup and view all the answers

What is the role of the Trial Balance in accounting?

To list all accounts which proves the equality of debits and credits Signup and view all the answers

Which transaction would generally have a debit effect on the accounts involved?

Payment of dividends Signup and view all the answers

What is the main characteristic of double entry bookkeeping?

It requires at least two accounts to be affected per transaction Signup and view all the answers

What does the term 'Income' imply in the context of normal balance?

It carries a Credit balance Signup and view all the answers

Study Notes

Fiscal and Calendar Year

Fiscal year: 12-month period starting on any date.
Calendar year: 12-month period starting January 1st and ending December 31st.

Accrual Principle (Income & Expense)

Income: Recognized when goods are delivered or services rendered, not when payment is received. Example: An advance payment for dental services is recorded as income when the service is provided, not when the payment is received.
Expense: Recognized when incurred (goods/services used), not when payment is made. Example: Prepaid goods and services are expensed when used.

Going Concern Assumption

Assumes a business will continue operating in the foreseeable future, avoiding liquidation or significant operational curtailment.

Debit and Credit

Debit (Debere): "To owe."
Credit (Credere): "To entrust."
Compound entry: Two or more debit or credit entries.
Simple entry: One debit or one credit entry.

Ledger and T-Account

Ledger: "Book of final entry," containing all company accounts and balances. Summarizes transactions and ending balances.
T-account: Simple skeletal form of a ledger.

Double-Entry Bookkeeping

Every transaction affects at least two accounts. Assets = Liabilities + Owner's Equity.
Normal Balances:
- Assets: Debit
- Liabilities: Credit
- Capital: Credit
- Drawings: Debit
- Income: Credit
- Expenses: Debit

Journalizing and Posting

Journal: "Book of original entry," chronologically recording transactions.
Posting: Transferring journal entries to the ledger.
Chart of accounts: List of account titles used by a business.

Trial Balance

Lists accounts to verify the equality of debits and credits in the general ledger.
Footing: The process of adding up amounts in a T-account.

Users of Accounting Information

Internal users: Within the business (management, employees, owners).
External users: Outside the business (customers, creditors, investors, government, academics, public).

Generally Accepted Accounting Principles (GAAP)

Set of industry rules, practices, and guidelines for financial accounting.
Includes standards, conventions, and rules for recording and summarizing transactions and preparing financial statements. Concepts are ideas needing deeper understanding; principles are basic rules to follow.

Fundamental Accounting Concepts and Principles

Business Entity Concept: Business is separate from its owner and other entities.
Entity Concept: Business and its owners are treated as separate.
Periodicity Concept: Financial information is reported for specific time periods.
Objectivity Principle: Business transactions must be supported by verifiable evidence (facts, not feelings).
Going concern assumption: The business will continue operating into the foreseeable future.

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Description

Test your understanding of key accounting principles, including fiscal and calendar years, the accrual principle for income and expenses, and the going concern assumption. This quiz also covers debits, credits, and the basics of ledgers and T-accounts.