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Questions and Answers
What is the definition of equity in accounting?
What is the definition of equity in accounting?
What is the primary purpose of journalizing transactions?
What is the primary purpose of journalizing transactions?
What is the formula for the balance sheet?
What is the formula for the balance sheet?
What is the first step in the accounting cycle?
What is the first step in the accounting cycle?
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What is the purpose of the cash flow statement?
What is the purpose of the cash flow statement?
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What is the purpose of internal controls?
What is the purpose of internal controls?
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What is the definition of a transaction in accounting?
What is the definition of a transaction in accounting?
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What is the purpose of posting to ledger accounts?
What is the purpose of posting to ledger accounts?
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Study Notes
Accounting Processes
Identifying and Recording Transactions
- Transaction: an economic event that affects the financial position of a business
- Journalizing: the process of recording transactions in a journal
- Posting: the process of transferring journal entries to ledger accounts
Classifying and Reporting Transactions
- Assets: resources owned or controlled by the business (e.g. cash, inventory, equipment)
- Liabilities: debts or obligations of the business (e.g. accounts payable, loans)
- Equity: ownership interest in the business (e.g. common stock, retained earnings)
- Revenues: inflows of resources from customers (e.g. sales, services)
- Expenses: outflows of resources (e.g. salaries, rent)
Preparing Financial Statements
-
Balance Sheet: presents the financial position of the business at a specific point in time
- Assets = Liabilities + Equity
-
Income Statement: presents the revenues and expenses of the business over a specific period of time
- Revenues - Expenses = Net Income
- Cash Flow Statement: presents the inflows and outflows of cash over a specific period of time
Accounting Cycle
- Identify and record transactions
- Journalize transactions
- Post to ledger accounts
- Prepare trial balance
- Adjust entries (if necessary)
- Prepare financial statements
- Close the books
Internal Controls
- Separation of duties: dividing responsibilities to prevent fraud and errors
- Accounting records: maintaining accurate and complete records
- Physical controls: safeguarding assets (e.g. cash, inventory)
- Independent audits: external examination of financial statements
Accounting Processes
Identifying and Recording Transactions
- A transaction is an economic event that affects the financial position of a business
- Journalizing is the process of recording transactions in a journal
- Posting is the process of transferring journal entries to ledger accounts
Classifying and Reporting Transactions
- Assets are resources owned or controlled by the business, such as cash, inventory, and equipment
- Liabilities are debts or obligations of the business, such as accounts payable and loans
- Equity represents the ownership interest in the business, including common stock and retained earnings
- Revenues are inflows of resources from customers, including sales and services
- Expenses are outflows of resources, including salaries and rent
Preparing Financial Statements
- The Balance Sheet presents the financial position of the business at a specific point in time, with the formula: Assets = Liabilities + Equity
- The Income Statement presents the revenues and expenses of the business over a specific period of time, with the formula: Revenues - Expenses = Net Income
- The Cash Flow Statement presents the inflows and outflows of cash over a specific period of time
Accounting Cycle
- The accounting cycle consists of 7 steps: identifying and recording transactions, journalizing, posting, preparing a trial balance, adjusting entries, preparing financial statements, and closing the books
Internal Controls
- Separation of duties is a key internal control, involving the division of responsibilities to prevent fraud and errors
- Maintaining accurate and complete accounting records is essential for internal control
- Physical controls are used to safeguard assets, such as cash and inventory
- Independent audits involve external examination of financial statements to ensure accuracy and reliability
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Description
Learn about the basics of accounting processes, including identifying and recording transactions, journalizing, and posting. Understand how to classify and report transactions, including assets and liabilities.
