Questions and Answers
Which of the following best describes liabilities?
What is net income?
What does a balance sheet represent?
Which of the following is an example of an expense?
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What type of account would accounts receivable be categorized as?
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What is the purpose of a trial balance?
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Which statement correctly describes depreciation?
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Which financial statement is primarily concerned with a company's profitability over a period?
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Study Notes
Accounting Terms Overview
- Assets: Resources owned by a business, expected to generate future economic benefits. Examples include cash, inventory, and equipment.
- Liabilities: Obligations or debts owed to external parties. Common types are loans, accounts payable, and mortgages.
- Revenue: Income generated from normal operations before expenses are deducted. Examples are sales revenue and service fees.
Financial Performance and Condition
- Expenses: Costs incurred to earn revenue, such as rent, salaries, and utilities.
- Net Income: The difference between total revenue and total expenses, also referred to as profit. For instance, earning 100,000inrevenuewith100,000 in revenue with 100,000inrevenuewith80,000 in expenses results in a net income of $20,000.
Accounts Management
- Accounts Receivable: Amounts owed to a business by customers for goods/services delivered. Credit sales lead to recorded accounts receivable.
- Accounts Payable: Debts a business owes to suppliers for received goods/services. For example, an unpaid invoice for $5,000 due within 30 days.
Financial Reporting
- General Ledger: Comprehensive record of all financial transactions throughout a company's life, including cash, accounts receivable, and accounts payable.
- Trial Balance: Report that lists all account balances in the general ledger, ensuring that total debits equal total credits. A trial balance might show both debits and credits at $50,000.
Financial Statements
- Balance Sheet: Financial statement showing a company’s assets, liabilities, and equity at a specific time. For example, assets of 200,000,liabilitiesof200,000, liabilities of 200,000,liabilitiesof120,000, and equity of $80,000 as of December 31.
- Income Statement: Details a company's financial performance over a specific period, outlining revenue and expenses. An example includes 300,000inrevenueagainst300,000 in revenue against 300,000inrevenueagainst250,000 in expenses, resulting in a $50,000 net income.
- Cash Flow Statement: Summary of cash inflows and outflows over a period. It may show cash inflows from operations as 70,000andoutflowsfrominvestingactivitiesas70,000 and outflows from investing activities as 70,000andoutflowsfrominvestingactivitiesas20,000.
Additional Concepts
- Depreciation: The method of allocating the cost of a tangible asset over its useful life. For instance, purchasing equipment for 10,000witha5−yearlifewouldleadto10,000 with a 5-year life would lead to 10,000witha5−yearlifewouldleadto2,000 depreciation annually.
- Equity: Represents the owner's claim on the business's assets after all liabilities have been settled. Components include owner's capital and retained earnings.
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Description
Test your knowledge of essential accounting terms including assets, liabilities, and revenues. This quiz covers definitions, examples, and the impacts of these terms on financial performance. Improve your understanding of financial management concepts.
