Questions and Answers
Which of the following is an element of accounting?
What is the Basic Accounting Equation?
Assets = Liabilities + Capital
What does the Going Concern Assumption imply?
The business will continue its operations indefinitely.
Match the following elements of accounting with their descriptions:
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The assumption that a business will continue to operate is known as the ______.
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Which of the following transactions affects the accounting equation?
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What increases the equity of a business?
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The Accrual Basis of Accounting recognizes revenue when cash is received.
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What are the two types of assets?
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What is accounting?
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Which of the following is NOT considered a type of accounting?
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Accounting is a service activity.
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According to the AAA, accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the __________.
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Who are the primary users of financial statements?
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Match the following types of accounting with their descriptions:
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Study Notes
Basic Accounting Principles
- Going Concern Assumption: Assumes that a business will continue to operate indefinitely unless there is evidence to the contrary.
- Accrual Basis of Accounting: Revenues and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid.
- Accounting Entity Concept: The business is treated as a separate legal entity from its owners for accounting purposes.
- Time Period (Periodicity): Financial statements are prepared for specific periods to provide timely information to users.
- Monetary Unit Assumption: Transactions are recorded in a stable currency, ignoring inflation or deflation.
Elements of Accounting
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Assets: Resources owned by the business.
- Current Assets: Assets likely to be converted to cash within a year, including cash, receivables, inventories, and prepaid expenses.
- Non-Current Assets: Long-term resources such as land, buildings, equipment, and intangible assets.
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Liabilities: Obligations the business owes to outside parties.
- Current Liabilities: Debts due within one year, such as payables and short-term borrowings.
- Non-Current Liabilities: Long-term debts, including notes, bonds, and deferred tax liabilities.
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Capital:
- Represents the owner's contributions and investments in the business.
- Withdrawals by owners, including dividends, also impact capital.
- Includes income generated and expenses incurred.
Accounting Equation
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Basic Accounting Equation: Assets = Liabilities + Capital
- Provides a foundation for double-entry bookkeeping.
- Must always be balanced after each transaction.
Example Transactions
- Investment: Mr. A invests $20,000, increasing both assets and capital.
- Loan Acquisition: A $30,000 bank loan adds to both assets and liabilities.
- Purchase of Equipment: Buying printers for $1,000 affects both assets and cash flow.
- Service Revenue: Earnings of $500 from cash services increase assets and capital.
- Accounts Receivable: $750 from services rendered on credit adds to assets.
- Purchasing Supplies on Credit: A $200 payable increases both assets and liabilities.
- Equipment Repair: $400 service on credit increases liabilities while affecting cash flow later.
- Owner Withdrawal: $5,000 withdrawn for personal use decreases cash and capital.
- Loan Payment: Paying one-third of the loan decreases cash and liabilities.
- Payment Collection: Cash received from accounts receivable enhances cash assets.
What is Accounting?
- Often referred to as the "language of business," facilitating communication about a business entity.
- Defined as "the art of recording, classifying, and summarizing transactions and events of a financial character."
- Involves interconnected phases: recording, classifying, summarizing, and interpreting financial data.
- Business transactions are quantified in monetary terms for clarity.
Purpose of Accounting
- Focuses on economic entities, which are distinct organizations utilizing resources to fulfill objectives.
- Defined by AICPA as a service activity providing quantitative, primarily financial information for economic decision-making.
- According to AAA, accounting encompasses identifying, measuring, and communicating economic information for informed judgment.
Accounting Information
- Provides insights into results of operations and financial position.
- Evaluates solvency and liquidity to assess an entity's financial health.
- Tracks cash flows and compiles other relevant financial information.
Users of Financial Statements
- Owners and investors utilize information to gauge investment viability.
- Management uses data for internal decision-making and strategy formulation.
- Lenders and suppliers assess creditworthiness and financial stability.
- Government entities require information for regulatory compliance and taxation.
- Employees seek insights regarding job security and organizational performance.
- Customers evaluate the stability and reliability of businesses.
- The general public can access financial statements for various purposes, impacting overall perception.
Types of Accounting
- Financial Accounting: Focuses on external reporting and compliance with standards.
- Managerial Accounting: Aims to provide internal management with relevant information for decision-making.
- Cost Accounting: Analyzes the costs of production or services to improve financial efficiency.
- Auditing: Involves reviewing financial statements for accuracy and compliance.
- Tax Accounting: Deals with tax-related issues and government regulations.
- Accounting Information Systems: Merges technology with accounting for efficient data management.
- Fiduciary Accounting: Manages financial duties on behalf of another party, ensuring proper stewardship.
- Forensic Accounting: Investigates financial discrepancies and fraud.
Areas of Accounting Practice
- Public Accounting: Offers services to a range of clients including individuals and corporations.
- Private Accounting: Involves working within organizations to manage financial activities.
- Government Accounting: Focuses on maintaining and auditing public sector financial resources.
- Accounting Education: Emphasizes teaching accounting principles and practices to future professionals.
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Description
Test your understanding of fundamental accounting concepts with this quiz! Covering the Going Concern Assumption, Accrual Basis, Accounting Entity Concept, and more, this quiz will challenge your knowledge of essential accounting principles. Perfect for Accounting 2 students!
