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Questions and Answers
Match the following accounting transactions with their definitions in the context of a sole proprietorship:
Revenue = The income that a business has from its normal business activities Expense = The cost required for something; the money spent on something Asset = A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit Liability = A company's legal financial debts or obligations that arise during the course of business operations
Match the following financial statements with their descriptions in the context of a sole proprietorship:
Income Statement = A financial statement that reports a company's financial performance over a specific accounting period Balance Sheet = A statement of the assets, liabilities, and capital of a business at a particular point in time Cash Flow Statement = A financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources Statement of Owner's Equity = A financial document that includes the changes in ownership equity over a specific period
Match the following accounting principles with their definitions:
Accrual Principle = Revenue is recognized when earned, and expenses are recognized when assets are consumed Consistency Principle = States that companies should use the same methods and procedures from period to period Economic Entity Principle = The transactions of a business should be kept separate from those of its owners Materiality Principle = States that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled
Study Notes
Accounting Transactions
- Accounting transactions refer to the events or activities that affect the financial position of a sole proprietorship, such as sales, purchases, payments, and receipts.
- Examples of accounting transactions include: • Cash received from customers • Payment of rent • Purchase of office equipment • Salary paid to employees
Financial Statements
- Financial statements are reports that provide information about the financial position, performance, and cash flows of a sole proprietorship.
- The primary financial statements include: • Balance Sheet (statement of financial position) • Income Statement (profit and loss statement) • Statement of Cash Flows
Accounting Principles
- Accounting principles are the rules and guidelines that govern financial accounting and reporting for a sole proprietorship.
- Examples of accounting principles include: • Accrual principle (recognizing revenues and expenses when earned or incurred, not when received or paid) • Consistency principle (applying the same accounting methods and procedures from one period to the next) • Matching principle (matching revenues with the expenses incurred to generate those revenues)
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Description
Test your knowledge of basic accounting transactions, financial statements, and accounting principles in the context of a sole proprietorship. Match the transactions, statements, and principles with their appropriate definitions to assess your understanding of these fundamental concepts.
