Introduction to Accounting Concepts

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Questions and Answers

Which accounting principle allows for immediate expense recognition of low-cost items?

Consistency Principle

Revenue Recognition Principle

Materiality Principle (correct)

Matching Principle

When should revenue be recognized according to the revenue recognition principle?

When goods or services are delivered (correct)

When cash is received from sales

At the beginning of the fiscal year

Once the contract is signed

What is the correct sequence of accounting entries leading to financial statements?

Journal Entries, General Ledger, Trial Balance, Financial Statement (correct)

General Ledger, Journal Entries, Trial Balance, Financial Statement

Trial Balance, Financial Statement, General Ledger, Journal Entries

Financial Statement, Trial Balance, Journal Entries, General Ledger

Which of the following is NOT included in the financial statements?

General Ledger Signup and view all the answers

What does the consistency principle require in financial reporting?

Uniform application of accounting methods over time Signup and view all the answers

What is the result of a debit entry for an asset account?

Increase in the asset value Signup and view all the answers

Which entry represents an increase in liabilities?

Credit to the liabilities account Signup and view all the answers

In the accounting equation, what represents equity?

Total assets minus total liabilities Signup and view all the answers

What does a credit entry typically do to income accounts?

It increases income Signup and view all the answers

When an expense is recorded, which of the following describes the accounting entry?

Debit the expense account, credit the cash account Signup and view all the answers

If a company borrows money, what effect does this have on the accounting entries?

Debit to cash and credit to liabilities Signup and view all the answers

Which of the following best describes a liability?

Obligations owed to creditors Signup and view all the answers

What is the primary principle behind the double-entry accounting system?

Each transaction has a corresponding debit and credit Signup and view all the answers

Which of the following actions results in a credit to the Income account?

Sale of a product Signup and view all the answers

Which category best describes an asset like goodwill?

Non-current Intangible Asset Signup and view all the answers

What type of asset is inventory classified as?

Current Asset Signup and view all the answers

Which of the following best defines a liability?

An obligation the company has to pay in the future Signup and view all the answers

Which of the following correctly describes the debit and credit rule for expenses?

Debits increase expenses while credits decrease them Signup and view all the answers

Which of the following is considered a current liability?

Accounts payable Signup and view all the answers

Which asset category includes cash and cash equivalents?

Current Assets Signup and view all the answers

Which of the following statements correctly describes equity?

It represents what the company owes its shareholders Signup and view all the answers

Study Notes

What is Accounting?

Accounting is the language of business
It records all business actions

Examples of Financial Transactions

A fast-food restaurant buys buns for $300
FFR pays $100 for electricity
They buy a computer for $1000

Debit and Credit

Each transaction has consequences (debit and credit)
An exception is when no debit and credit are involved

Purchase of Buns

Non-accounting entry (single entry): $300 cost of buns
Accounting entry (double entry):
- Debit - Buns Inventory (asset): $300
- Credit - Cash paid (asset): $300

Key Rules in Accounting

Think of each transaction in terms of two consequences (debit/credit)
Each transaction results in one of the following:
- Assets
- Liabilities
- Equity
- Income
- Expenses

Purchase of a Computer

Non-accounting entry (single entry): $1000 Cost of computer
Accounting entry (double entry):
- Debit - Computer (asset): $1000
- Credit - Cash (asset): $1000

Rules of Debit and Credit

Non-accounting entry (single entry): Cost of electricity $100
Accounting entry (double entry):
- Debit - Electricity (Expense): $100
- Credit - Cash (Asset): $100
Non-accounting entry (single entry): Cost of computer $1000
Accounting entry (double entry):
- Debit - Computer (Asset): $1000
- Credit - Cash (Asset): $1000

Types of Assets

Current Assets: Cash, cash equivalents, expected to be converted to cash in 12 months or less, expected to be sold or consumed within a normal operating cycle
Non-Current Assets: Assets beyond current assets
Tangible Assets: Physical items (buildings, equipment)
Intangible Assets: Non-physical items (patents, trademarks)

What is a Liability?

Something the company owes

Examples of Liabilities

Accounts payable
Accrued liabilities (e.g. electricity, salaries)
Accrued salaries and wages
Taxes payable
Long-term debt/loans
Portions of long-term debt payable
Deferred revenue
Bank overdrafts

Types of Liabilities

Current Liabilities: Short-term obligations
Non-current Liabilities: Long-term obligations

What is Equity?

Represents ownership of a company
Equity = Assets - Liabilities

Income Statement, Balance Sheet

Income and expenses are recorded, tracked, and summarized
These are tracked to calculate the profitability of an entity

Accounting Principles

Accrual Principle: Record transactions when they occur, not when cash is exchanged.
Matching Principle: Match revenues and expenses in the same period.
Cost Principle: Record assets at their original cost, not market value.
Going Concern Principle: Assume the business will continue operating.
Materiality Principle: Significant events influence decisions, insignificant events do not.
Consistency Principle: Apply accounting methods consistently.
Revenue Recognition Principle: Record revenue when earned.

Flow of Accounting Entries

Journal Entries: Record all business transactions chronologically
General Ledger: Summarizes all transactions per account type
Trial Balance: Lists all accounts with their balances
Financial Statements: Summarize the performance of the entity (Balance Sheet, Income Statement, Cashflow Statement)

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Description

Explore the basics of accounting through this quiz. Understand essential terms such as debit and credit, and learn how financial transactions are recorded. Ideal for beginners looking to grasp fundamental accounting principles.