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?

<p>General Ledger (C)</p> Signup and view all the answers

What does the consistency principle require in financial reporting?

<p>Uniform application of accounting methods over time (D)</p> Signup and view all the answers

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

<p>Increase in the asset value (D)</p> Signup and view all the answers

Which entry represents an increase in liabilities?

<p>Credit to the liabilities account (D)</p> Signup and view all the answers

In the accounting equation, what represents equity?

<p>Total assets minus total liabilities (B)</p> Signup and view all the answers

What does a credit entry typically do to income accounts?

<p>It increases income (A)</p> Signup and view all the answers

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

<p>Debit the expense account, credit the cash account (D)</p> Signup and view all the answers

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

<p>Debit to cash and credit to liabilities (C)</p> Signup and view all the answers

Which of the following best describes a liability?

<p>Obligations owed to creditors (C)</p> Signup and view all the answers

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

<p>Each transaction has a corresponding debit and credit (D)</p> Signup and view all the answers

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

<p>Sale of a product (B)</p> Signup and view all the answers

Which category best describes an asset like goodwill?

<p>Non-current Intangible Asset (A)</p> Signup and view all the answers

What type of asset is inventory classified as?

<p>Current Asset (D)</p> Signup and view all the answers

Which of the following best defines a liability?

<p>An obligation the company has to pay in the future (C)</p> Signup and view all the answers

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

<p>Debits increase expenses while credits decrease them (D)</p> Signup and view all the answers

Which of the following is considered a current liability?

<p>Accounts payable (D)</p> Signup and view all the answers

Which asset category includes cash and cash equivalents?

<p>Current Assets (D)</p> Signup and view all the answers

Which of the following statements correctly describes equity?

<p>It represents what the company owes its shareholders (D)</p> Signup and view all the answers

Flashcards

Accounting

The language of business, recording business transactions.

Debit

In accounting, an entry that increases asset or expense accounts, and decreases liability, equity, and income accounts.

Credit

In accounting, an entry that increases liability, equity, and income accounts, and decreases asset and expense accounts

Asset

Something a business owns that has value, like cash or equipment.

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Liability

Something a business owes to others, like debts or loans.

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Double-entry bookkeeping

A system of recording financial transactions where every transaction affects at least two accounts.

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Accounting Equation

Assets = Liabilities + Equity

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Expense

The cost of operating a business, such as rent or salaries.

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Income

Revenue generated from business operations.

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Equity

The owners' stake in the business.

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Materiality Principle

If an amount is not large enough to affect investor decisions, a mistake or omission is not important and doesn't need correcting.

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Revenue Recognition Principle

Record revenue when goods or services are provided, not when cash is received.

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Consistency Principle

Use the same accounting methods consistently unless a better method is available.

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Journal Entries

Record business transactions in a chronological format with a double-entry system.

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General Ledger

Summarize journal entries, including account balances.

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Trial Balance

A list of all accounts and their balances.

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Financial Statements

Reports summarizing a company's financial health (Balance Sheet, Income Statement, Cash Flow Statement, etc.).

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Balance Sheet

A snapshot of a company's assets, liabilities, and equity at a specific point in time.

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Income Statement

Reports a company's financial performance over a period (e.g., a quarter or a year).

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Cash Flow Statement

Tracks the movement of cash into and out of a company during a period.

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Equity

Represents what a company owes to its shareholders.

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Income

Money a business earns from sales.

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Expense

Costs incurred by a business (like rent, utilities).

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Asset

Something a company owns and expects to use/benefit from.

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Current Asset

Asset expected to be converted to cash within a year.

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Non-Current Asset

Asset expected to be used over more than a year.

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Liability

Something a company owes (debts/obligations).

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Intangible Asset

Assets that have no physical form (e.g., patents, trademarks).

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Tangible Asset

Assets that have a physical form (e.g., equipment, buildings).

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Accounts Receivable

Money customers owe a company after receiving a service.

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Prepaid payments

Payments made in advance for services.

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Investments

Assets acquired for the generation of future income or for strategic advantage.

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Goodwill

The excess amount paid when acquiring another company.

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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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Accounting Principles and Practices PDF

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.

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