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Questions and Answers
A company purchases equipment for $50,000 but estimates its market value to be $60,000. Following the cost principle, at what value should the equipment be recorded on the balance sheet?
A company purchases equipment for $50,000 but estimates its market value to be $60,000. Following the cost principle, at what value should the equipment be recorded on the balance sheet?
Which of the following scenarios best exemplifies the application of the conservatism principle in accounting?
Which of the following scenarios best exemplifies the application of the conservatism principle in accounting?
A company receives $12,000 on November 1 for services to be performed evenly over the next six months. How would this transaction be classified, and what is the correct initial journal entry?
A company receives $12,000 on November 1 for services to be performed evenly over the next six months. How would this transaction be classified, and what is the correct initial journal entry?
How does an accrual adjustment impact the accounting equation if a company has an accrued expense (e.g., salaries owed to employees at the end of the period that will be paid next period)?
How does an accrual adjustment impact the accounting equation if a company has an accrued expense (e.g., salaries owed to employees at the end of the period that will be paid next period)?
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What is the purpose of preparing a trial balance at the end of an accounting period?
What is the purpose of preparing a trial balance at the end of an accounting period?
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A company purchases a new machine with a loan. How does this transaction primarily affect the accounting equation?
A company purchases a new machine with a loan. How does this transaction primarily affect the accounting equation?
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Which accounting principle requires that expenses be recognized in the same period as the revenues they helped to generate?
Which accounting principle requires that expenses be recognized in the same period as the revenues they helped to generate?
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Under accrual basis accounting, when should revenue be recognized?
Under accrual basis accounting, when should revenue be recognized?
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If a company's assets are $200,000 and its liabilities are $80,000, what is the amount of its equity?
If a company's assets are $200,000 and its liabilities are $80,000, what is the amount of its equity?
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Which financial statement provides a snapshot of a company's assets, liabilities, and equity at a specific point in time?
Which financial statement provides a snapshot of a company's assets, liabilities, and equity at a specific point in time?
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Which of the following activities would be classified as a financing activity on the statement of cash flows?
Which of the following activities would be classified as a financing activity on the statement of cash flows?
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A company uses the cash basis of accounting. Which of the following is true?
A company uses the cash basis of accounting. Which of the following is true?
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What is the primary implication of the 'going concern' assumption in accounting?
What is the primary implication of the 'going concern' assumption in accounting?
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Flashcards
Cost Principle
Cost Principle
Assets are recorded at their original cost.
Full Disclosure Principle
Full Disclosure Principle
All relevant financial information must be disclosed to users of financial statements.
Conservatism Principle
Conservatism Principle
When in doubt, choose the approach that results in less optimistic financial reporting.
Deferrals
Deferrals
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Accruals
Accruals
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Accounting
Accounting
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Double-entry bookkeeping
Double-entry bookkeeping
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Accrual basis accounting
Accrual basis accounting
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Going concern assumption
Going concern assumption
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Matching principle
Matching principle
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Fundamental Accounting Equation
Fundamental Accounting Equation
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Income Statement
Income Statement
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Balance Sheet
Balance Sheet
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Study Notes
Introduction to Accounting
- Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions to provide information useful for decision-making.
- It's a fundamental part of business operations, enabling informed choices about investments, operations, and financing.
- Key users of accounting information include investors, creditors, managers, and government agencies.
Basic Accounting Concepts
- Double-entry bookkeeping: Every transaction affects at least two accounts, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.
- Accrual basis accounting: Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands. This contrasts with cash basis accounting, which recognizes transactions when cash is received or paid.
- Going concern assumption: Financial statements are prepared on the assumption that the business will continue its operations into the foreseeable future.
- Matching principle: Expenses are matched with the revenues they generate during a period. This helps to accurately reflect profitability.
- Time period assumption: Financial statements are prepared for specific time periods (e.g., monthly, quarterly, annually), allowing for consistent comparison over time.
- Objectivity principle: Financial information should be based on verifiable evidence rather than opinions or estimates.
Fundamental Accounting Equation
- Assets = Liabilities + Equity
- Assets: Resources owned or controlled by a company that are expected to provide future economic benefits. Examples include cash, accounts receivable, equipment, and buildings.
- Liabilities: Obligations of a company to others (e.g., creditors and employees) that are expected to result in future outflows of resources. Examples include accounts payable, salaries payable, and loans payable.
- Equity: Represents the owners' stake in the company. This is the residual interest in the assets after deducting liabilities.
Basic Financial Statements
- Income Statement: Reports a company's financial performance over a period of time, showing revenues and expenses. The result is net income or net loss.
- Balance Sheet: Presents a snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity.
- Statement of Cash Flows: Summarizes cash inflows and outflows during a period, categorized into operating, investing, and financing activities.
Key Accounting Principles
- Cost principle: Assets are recorded at their original cost.
- Full disclosure principle: All relevant financial information must be disclosed to users of financial statements.
- Conservatism principle: When in doubt, choose the approach that results in less optimistic financial reporting.
Types of Accounts
- Assets: Increased by debits, decreased by credits
- Liabilities: Increased by credits, decreased by debits
- Equity: Increased by credits, decreased by debits
- Revenue: Increased by credits, decreased by debits
- Expenses: Increased by debits, decreased by credits
Deferrals and Accruals
- Deferrals: Cash received or paid in one period but recognized in a future period (e.g., prepaid expenses, unearned revenue).
- Accruals: Revenue earned or expenses incurred in one period but not yet received or paid (e.g., accrued revenue, accrued expenses).
An overview of the Accounting Cycle
- The accounting cycle is the process of recording and summarizing financial transactions to prepare financial statements. It includes several steps, including journalizing transactions, posting to ledgers, creating trial balances, and preparing financial statements.
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Description
Explore the fundamentals of accounting, including recording, classifying, and interpreting financial transactions. Understand double-entry bookkeeping, accrual vs. cash basis accounting, and the going concern assumption. Learn how accounting informs decisions for investors, creditors, and managers.
