Accounting Test PDF

What is Accounting? Definition: A system that records, summarizes, and reports a business's financial activities. Purpose: ○ Summarizes information using Financial Statements. ○ Provides data for decision-making. Why is Accounting Important? 1. A...

What is Accounting? Definition: A system that records, summarizes, and reports a business's financial activities. Purpose: ○ Summarizes information using Financial Statements. ○ Provides data for decision-making. Why is Accounting Important? 1. Accountability & Transparency: ○ Ensures cash handlers are responsible for funds. ○ Financial activities of public corporations are open to public review. 2. Budgeting: ○ Helps estimate future sales and expenses. 3. Taxation: ○ Records must be maintained to calculate and pay taxes. Financial Statements Definition: Reports summarizing a business's financial performance and health. Examples: ○ Annual Reports: Shared with shareholders and potential investors. Users of Financial Information Internal: Business owners, managers. External: ○ Government ○ Bankers/Lenders ○ Potential Investors The Balance Sheet Equation Assets = Liabilities + Owner’s Equity OR Assets – Liabilities = Owner’s Equity Key Terms: 1. Assets: ○ Items of value owned by a business or person. ○ Examples: Cash, House, Car. 2. Liabilities: ○ Debts owed by a business or person. ○ Examples: Credit Card, Bank Loan. 3. Owner’s Equity: ○ The difference between total assets and liabilities. ○ Represents net worth. Steps to Create a Balance Sheet 1. Heading (Three Lines): ○ WHO? Name of business/individual. ○ WHAT? Balance Sheet. ○ WHEN? Date. 2. Assets Section: ○ Listed on the left, divided into: Short-Term Assets (liquidity order): Cash, Accounts Receivable. Long-Term Assets (useful life order): Land, Buildings. 3. Liabilities Section: ○ Listed on the right, in order of due date: Examples: Accounts Payable, Mortgage. 4. Owner’s Equity: ○ Listed after liabilities: Example: Owner’s Capital. Example Balance Sheet  Indra Nooyi Balance Sheet November 17, 2023 Assets Liabilities Cash $2,000.00 Credit Card $2,000.00 Household Items 5,000.00 Car Loan 500.00 Car 5,000.00 Bank Loan 20,000.00 House 300,000.00 Mortgage 200,000.00 Total Liabilities 222,500.00 Owner's Equity Indra Nooyi, Capital 89,500 Total Assets $312,000.00 Total Liabilities and Equity $312,000.00 Additional Terms 1. Accounts Receivable: ○ Asset: Money owed by customers for goods/services sold on credit. ○ Typically due in 30-60 days. 2. Accounts Payable: ○ Liability: Money owed to creditors for goods/services purchased on credit. ○ Typically due in 30-60 days.