Basics Flashcards
(33 cards)
What is (financial) Capital?
The money and other assets that a business or individual has available for investing or operating purposes. It includes both equity capital (funds contributed by the owners/shareholders) and debt capital (funds borrowed from creditors).
What is the General Ledger for?
The general ledger is a core component of accounting that serves as the central repository for all financial transactions of a business. It’s essentially a master set of accounts where all the financial records of a company are recorded, summarized, and classified.
What is Working Capital?
The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
What is the Accounting Equation? What are the normal balances?
Assets = Liabilities + Owners Equity
Assets (Debit increase, credit decrease), Liabilities and Owners Equity are opposite.
What are the steps of the accounting cycle? (9 steps)
- Record/analyze transactions (source documents).
- Record these transactions as Journal Entries. (In chronological order)
3.Transfer journal entries into General Ledger (which forms a summary for all transactions) - Make a trial balance to check all debits equal credits and that the books are balanced/account balances are equal.
- Adjusting Entries: Updates made at the end of the period to bring them to their correct balances.
6.Adjusting trial balance to check for accuracy once again.
7.Create financial statements (four main)
8.Journalize and post closing entries
9.Prepare post-closing trial balance to check.
What is equity capital?
Equity capital is the money a business raises from it’s shareholders.
What are accurals? What is accrual accounting?
Accural accounting is a method of accounting in which revenues and expenses are recorded as they are incurred (rather than when the money is exchanged).
“Accurals” are amounts of money that have been earned or spent but not yet paid.
What is the purpose of a balance sheet?
To provide a snapshot of the company’s financial position at a particular time. (Usually at the end of an accounting period). It shows what the company owns (assets), what the company owes (liabilities), and residual interest for the owner (equity). The assets should ALWAYS equal the liabilities + equity.
What is a trial balance?
An internal document (not for the public) used to check that debits = credits.
What does it mean if money is accrued?
When money is accrued, it means that an amount of money has been recognized as income or revenue before it has been received. This concept is crucial in accrual accounting, where transactions are recorded when they occur, not necessarily when cash changes hands.
Explain Adjusting Entries in more detail?
Updates made at the end of the period to bring them to their correct balances.
What is the Statement of Owner’s Equity also called?
The Statement of Retained Earnings
What are the four main Financial Statements?
- The Income Statement (Also known as Statement of Profit or Loss)
- Statement of Owners Equity (Also know as Statement of Retained Earnings)
3.Balance Sheet (Also known as the Statement of Financial Position) - Statement of Cash Flows
What is Gross Profit?
The profit a business makes after subtracting all the costs related to manufacturing and selling its products and services.
Revenue- COGS = Gross Profit
What is Net Profit?
Net Profit is the money left after paying absolutely all expenses and taxes.
Net Profit = Revenue - Total Expenses
What is the difference between net and gross profit?
Gross profit is profit after removing COGS only, net profit is the actual profit after removing not just COGS but also all other expenses and taxes.
What is “Income before Taxes” (on an Income Statement)
Income before taxes = Operating Income - non-operating expenses
Net Income?
Income before taxes
Revenue
How much money a business took in during a reporting period.
Expenses
How much a business spent during a report?
What does it mean to realize an asset?
To convert the asset into cash or cash equivalents. (To sell)
What are the four financial statements?
The Income Statement, The Statement of Owner’s Equity (Statement of Retained Earnings), The Balance Sheet (The Statement of Financial Position), and the Statement of Cash Flows
What is a contra account?
What is a current asset?
Assets that are able to be sold within one year (land for example, is NOT a current asset because it would take longer for it to be sold and show on statement than one year)
