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BUS103: INTRODUCTION TO FINANCIAL ACCOUNTING > definitions > Flashcards

Flashcards in definitions Deck (49):
1

Economic entity assumption

Financial records must be separately maintained for each economic entity.

2

Monetary unit assumption.

An economic entity's accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new chief executive officer or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company's accounting records.

3

Full disclosure principle

Financial statements normally provide information about a company's past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company's financial status. The full disclosure principle requires that financial statements include disclosure of such information.

4

Time period assumption

 Most businesses exist for long periods of time, so artificial time periods must be used to report the results of business activity. Depending on the type of report, the time period may be a day, a month, a year, or another arbitrary period.

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major types of business activities:

  •  financing: Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. Owner financing refers to resources contributed by the owner. Nonowner(or creditor) financingrefers to resources contributed by creditors (lenders). Financial management is the task of planning how to obtain these resources and to set the right 
    mix between owner and creditor financing.
  • investing, and
  • operating

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Accrual basis accounting

Accrual basis accounting captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands

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Revenue recognition principle

Revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow. 

8

Matching principle

The costs of doing business are recorded in the same period as the revenue they help to generate.

9

Cost principle

Assets are recorded at cost, which equals the value exchanged at the time of their acquisition.

10

Going concern principle

Unless otherwise noted, financial statements are prepared under the assumption that the company will remain in business indefinitely. 

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Relevance, reliability, and consistency

To be useful, financial information must be relevant, reliable, and prepared in a consistent manner.

Reliable information is verifiable and objective. Consistent information is prepared using the same methods each accounting period, which allows meaningful comparisons to be made 

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Principle of conservatism

which requires that the less optimistic estimate be chosen when two estimates are judged to be equally likely

13

Materiality principle

which states that the requirements of any accounting principle may be ignored when there is no effect on the users of financial information

14

GAAP

generally accepted accounting principles

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account

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item

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ledger

The general ledger,or simply ledger,is a record containing all accounts used by a company. The ledger is often in electronic form.

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account categories

 three general categories based on the accounting equation:

asset accounts, liability accounts, or equity accounts

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debtor

Customers and others who owe 
a company according to accounts recievables are called its debtors

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premium

 an insurance fee, called a premium

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Creditors 

Creditors are individuals and organizations that have rights to receive payments from a company

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Accrued liabilities

Accrued liabilities are amounts owed that are not yet paid. Examples are wages payable, 
taxes payable, and interest payable.

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Unearned revenue

Unearned revenue refers to a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as 
unearned revenue.

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contra equity account

The Owner’s Withdrawals account is a contra equity account because it reduces the normal balance 
of equity.

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dividend

The withdrawal of assets by the owners of a corporation is called a dividend

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chart of accounts

The chart of accounts is a list of all 
ledger accounts and includes an identification number assigned to each account

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Users of Accounting Information

  • External users
  • Internal users-of accounting information are those directly  involved in managing and operating an organization.

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Financial accountingis

Financial accountingis the area of accounting aimed at serving external users by providing 
them with general-purpose financial statements.

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Managerial accountingis

Managerial accountingis the area of accounting 
that serves the decision-making needs of internal users. Internal reports are not subject to the same 
rules as external reports and instead are designed with the special needs of internal users in mind.

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IASB

International Accounting Standards Board 
 

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IFRS

International Financial Reporting Standards 

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SEC

Securities and Exchange Commission , a government 
agency, has the legal authority to set GAAP

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3 basic types of 
company operations

There are 3 basic types of 
company operations: (1) Services — 
providing customer services for profit, 
(2) Merchandisers — buying products 
and re-selling them for profit, and 
(3) Manufacturers — creating products 
and selling them for profit

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 4 financial statements

Financial statements and their purposes are (in right order):

  • 1. Income statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
  • 2. Statement of owner’s equity— explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time.
  • 3.  Balance sheet describes a company’s financial position (types and amounts of assets,  liabilities, and equity) at a point in time.
  • 4. Statement of cash flowsidentifies cash inflows (receipts) and cash outflows (payments)  over a period of time.

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net income

net loss

revenues > expenses

revenues< expenses

< p=""><>

sometimes calles earnings or profit

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 statement of cash flows

  1.  operating activities
  2.  investing activities
  3.  financing activities

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financial statement analysis 

four areas:

(1) liquidity and efficiency,

(2) solvency,

(3) profitability

(4) market prospects

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Return on assets (ROA)

 or Return on investment (ROI)

  • profitability measure

Return on assets=  Net income
                            Average total assets

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 Financial management

 Financial management is the task of planning how to obtain these resources and to set the right 
mix between owner and creditor financing.

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asset management

 Organizations differ on the amount and makeup of assets. Some require land and factories to operate. Others need  only an office. Determining the amount and type of assets for operations is called asset management

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Strategic management

Strategic management is the process of determining the right mix of operating activities for the type of organization, its plans, and its market.

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Accounting Cycle

  1. Source documents
  2. Journals
  3. Ledger (T-accounts)
  4. Trial Balance
  5. Financial Statements

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Source document

first document that exists relating to the transaction

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Types of source documents

  • Invoices
  • Receipts (ususally for payments by cash or debit/credit card)
  • Deposit slips (proof that cash has been deposited ina bank account)
  • Check (cheque) conterfoil - part of the check kept by drawer of the check as a record of the transaction.
  • Statement - a report showing the amount owned by one business to another , as welle as details of transactions between the two businesses.
  • Payment confirmation (electronic payment)

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Journal

The book of the first entry

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Folio number

Cross- referencing code for the source document, journals, accounts.

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7 types of accounting journals

  • Cash Reciept Journal (CRJ)
  • Cash Payment Journal (CPJ)
    • Can be replaces by one Cash Book
  • Sales Journal (SJ) - for sales on credit
  • Sales Returns Journal (SRJ)
  • Purchases Journal (PJ) - purchases of inventory on credit
  • Purchases Returns Journal (PRJ)
  • General Journal (GJ) - all journal entries not mentoned above

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3 types of ledger

  • the General ledger
  • the Debtors ledger
  • the Creditors Ledger 

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Trial balance 

Accounts order

  1. Assets
  2. Liabilities
  3. Equity
  4. Revenues
  5. Expenses

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