Section 1 - Domain 1: Accounting Concepts Flashcards
(24 cards)
Definition “Accounting”
the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting results
accounting is accomplished through (…)?
Keeping a balance of the accounting equation
What is the accounting equation
Assets = Liabilities + Owner’s Equity
Definitiv “Assets”
Net resources owned by an entity (e.g. cash, inventory,…)
Definition “Liabilities”
Obligations of an entity or outsider’s claims against a company’s asset (e.g. arising from acquisition, incurrence of operational expenses)
Definition “Owner’s Equity”
Investment of a company’s owners and accumulated profits (revenues minus expenses)
Assets - Liabilities = Owner’s Equity
Definition “Account”
Specific accounting record that provides an efficient way to categorise similar transactions
5 categories of accounts
- Asset account
- Liability account
- Owner’s equity account
- Revenue account
- Expense account
Definition “Debits”
Increases assets and expense accounts
Definition “credits”
decreases assets and expense accounts
What is “double-entry accounting”
The documentation of every credit and debit side of a transaction
To qualify as an asset, an item must (…)
- Be owned by the entity
- Provide future economic benefit by
a) generating cash inflows
b) decreasing cash outflows
Describe the accounting cycle
- Transaction occurs
- Purchase orders, receipts, and other documents are created
- Transaction is recorded in journals
- Journals are posted to individual accounts
- Financial statements are generated from account balances
Definition of “Journal entry”
Record of a particular transaction
Definition of “adjusting Journal entry”
Journal entry that is not prompted by a transaction (e.g. depreciation expense, write-offs)
Name two accounting methods
- Cash-basis accounting
- Accrual-basis accounting
Explain “cash-basis accounting”
- records revenue/expenses when a company receives/pays cash
- unrelated to delivery of goods
Pro / Contra if “cash-basis accounting”
+ simple system for tracking
- possibility of overstating financial health
Explain “accrual-basis accounting”
- records revenues when earned
- unrelated to cash flow
- mandated by GAAP
What are the advantages of “accrual-basis accounting”?
+ feedbacks on a company’s expected cash inflows/outflows
+ more accurate representation of the financial situation
What does a financial statement do?
It presents the financial position and operating results of an entity.
= presentation of financial data and accompanying notes
Name four typical financial statements
- statement of financial position (balance sheet)
- Statement of profit of loss and other comprehensive income for the period (income statement)
- Statement of changes in owner’s equity or statement of retained earnings
- Statement of cash flows
What a balance sheet
Statement of financial position at a specific point in time
What is an income statement
Statement of profit or loss and other comprehensive income for the period
