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45 Cards in this Set
- Front
- Back
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What is accounting |
Identifying, measuring, communicating and interpreting of financial activity of a business together with the theory and system of setting up and maintaining the books of an organization, including the analysis of a business operation through the study of income and expenses What is an accounting system? |
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What is an accounting system? |
Systematic record of the daily business activity in terms of money off the business entity |
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Three steps of creating accounting information |
1. Recording 2. Classifying 3. Summarizing
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What is GAAP? |
The accounting concepts, measurement techniques and standards of presentation used in the preparation of financial statements This set up the ground rules and assumptions in the accounting report, so that users of reports will be able to interpret the information properly |
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Financial accounting |
It’s summarizes the business transactions of a specific time. Such as month or year. |
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The balance sheet equation is Assets = Liabilities + Owner’s Equity Any single transaction will have one or combination of these effects: |
1. It increases both an asset and the liability or owners equity. 2. It decreases both an asset and a liability or owners equity. 3. It increases one asset and decreases another asset. 4. It increases one liability or equity, and decreases another liability or equity. |
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Every business transaction involves two considerations: |
1. value received - debit 2. value given- a credit |
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Account purpose |
To accumulate the changes that take place in each balance sheet item |
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Ledger |
Collection of individual accounts |
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Rules in placement of Increases and decreases in an account |
1. Increases in assets are entered on the left side and decreases in assets on the right side, 2. increases in liabilities are entered on the right side, and decreases in liabilities. On the left side, 3. increases in owners equity entered on the right side, and decreases in owners equity on the left side. |
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Rules of Debit & Credit |
Debit - a charge, Indicates an increase in an asset, a decrease in a liability, or a decrease in an owners equity item Credit - Indicates a decrease in an asset, an increase in a liability, or an increase in owners equity item In order to maintain the equality of the balance sheet equation, the amounts debited to various accounts for each transaction must equal the amounts credited to various accounts likewise, the sum of balances in accounts, with debit balances at the end of each period must equal the sum of balances in the accounts with credit balances |
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What is the basic purpose of financial statements? |
To assist decision makers in evaluating the financial strength, profitability and future prospects of business entity |
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What are the importance of adequate records? |
1. To assist in the planning process, especially in the preparation of budgets 2. To assist in safeguarding the assets of the business 3. They require orderly procedures in their preparation |
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Accounting system must do the following: |
1. simple, easy to understand and easy to work with 2. provide accurate financial information 3. Deliver accurate financial information on a timely basis 4. Provide a proper audit trail of documents 5. Meet the minimum regulatory requirements of the industry that the business operates in 6. Provide for records retention. Source documents need 6 years retention after the end of taxation years. If business is wound up, additional 2 years |
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Basic accounting system types of documents |
1. Source documents: leases, cancelled cheques & invoices from suppliers 2. Books of original entry and sub ledgers: cash disbursements, cash receipts journal, accounts receivable ledger 3. General ledger: A summary of the books up original entry ex. total of all the checks written for the month is then posted to the particular general ledger account |
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The elements of an accounting system |
1. The business entity- an economic unit which enters into business transactions that must be recorded summarized and reported. It is separate from its owner/s. 2. Assets - are economic resources, which are owned by a business and are expected to benefit future operations 3. Liabilities - Debts or obligations of the business that entity Accounts payable - Liability arising from the purchase of goods or services on credit Creditor - The company to whom the accounts payable is owed 4. Owner’s Equity/Shareholder’s equity - The resources invested by the owner and is equal to the total assets minus the total liabilities Increase in owner’s equity comes from 2 sources: 1. Owners investment of cash, or personally owned assets 2. Earnings from profitable operation of the business Decrease in owners equity are due to: 1. Withdrawals of cash, or other assets by the owner 2. losses from unprofitable Operation of the business 5. Balance sheet - Shows the financial position of a business at a particular date : month or year. It consists of a listing of the assets and liabilities of a business and of the owners shareholders equity 6. Revenue - The price of goods sold and services rendered to customers. Revenue = Cash + A/R 7. Expenses - The cost of goods and services used up in the process of obtaining revenue The costs of doing business 8. Net Income = Revenue - Expenses 9. Income Statement - Referred to as a profit and loss statement used to evaluate the performance of the business by matching the revenue earned during a given time period with theqtu expenses incurred in obtaining that revenue. 10. Accounts & Ledgers - The form of record used to record increases and decreases in a single balance sheet or income statement item. Ledger - the entire group of accounts 11. Journal - A place where transactions are recorded as they occur; it is a book of original entry 12. Debits & Credits - A double set up entries required in accrual accounting. In any transaction, the value of all debits will equal the value of all credits 13. Posting - totalled transactions entered in the journals, are posted to individual accounts in the general ledger at periodic intervals 14. Trial balance - A listing of the general ledger accounts with respective balances |
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Accrual accounting |
An accounting method, where each item of revenue or expense is recorded based on the date such an event occurred without concern for the actual date of receipt or payment |
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2 methods of recording accrual accounting in real estate |
1. Trade written - income is recorded on the date the trade is written 2. Trade closed - income is recorded on the date the trade closes |
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2 methods of income computation from a tax perspective: |
1. Cash accounting - single entry system, Requires that the taxpayer record any cash received during the year along with monies expended in the same Period 2. Accrual accounting - requires double set of entries: debit and credit with 2 accounting entries for a single transaction. Revenue and expenses are recorded as they are incurred and not when they are paid or received |
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When is cash accounting used? |
Conmissioned salesperson, farmers , fishermen Not used for business or profession |
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Asset = Liabilities + Owner’s Equity Any single transaction will have one or combination of these effects in a balance equation: |
1. It increases both an asset and a liability or owners equity. 2. It decreases both an asset and a liability or owners equity. 3. It increases one asset and decreases another asset. 4. It increases one liability or owners equity, and decreases another liability or equity. |
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What is Gen journal? |
A book or other device, containing a listing of journal entries in chronological order. It is referred to as the book of original entry Because transactions enter the accounting system through it |
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Summary |
The balance sheet comprises, three major classes of items assets liabilities and owners equity Resources are recognized as assets when a company has acquired rights to the future, as a result of past transaction or exchange, and when the value of the future benefits can be measured with a reasonable degree of precision, Monetary assets are in general, stated at their current cash, or cash equivalent value Non monetary assets, are stated at acquisition costs Liability represents obligations of company to make payments of reasonably definite amount at a reasonably definite future time For benefits already received Owners equity is the difference between total assets and total liabilities The equality of total assets and total liabilities + owners equity is maintained by recording the effects of each transaction in a dual manner in the accounts |
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The double entry system is based on this simple principal of exchange. Every business transaction involves two considerations: |
1. Value received = Debit 2. Value given = Credit All transactions are expressed by means of a debit and credit at all times the total of debits, and the total of credits are equal |
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Purpose of an accounts |
To accumulate the changes that take place in each balance sheet item accounting system use a device known as an account |
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What is a general ledger? |
The collection of individual accounts is called a general ledger |
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What is T account? |
The account may take many forms, but the most useful form of the account for textbook, problems and examinations is the T account. It is T shape |
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The rules of placement of increases and decreases in an account |
1. Increases in assets are entered on the left side and decreases in assets on the right side, 2. increases in liabilities are entered on the right side, and the decreases in liabilities on the left side 3. increases in owners equity are entered on the right side and the decreases in owners equity on the left side |
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Rules of debit and credit in terms of balance sheet categories |
1.,Debit or charge - indicates an increase in an asset, a decrease in a liability, or a decrease in an owners equity. 2. A credit - indicates a decrease in an asset, or an increase in liability, or an increase in an owners equity. |
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What is the accounting process? |
1. Occurrence of business transaction express in terms of money 2. Enter the results of each transaction in the form of journal entry - JOURNALIZING 3. Posting the journal entries from the general journal to the accounts in the GENERAL LEDGER 4. Preparing a TRIAL BALANCE of the accounts in the general ledger, 5. making END OF PERIOD ADJUSTING journal entries to accounts, listed in the trial balance and posting them to the appropriate general ledger accounts 6. Preparing the ADJUSTED TRIAL BALANCE 7. Preparing FINANCIAL STATEMENTS from the adjusted trial balance |
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What is an accounting cycle? |
Accounting process is known as the accounting cycle. It does not have an end point, but will continue. The cycle only ends with the following: 1. cessation of the operation of the business 2. disposal of all assets 3. payment of all liabilities 4. payment of any surplus to the owners. |
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What is journalizing? |
The recording of each transaction in the general Jornal in the form of journal entry |
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What is Profit? |
Rapid is the increase of owners equity resulting from operation of the business good |
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What is depreciation? |
It means the systematic allocation of the cost of an asset to expense over the accounting period making up its useful like |
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Two ways of expensing depreciation |
1. Depreciation for accounting purposes 2. Capital cost allowance-, 1 CCA |
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The main features of capital cost allowance are: |
1. Depreciable assets of a similar nature are grouped into particular class or pool 2. Costs of additions are added to, and proceeds of disposals are reduced from the balance of the class or pool 3. When a class or pool has a credit balance at the end of the year, the credit balance known as recaptured capital cost allowance must be included in income for tax purposes 4. Stipulated rate is applied to the balance of each class or both to obtain the amount of capital cost allowance of the year |
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What is Loss |
Decrease in Owners equity from operation of the business |
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What is net income? |
Net income is the excess of the price of goods sold, and services rendered over the cost of goods and services during a given time period |
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What determines the net income? |
1. Revenue is the price of goods sold and services rendered 2. Expenses - the cost of goods sold and services used up. |
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What is a matching principle? |
Matching principle is used to determine the net income for the particular time period. It refers to the Close relationship that exist between certain expenses, and the revenue realized as a result of incurring those expenses. |
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What are the two questions to be met in order to classify the transactions as an expense? |
1. Was the alleged expenses incurred in order to produce revenue in the current period? 2. That’s the item in question reduce the owners equity. The answer to both questions should be yes |
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What is an accounting Period? |
It means the span of time covered by an income statement. It may be a month a quarter of the year happier or are year |
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What is a fiscal year? |
Any 12 month accounting period adopted by a business. |
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Recoverable expenses |
Brokerage pays, selected expenses on behalf of the sales person, and then recovers this amounts through separate billings back to the sales person |
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Shadow expense account |
It provides a device to track non recovered expenses incurred by the brokerage |
