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Financial Accounting Terms questions with actual answers.
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Financial Accounting Terms questionswith actual answers.
Accounting Equation ANS - Assets=Liabilities+Owners' Equity
Equality of Assets= Claims of Creditors+Claims of Owners
Reason why we call it a "Balance" Sheet.
Always equal because they represent two views of the same business.
Everything a business owns has been supplied to it either by the creditors or the owners
Accrual ANS - Example-Interest Expense, Wages (or Salaries) Expense, Uncollected Revenue.
To grow or accumulate overtime.
Accrual Accounting ANS - Calls for recording revenue in the period in which it is earned and recording
expenses in which they are incurred. The effect of events on the business is recognized as services are
rendered or consumed rather than cash is received or paid.
The policy of recognizing in the accounting records when it is earned and recognizing expenses when the
related goods or services are used.
The purpose for this is to measure the profitability of economic activities conducted during the
accounting period.
Matching Principle-most important concept, Revenue is offset with all of the expenses incurred in
generating that revenue, measuring overall profitability of the economic activity.
Alternate is Cash Basis Accounting
,Adjusted Trial Balance ANS - A schedule indicating the balances in ledger accounts after end-of-period
adjusting entries have been posted. The amounts shown in this are carried directly into financial
statements.
Step 5 of Accounting Cycle; comes after end-of-period adjustments
Adjusting Entry ANS - Example:Shop purchases supplies that will be used for several months. You need
this to record the expense associated with the shop supplies used each month.
Example 2: Two or Three year magazine subscriptions
Needed at the end of each accounting period to make certain that appropriate amounts of revenue and
expense are reported in the company's income statement.
Four Types of Adjusting Entries (pg. 142)
1)Converting Assets to Expenses
2)Converting Liabilities to Revenue
3)Accruing Unpaid Expenses
4)Accruing Uncollected Revenue
These entries assign revenues to the period in which they are earned, and expenses to the periods in
which related goods or services are used.
Certain transactions affect the revenue or expenses of two or more accounting periods. The purpose of
adjusting entires is to assign to each accounting period appropriate amounts of revenue and expense.
Balance Sheet ANS - The financial statement showing the financial position of an enterprise by
summarizing its assets, liabilities, and owners' equity at a point in time or specific date. Sometimes
described as a snapshot of the business in financial or dollar terms. Also called the statement of financial
position.
, Business Transactions ANS - An economic event that initiates the accounting process of recording it in a
company's accounting system. They are the interactions between businesses and their customers,
vendors and others with whom they do business.
Consistency ANS - Example: Choosing FIFO or LIFO.
Example: Choosing Accelerated Method for ALL Vehicles and Equipment.
(in inventory valuation) Basic concept underlying reliable financial statements that calls for the use of
the same method of inventory pricing from year to year, with full disclosure of the effects of any change
in method. Intended to make financial statements comparable.
(in Depreciation) The company does not change from year to year the method used in computing the
depreciation expense for a given plant asset. Choosing Straight-Line or Accelerated Method.
Cost Principle ANS - Example: Business buys land for $100,000. Entered in accounting as asset of
$100,000. In 10 years if market value rises to $250,000, amount on balance sheet is still $100,000.
The widely used principle of accounting for assets at their original cost to the current owner. Whatever
the asset was originally purchased for (historical cost), is what is on the balance sheet, no matter the
current market value.
Deferral ANS - Examples
Converting Asset to an Expense-Cost that will benefit more than one accounting period usually recorded
by debiting asset account (supplies, unexpired insurance, etc.) and crediting cash.
Converting liabilities to revenue-collecting cash in advance for future services rendered. Debiting cash
and crediting liability account (unearned revenue, customer deposits, etc.) The liability account created
represents this.
Postponement of an expense or revenue in the asset account.
Double-entry accounting ANS - Debit=Credit
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