Accounting: Financial Accounting Basics Flashcards

Question 1

Define Accounting Equation.

Accepted Answer

The rule that a business's assets always equal its liabilities plus owners' equity, because every resource it holds is financed either by debt or by owner investment and retained profit.

Question 2

What is Asset?

Accepted Answer

A resource a business owns or controls that is expected to provide future economic benefit, such as cash, inventory, equipment, or amounts customers owe it.

Question 3

What is Liability?

Accepted Answer

An obligation a business owes to outsiders that will require a future outflow of resources, usually cash, such as loans, unpaid supplier bills, or wages owed to employees.

Question 4

Define Equity (Owners' Equity).

Accepted Answer

The owners' residual claim on a business after subtracting liabilities from assets; it grows with owner investment and profits and shrinks with losses and withdrawals.

Question 5

What is Debit?

Accepted Answer

An entry recorded on the left side of an account; debits increase asset and expense accounts and decrease liability, equity, and revenue accounts.

Question 6

What is Credit?

Accepted Answer

An entry recorded on the right side of an account; credits increase liability, equity, and revenue accounts and decrease asset and expense accounts.

Question 7

Define Double-Entry Bookkeeping.

Accepted Answer

A system in which every transaction is recorded in at least two accounts, with total debits equal to total credits, so the accounting equation always stays in balance.

Question 8

Define Journal Entry.

Accepted Answer

The first record of a business transaction, listing the accounts debited and credited, the amounts, and the date, before those amounts are posted to the ledger.

Question 9

Define General Ledger.

Accepted Answer

The complete collection of a company's accounts, where journal entries are posted and a running balance is maintained for each account such as Cash or Revenue.

Question 10

What is T-Account?

Accepted Answer

A simple visual form of a ledger account shaped like the letter T, with debits recorded on the left side and credits recorded on the right side.

Question 11

Define Trial Balance.

Accepted Answer

A list of every ledger account and its balance at a point in time, prepared to check that total debits equal total credits before financial statements are built.

Question 12

Define Normal Balance.

Accepted Answer

The side, debit or credit, on which an account increases and therefore usually carries its balance; assets and expenses are normally debit, while liabilities, equity, and revenue are normally credit.

Question 13

Define Chart of Accounts.

Accepted Answer

An organized list of every account a business uses to record transactions, grouped by type (assets, liabilities, equity, revenue, expenses) and usually assigned a reference number.

Question 14

What is Revenue?

Accepted Answer

The income a business earns from its main operations, such as selling goods or services, recorded when it is earned rather than when the cash is collected under accrual accounting.

Question 15

What is Expense?

Accepted Answer

The cost of resources used up to generate revenue during a period, such as rent, wages, and utilities, which reduces both net income and equity.

Question 16

Define Net Income.

Accepted Answer

The profit that remains after subtracting all expenses from all revenues for a period; when expenses exceed revenues the result is instead called a net loss.

Question 17

Define Retained Earnings.

Accepted Answer

The cumulative net income a company has kept rather than paid out as dividends; it is part of equity and rises each period the business is profitable.

Question 18

Define Accounts Receivable.

Accepted Answer

Money customers owe a business for goods or services already delivered but not yet paid for; it is a current asset expected to be collected soon.

Question 19

Define Accounts Payable.

Accepted Answer

Amounts a business owes its suppliers for goods or services bought on credit but not yet paid for; it is a current liability.

Question 20

Define Accrual Basis Accounting.

Accepted Answer

A method that records revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, giving a truer picture of a period's performance.

Question 21

Define Cash Basis Accounting.

Accepted Answer

A method that records revenue only when cash is received and expenses only when cash is paid; it is simpler than accrual but not allowed under GAAP for most companies.

Question 22

Define Matching Principle.

Accepted Answer

The accrual rule that expenses should be recorded in the same period as the revenues they helped generate, so reported profit reflects the true cost of earning it.

Question 23

Define Revenue Recognition Principle.

Accepted Answer

The rule that revenue is recorded when it is earned, meaning when goods or services are delivered to the customer, not necessarily when the payment arrives.

Question 24

What is GAAP?

Accepted Answer

Generally Accepted Accounting Principles: the common set of standards, rules, and conventions U.S. companies follow so their financial statements are consistent and comparable.

Question 25

Define Balance Sheet.

Accepted Answer

A financial statement showing a company's assets, liabilities, and equity at a single point in time, always balancing under the equation Assets = Liabilities + Equity.

Question 26

Define Income Statement.

Accepted Answer

A financial statement reporting revenues, expenses, and the resulting net income or loss over a period of time, showing whether the business was profitable.

Question 27

Define Statement of Cash Flows.

Accepted Answer

A financial statement reporting the cash a business generated and used during a period, divided into operating, investing, and financing activities.

Question 28

What is Depreciation?

Accepted Answer

The systematic allocation of a long-lived asset's cost across its useful life as an expense, reflecting the gradual wearing out and use of the asset over time.

Question 29

Define Accumulated Depreciation.

Accepted Answer

A contra-asset account holding the total depreciation charged against an asset since its purchase; it is subtracted from the asset's cost to give its book value.

Question 30

Define Contra Account.

Accepted Answer

An account that offsets and is reported against a related account, carrying the opposite normal balance, such as Accumulated Depreciation offsetting a fixed asset.

Question 31

Define Prepaid Expense.

Accepted Answer

A cost paid in advance for goods or services to be received later; it is first recorded as an asset and then expensed gradually as the benefit is used up.

Question 32

Define Unearned Revenue (Deferred Revenue).

Accepted Answer

Cash a business has received for goods or services it has not yet delivered; it is a liability until the work is done and the revenue can be recognized.

Question 33

Define Closing Entries.

Accepted Answer

End-of-period journal entries that transfer the balances of temporary accounts (revenue, expenses, dividends) into retained earnings, resetting them to zero for the next period.

Question 34

Define Cost of Goods Sold (COGS).

Accepted Answer

The direct cost of producing or purchasing the goods a company sold during a period; it is subtracted from sales revenue to arrive at gross profit.