Key Accounting Principles fully solved

Accounting accurately measures all the financial activities of an individual or a business. accounting cycle The steps repeated each reporting period for the purpose of preparing financial statements for users. Accounting Equation The logic of the double entry is based ont his equation: Assets = Liabilities + Net Worth Accounting Ethics A high standard of behavior (honesty and fairness) that all accountants are expected to follow. Accounts Payable The amount the business has been billed but has yet to pay. This is the money the business owes to it suppliers from whom it has purchased goods or services. Accounting Periods The length of time covered by financial statements and other reports; also called reporting periods. Accounts Receivable The amount that is billed to customers and owing from them but has not yet been collected Accounts Receivable Turnover Measures the number of times in a year the company collects it accounts receivable. Accruals Relates to new worth, which does not necessarily connect to cash flow. Accrual Accounting The approach to preparing financial statements that uses the adjusting process to recognize revenues when earned and expenses when incurred, not when cash is paid or received; the basis for Generally Accepted Accounting Principles (GAAP). Accrued Expense An expense incurred in one accounting period but not paid until a later accounting period. An adjusting entry is required to account for accrued expenses. Accumulated Depreciation Linked to property, plant and equipment, this contra asses account reflects the total decrease in the value of property, plant and equipment Adjustments Transactions made at the end of an accounting period to properly update assets, liabilities, revenue and expenses to their correct balances. Asset Turnover Measures the ability of a company to generate revenue from their asset investments. Assets All the items that are owned such as cash, inventory, land, machinery, accounts receivable, etc. Balance Sheet A permanent document that shows what a company owns (assets) and what it owes (liabilities). The difference between assets and liabilities represents the net worth (or equity) at a specific point in time. Bank Reconciliation An analysis that explains the difference between the balance of a chequing account shown in the depositor's records and the balance reported on the bank statement. Book Value Book value is the difference between the purchase price of an asset and the amount of accumulated depreciation. Bottom-up or participative budgeting A budgeting process where managers of all levels fully co-operate and contribute budget creation. Budget a tool to help managers decide on a course of action to achieve the company's financial goals. Budgetary Slack Represents the tendency of employees to intentionally underestimate revenues and overestimate expenses int eh budgeting process. Capital The difference between total assets and total liabilites (same as net worth, owner's equity). Capital Account Used to record owner's equity in a proprietary business. Cash flow Relates to cash flowing into and out of the bank account, which is not necessarily directly connected to equity. Chart of Accounts List of accounts used by a company; includes an identification number for each account. Closing the Books The process of updating the capital account and resetting revenue, expenses and owner's drawings to zero to start a new accounting period. Common Shares Represents ownership in a corporation. Comparability Means the financial statements of a company must be prepared in a similar way year after year. This allows for a comparison of this year's performance to past years. Conservatism Principle When an accountant must exercise judgment, they must choose the option which will understate assets, understate net income or overstate liabilities.