Accounting & Bookkeeping Faq
Accounting is the systematic process of recording, summarizing, and analyzing financial transactions and information of a business or organization.
Financial statements are formal reports that present the financial position, performance, and cash flows of a company.
Accrual accounting recognizes revenue when it’s earned and expenses when they’re incurred, providing a more accurate representation of a company’s financial position over a specific period.
Cash accounting is simpler but may not provide an accurate picture of a company’s financial performance because it doesn’t consider revenue and expenses until actual cash changes hands.
Double-entry ensures that the accounting equation (Assets = Liabilities + Equity) always remains balanced. Every transaction impacts at least two accounts, helping to maintain accurate records and catch errors.
This equation reflects the fundamental principle of accounting, demonstrating the relationship between what a company owns (assets) and what it owes (liabilities) in relation to the owner’s investment (equity).
Assets include cash, accounts receivable, inventory, property, equipment, and investments. They are categorized as current (short-term) or non-current (long-term) assets on the balance sheet.
Liabilities include accounts payable, loans, bonds, and other obligations. They are categorized as current (due within a year) or non-current (due beyond a year) liabilities.
Equity includes capital contributed by owners and retained earnings (accumulated profits). It’s the ownership claim on a company’s assets once all obligations are settled.
Each account in the chart of accounts has a unique code or number. It categorizes transactions for easier organization, reporting, and analysis.
Debits and credits ensure that each transaction maintains the balance in the accounting equation. They are recorded in corresponding accounts to maintain accurate records.
Transactions are initially recorded in journals and then posted to the general ledger. It serves as the primary source for creating financial statements and reporting.
A journal entry includes the accounts affected, their debits and credits, the transaction date, and a brief description. It provides an audit trail and ensures accurate recording.
Depreciation reflects the gradual reduction in the value of assets like buildings, machinery, and vehicles due to wear and tear. It’s an expense recorded on the income statement.
A trial balance is a list of all general ledger account balances to ensure that debits equal credits before creating financial statements.
The income statement helps assess a company’s profitability. It shows how much revenue is generated and the costs incurred to generate that revenue
The balance sheet presents a snapshot of a company’s financial position. It helps assess solvency and liquidity by showing what the company owns and owes.
The cash flow statement highlights a company’s ability to generate and use cash, which is crucial for its operations and growth.
Matching ensures accurate reporting by associating the costs incurred to produce revenue. It contributes to a more realistic representation of a company’s financial performance.
Gross profit measures the efficiency of production, while net profit reflects the overall profitability after all expenses are accounted for.
This concept is crucial for preparing financial statements. If a business is considered a going concern, assets are valued based on their continued use rather than their liquidation value.
Materiality helps determine what information needs to be included in financial statements. Items that could impact decision-making are considered material and must be disclosed.
A fiscal year is chosen by a company for accounting and reporting purposes. It allows businesses to better match their reporting cycle with their operations.
Accounts payable are liabilities, and accounts receivable are assets. Businesses manage these accounts to maintain healthy cash flow.
Examples include accumulated depreciation (contra to the asset account) and sales returns (contra to the revenue account). They help provide more accurate financial information.
Prepaids are recorded as assets initially and then expensed over time. Accruals are recorded to ensure expenses are recognized in the appropriate period.
This statement helps assess a company’s ability to generate cash and meet its obligations. It complements the income statement and balance sheet.
The income is already recognized when the sale was made. The increase in accounts receivable reflects the amounts yet to be collected.
Book value is used for accounting purposes, while market value provides a more current measure of an asset’s worth.
Audits provide confidence to stakeholders that the financial statements present a true and fair view of the company’s financial position and performance.
Fixed assets include buildings, equipment, vehicles, and machinery. They are recorded on the balance sheet and depreciated over their useful life.
The quick ratio provides a more stringent measure of liquidity since it excludes inventory, which may not be as easily converted to cash.
The SEC requires companies to submit regular financial reports to provide investors with accurate and timely information.
When a company borrows money, its assets (cash) increase, but its liabilities (loan payable) also increase, maintaining the balance in the accounting equation.
GAAP ensures consistency and comparability in financial reporting, allowing investors and stakeholders to make informed decisions.
SOX requires companies to establish internal controls, undergo external audits, and enhance transparency in financial reporting.
Expenses reduce a company’s equity, whereas liabilities represent claims on the company’s assets.
It reconciles the beginning and ending balances of retained earnings and explains how profits are retained or distributed.
COGS represents the direct costs of producing the goods sold during the period and is deducted from revenue to calculate gross profit.
If the trial balance doesn’t balance, it indicates errors in recording transactions that need to be investigated and corrected.
This method enhances accuracy, reduces errors, and provides a clear audit trail of financial transactions.
Closing entries reset the temporary accounts for the next period, helping to start the new accounting period with accurate balances.
The accrual basis provides a more accurate picture of a company’s financial position and performance, but the cash basis is simpler and suitable for smaller businesses.
This principle helps prevent financial statements from misleading users by presenting a more conservative view of a company’s financial health.
This ratio indicates how efficiently a company manages its inventory by showing how many times it sells and replaces its inventory within a period.
The balance sheet is a financial statement that lists assets, liabilities, and equity, reflecting the accounting equation’s balance.
Dividends decrease equity and are disclosed in the statement of changes in equity and the statement of cash flows.
It explains how equity has changed due to net income, dividends, stock issuances, and other transactions affecting equity.
Credit and debit memos are used to correct billing or purchase order errors and adjust account balances accordingly.
: It provides insights into a company’s liquidity, solvency, and ability to generate cash, complementing the income statement and balance sheet.
This process reflects the asset’s decreasing value and ensures accurate matching of costs with revenues.
The journal serves as the initial record, and the ledger summarizes and categorizes transactions for financial reporting.
It provides a systematic way to organize financial information, making it easier to record and track transactions.
This principle ensures that financial statements accurately reflect the financial results of a specific period, improving comparability.
The interest expense is recorded as an expense on the income statement and reduces net income.
An example is a sales returns account, which is used to reduce the sales revenue account to account for returned merchandise.
Subsidiary ledgers help manage accounts with multiple transactions, such as accounts receivable or accounts payable.
The income tax expense is calculated based on the company’s taxable income and tax rate and is adjusted for deferred taxes.
Horizontal analysis helps identify trends, while vertical analysis provides insights into the composition of each financial statement item.
This concept helps avoid overstating assets or income, ensuring that financial statements present a more cautious and reliable view of a company’s financial position.
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