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Financial Accounting Key Concepts and Formulas

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이 집합의 용어 (27)

  • What is accounting?

    Accounting identifies business activities, processes information, and reports results.

  • Purpose of financial accounting

    Provides information for external users such as investors, creditors, and government.

  • Purpose of managerial accounting

    Provides information for internal users like managers to aid decision-making.

  • Role of FASB

    FASB creates accounting standards in the U.S.

  • Role of SEC

    SEC oversees U.S. financial markets and enforces securities laws.

  • Role of IASB

    IASB publishes International Financial Reporting Standards (IFRS).

  • What is GAAP?

    GAAP are U.S. accounting guidelines companies must follow.

  • Accounting equation

    Assets = Liabilities + Equity

  • Define assets, liabilities, and equity

    Assets: what the business owns
    Liabilities: what the business owes
    Equity: owner's claim on assets

  • Equity formula

    Equity = Capital + Revenues − Expenses − Withdrawals

  • Return on Assets (ROA) formula

    ROA = Net Income ÷ Average Total Assets

  • What increases with debits? (DEAD)

    Expenses, Assets, and Drawings (Withdrawals) increase with debits.

  • What increases with credits? (CLIC)

    Capital, Liabilities, Income (Revenue) increase with credits.

  • Normal balance of asset accounts

    Debit is the normal balance for assets.

  • Normal balance of liability accounts

    Credit is the normal balance for liabilities.

  • Double-entry accounting rule

    Every transaction affects at least two accounts and total debits must equal total credits.

  • Difference between cash and accrual basis accounting

    Cash basis: record when cash is received/paid.
    Accrual basis: record revenue when earned and expenses when incurred.

  • What are deferrals in adjusting entries?

    Cash happens first; expense or revenue is recognized later (e.g., prepaid rent, unearned revenue).

  • What are accruals in adjusting entries?

    Expense or revenue happens first; cash is received or paid later (e.g., salaries payable, interest revenue).

  • Purpose of closing entries

    Close temporary accounts (revenues, expenses, withdrawals) to prepare for next period; permanent accounts remain open.

  • Current ratio formula and purpose

    Current Ratio = Current Assets ÷ Current Liabilities
    Measures ability to pay short-term debts.

  • Gross profit formula

    Gross Profit = Sales Revenue − Cost of Goods Sold (COGS)

  • Difference between perpetual and periodic inventory systems

    Perpetual: inventory updated continuously.
    Periodic: inventory updated by physical count.

  • Two entries required for a perpetual inventory sale

    1) Record sale: Cash/Accounts Receivable Dr, Sales Revenue Cr
    2) Record cost: COGS Dr, Inventory Cr

  • Freight-in vs. freight-out

    Freight In: part of inventory cost.
    Freight Out: selling or delivery expense.

  • Accounting cycle steps

    Transactions → Journal → Ledger → Trial Balance → Adjust → Adjusted Trial Balance → Financial Statements → Close → Post-Closing Trial Balance

  • Why does debit not always mean increase?

    Debit increases depend on account type; for example, debits increase assets and expenses but decrease liabilities and equity.