Financial Accouning or Accounting 101 Course

Introcution to Financial Accouting / Accounting 101/ 100 FAQs

Accounting is the process of gathering, recording, and reporting a business's economic activities to its users. Often referred to as the language of business, it employs a distinct vocabulary to convey information to decision-makers. To grasp the fundamentals of accounting, we first explore the basic types of business organizations. Next, we delve into the principles and concepts that underpin financial accounting. Focusing primarily on the corporate form of business, we will investigate how financial information is communicated to users through financial statements. Lastly, we will review how financial transactions are analyzed and reported within these statements.

Learning Objectives

LO1 – Defining  accounting.

LO2 – Identifying and describing the forms of business organization.

LO3 – Identifying and explaining the Generally Accepted Accounting Principles (GAAP).

LO4 – Identifying, explainining, and preparing the financial statements.

LO5 – Analysing transactions by using the accounting equation.

100 FAQs Accounting 101 Course

1. What is accounting?

A: Accounting is the process of identifying, recording, summarizing, and reporting financial transactions to provide useful information for decision-making.

2. Why is accounting called the language of business?

A: It communicates the financial health of a business to stakeholders through financial reports.

3. What are the main purposes of accounting?

A: The main purposes are to record transactions, summarize financial data, prepare reports, and help in decision-making.

Forms of Business Organization (LO2)

4. What are the main types of business organizations?

A: Sole proprietorship, partnership, and corporation.

5. What is a sole proprietorship?

A: A business owned and operated by one individual, where the owner is personally responsible for liabilities.

6. What is a partnership?

A: A business owned by two or more individuals who share profits, losses, and responsibilities.

7. What is a corporation?

A: A legal entity separate from its owners, offering limited liability to its shareholders.

8. How is ownership transferred in a corporation?

A: Through the buying and selling of stocks.

9. Which business organization is easiest to start?

A: Sole proprietorship.

10. What is limited liability?

A: It means owners are not personally responsible for the company’s debts beyond their investments.

Generally Accepted Accounting Principles (GAAP) (LO3)

11. What are GAAP?

A: Generally Accepted Accounting Principles are standards and rules for financial reporting.

12. Why is GAAP important?

A: It ensures consistency, transparency, and comparability in financial reporting.

13. Who sets GAAP in the U.S.?

A: The Financial Accounting Standards Board (FASB).

14. What is the economic entity principle?

A: A business is treated as separate from its owners for accounting purposes.

15. What is the cost principle?

A: Assets are recorded at their original cost, not their current market value.

16. What is the revenue recognition principle?

A: Revenue is recognized when earned, not when cash is received.

17. What is the matching principle?

A: Expenses are recorded in the same period as the related revenue.

18. What is the going concern assumption?

A: It assumes a business will continue operating indefinitely.

19. What is the monetary unit assumption?

A: Financial information is reported in a stable currency.

20. What is the time-period assumption?

A: Financial reporting is divided into specific time periods, like months or years.

Financial Statements (LO4)

21. What are the main financial statements?

A: Income statement, balance sheet, statement of retained earnings, and cash flow statement.

22. What is an income statement?

A: A report showing revenues, expenses, and net income or loss over a specific period.

23. What is a balance sheet?

A: A statement showing a company’s assets, liabilities, and equity at a specific date.

24. What is the statement of retained earnings?

A: It shows changes in retained earnings over a period due to net income and dividends.

25. What is the cash flow statement?

A: It shows cash inflows and outflows from operating, investing, and financing activities.

26. What is net income?

A: The profit a company earns after all expenses are deducted from revenues.

27. What is the accounting equation?

A: Assets = Liabilities + Owner’s Equity.

28. What are current assets?

A: Assets expected to be used or converted to cash within one year.

29. What are liabilities?

A: Obligations a company owes to others, such as debts and loans.

30. What is equity?

A: The owners’ claims on a company’s assets after liabilities are paid.

Analyzing Transactions (LO5)

31. What is a transaction?

A: An economic event affecting a business’s financial position and requiring recording.

32. How are transactions recorded?

A: Through journal entries using the double-entry system.

33. What is the double-entry system?

A: Each transaction affects at least two accounts, with one debit and one credit.

34. What is a ledger?

A: A record where all transactions are posted from journal entries.

35. What is a trial balance?

A: A list of all accounts and their balances used to verify that debits equal credits.

36. What is a debit?

A: An entry on the left side of an account, indicating an increase in assets or expenses.

37. What is a credit?

A: An entry on the right side of an account, indicating an increase in liabilities, equity, or revenue.

38. What is a general journal?

A: A chronological record of all business transactions.

39. What is posting in accounting?

A: Transferring journal entries to the ledger accounts.

40. What is a T-account?

A: A visual representation of an account showing debits on the left and credits on the right.

41. What is the accounting cycle?

A: A series of steps in the accounting process, from recording transactions to preparing financial statements and closing the books.

42. What are the main steps in the accounting cycle?

A: Identifying transactions, recording journal entries, posting to the ledger, preparing a trial balance, adjusting entries, preparing financial statements, and closing entries.

43. What is an adjusting entry?

A: A journal entry made at the end of an accounting period to update accounts before preparing financial statements.

44. Why are adjusting entries needed?

A: To match revenues and expenses according to the accrual accounting principle.

45. What is accrual accounting?

A: Recording revenues and expenses when they are incurred, not when cash is exchanged.

46. What is cash-basis accounting?

A: Recording transactions only when cash is received or paid.

47. What is depreciation?

A: The allocation of the cost of a long-term asset over its useful life.

48. What is accumulated depreciation?

A: The total depreciation expense recognized for an asset to date.

49. What are prepaid expenses?

A: Expenses paid in advance and recorded as assets until used.

50. What are unearned revenues?

A: Payments received before services are performed, recorded as liabilities until earned.

Financial Statement Elements (LO4)

51. What are revenues?

A: Income generated from business operations.

52. What are expenses?

A: Costs incurred in operating a business.

53. What is gross profit?

A: Revenue minus the cost of goods sold (COGS).

54. What is operating income?

A: Gross profit minus operating expenses.

55. What is net income?

A: The company’s total profit after all expenses, including taxes and interest, are deducted.

56. What is retained earnings?

A: The accumulated net income not distributed as dividends but retained in the business.

57. What is common stock?

A: Ownership shares issued by a corporation to raise capital.

58. What are dividends?

A: Payments made to shareholders from a company’s profits.

59. What are accounts receivable?

A: Money owed to a business by its customers for sales made on credit.

60. What are accounts payable?

A: Amounts a business owes to suppliers or creditors.

Analyzing Transactions (Continued)

61. What is a chart of accounts?

A: A list of all accounts used by a business to record transactions.

62. What is a trial balance used for?

A: To check the accuracy of recorded transactions by ensuring total debits equal total credits.

63. What happens if a trial balance does not balance?

A: It indicates possible errors that must be investigated and corrected.

64. What are correcting entries?

A: Journal entries made to fix errors discovered in the accounting records.

65. What is the purpose of closing entries?

A: To reset revenue, expense, and dividend accounts to zero at the end of the accounting period.

66. What is the post-closing trial balance?

A: A trial balance prepared after closing entries to ensure accounts are ready for the next accounting period.

67. What is a fiscal year?

A: A 12-month period used for financial reporting, not necessarily matching the calendar year.

68. What is an accounting period?

A: A specific time frame for which financial statements are prepared.

69. What is an income summary account?

A: A temporary account used to transfer revenues and expenses before closing retained earnings.

70. What is bookkeeping?

A: The process of recording and maintaining financial transactions.

GAAP Principles (Continued)

71. What is the materiality principle?

A: It states that only significant financial information that could influence decisions should be reported.

72. What is the consistency principle?

A: A company should use the same accounting methods from one period to the next.

73. What is the full disclosure principle?

A: All relevant financial information must be disclosed in financial statements.

74. What is the reliability principle?

A: Financial data should be accurate, complete, and verifiable.

75. What is the conservatism principle?

A: When in doubt, accountants should choose the solution that results in lower reported profits.

Accounting Systems and Controls

76. What is an internal control system?

A: Processes designed to ensure accurate reporting and prevent fraud.

77. What are examples of internal controls?

A: Segregation of duties, regular audits, and authorization procedures.

78. What is a financial audit?

A: An independent review of financial statements to ensure compliance with accounting standards.

79. What is forensic accounting?

A: Investigative accounting used to detect and prevent fraud.

80. What is managerial accounting?

A: The use of accounting information for internal decision-making.

Accounting Careers and Certifications

81. What is a CPA?

A: A Certified Public Accountant, a licensed professional in accounting.

82. What is a CMA?

A: A Certified Management Accountant specializing in financial management and strategy.

83. What is a financial analyst?

A: A professional who evaluates financial data to guide investment decisions.

84. What is the role of an auditor?

A: To review financial statements for accuracy and compliance with regulations.

85. What is an accounting clerk?

A: A person responsible for recording financial transactions and maintaining records.

Miscellaneous Accounting FAQs

86. What is budgeting?

A: Creating a financial plan that estimates income and expenses over a period.

87. What is forecasting?

A: Predicting future financial performance based on historical data.

88. What is financial planning?

A: Developing strategies to manage a company’s financial resources effectively.

89. What is business valuation?

A: Estimating the economic value of a business.

90. What is working capital?

A: Current assets minus current liabilities, indicating short-term financial health.

Get full Accounting Book Free: https://open.umn.edu/opentextbooks/textbooks/introduction-to-financial-accounting

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