BCOR 2110 Chapters 1–4 Study Materials Flashcards

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Accounting Equation

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The accounting equation is Assets = Liabilities + Stockholders' Equity. It must remain balanced after every transaction and guides transaction analysis.

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Double-entry

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The double-entry system requires that each transaction affects at least two accounts so total debits equal total credits. This system helps detect errors and maintain the accounting equation.

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Trial Balance

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A trial balance lists all ledger account balances to verify that total debits equal total credits. It helps identify recording errors but cannot detect every type of mistake.

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Chart of Accounts

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The chart of accounts is a listing of a company's account names and numbers organized for recording transactions. It ensures consistency and completeness in financial recordkeeping.

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Accrual Basis

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Accrual-basis accounting records revenues when performance obligations are satisfied and expenses when incurred, regardless of cash flows. It is required by GAAP and provides a more accurate picture of financial performance.

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Cash Basis

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Cash-basis accounting records revenues and expenses only when cash is received or paid. It is not in accordance with GAAP and can produce misleading financial statements.

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Adjusting Entries

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Adjusting entries update account balances at period end to follow revenue and expense recognition principles. Each adjustment affects one income statement account and one balance sheet account.

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Deferral

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A deferral is when cash is exchanged before revenue is earned or before an expense is incurred (e.g., prepaid expenses, unearned revenue). Adjusting entries reclassify deferrals to the proper expense or revenue accounts.

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Accrual

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An accrual records revenue earned or expenses incurred that have not yet been recorded or paid. Adjusting entries increase both a balance sheet account and an income statement account for accruals.

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Depreciation

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Depreciation allocates the cost of a long-lived asset to expense over its useful life. It uses a contra-asset account, Accumulated Depreciation, and does not attempt to report market value.

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Revenue Recognition

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Revenue is recognized when a performance obligation is satisfied—when goods or services are provided to the customer. The timing of recognition may differ from cash receipt.

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Expense Recognition

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The expense recognition (matching) principle requires recognizing expenses in the period they help generate revenues. This ties expense recognition to revenue recognition rather than cash payments.

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Post-Closing Trial

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The post-closing trial balance is prepared after closing entries are posted and includes only permanent accounts. Temporary accounts (e.g., Dividends) do not appear on it.

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Income Statement

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The income statement reports revenues and expenses for a period to determine net income or loss. It is often prepared before the retained earnings and balance sheet.

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Balance Sheet

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The balance sheet reports assets, liabilities, and stockholders’ equity as of a specific date. It provides a snapshot of financial position at a point in time.

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Current Ratio

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The current ratio equals current assets divided by current liabilities and measures short-term liquidity. A higher ratio indicates better ability to meet near-term obligations.

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Debt-to-Assets

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Debt-to-assets ratio equals total liabilities divided by total assets and indicates the proportion of assets financed by creditors. A lower percentage suggests stronger solvency.

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Earnings Per Share

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Earnings per share (EPS) equals net income less preferred dividends divided by the weighted-average common shares outstanding. Changes in outstanding shares can affect EPS even when net income rises.

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MD&A

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The Management Discussion and Analysis (MD&A) provides management’s perspective on operations, liquidity, and future outlook. It supplements the financial statements with qualitative context.

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Closing Entries

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Closing entries transfer the balances of temporary accounts (revenues, expenses, dividends) to Retained Earnings to reset them to zero for the next period. They finalize the accounting cycle and prepare books for a new period.