Debits & Credits
What does a debit do to an asset account?
increase it
What are the three main financial statements?
Balance Sheet, Income Statement, Cash Flow Statement
What is the first step of the accounting cycle?
Recording transactions!
What does GAAP stand for?
Generally Accepted Accounting Principles!
Which financial statement would you check if you wanted to know how much cash a company has?
If cash is credited, what type of transaction likely happened?
A payment was made
Which financial statement shows revenues and expenses?
Income Statement!
In which book are all transactions first recorded?
The journal
The Matching Principle states that expenses should be recorded in the same period as what?
The revenue they helped generate!
If a business owner uses company money to buy a personal vacation, what principle is violated?
Entity Assumption!
What account is debited when a business purchases inventory on credit?
Inventory
What equation must always be balanced on the Balance Sheet?
Assets = Liabilities + Equity
What is the purpose of a trial balance?
To check that debits = credits!
The Entity Assumption means that a company’s finances must be kept separate from whose?
The owner’s personal finances!
What happened to WorldCom when they misclassified expenses as assets?
They went bankrupt & their CEO went to jail!
True or False: Liabilities are increased with a debit.
False – Liabilities increase with a credit
What financial statement shows the movement of cash in and out of a business?
Cash Flow Statement!
What happens after a trial balance is prepared?
Financial statements are created!
Which principle says that assets must be recorded at their original purchase price?
Historical Cost Principle!
Why did Hertz have to restate its financial statements?
Because they overstated revenue & miscalculated expenses!
If a company receives $5,000 in cash for services performed, what two accounts are affected?
Cash (debit) & Revenue (credit).
If a company has a net loss, where will this show on the balance sheet?
In Retained Earnings under Equity
What is the last step in the accounting cycle?
Closing the books!
The Materiality Principle says that small accounting errors can be ignored unless they do what?
Significantly impact financial decisions!
Name one reason a company might commit financial fraud.
To make profits look higher, to attract investors, to avoid debt problems, etc.