Term
| What is the difference between cash and accrual based accounting? |
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Definition
Cash based focuses on the flows of cash in and out of the organization.
Accrual Based focuses on the flows of resources and the revenues those resources help to generate. |
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Term
GAAP suggest that HCO's use the ______ based accounting system.
Why? |
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Definition
| Accrual. because it more accurately matches resources used to revenues earned. It is less succeptible to manipulating books than cash based. |
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Term
| Two rules for recording transactions under accrual based accounting. |
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Definition
1. At least 2 accounts must be used to record a transaction.
2. After each transaction, the fundamental accounting equation must be in balance:
Assets = Liabilities + Net Assets |
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Term
| Define Accrual Basis of Accounting: |
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Definition
| An accounting method which aligns the flow of resources and the revenues those resources helped to generate. It records revenues when earned and expenses when resources are used, regardless of the flow of cash in or out of the organization. This is the standard method in use today. |
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Term
| Define Cash Basis of Accounting: |
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Definition
| An accounting method which tracks when cash was received and when cash was expended, regardless of when services were provided or resources were used. |
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Term
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Definition
| An asset which, when increased, decreases the value of a related asset on the books. Two primary examples are Accumulated Depreciation, which is the contra-asset to Properties and Equipment, and the Allowance for Uncollectibles, which is the contra-asset to Accounts Receivable. |
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Term
| The major reasons to use accrual basis of accounting are to: |
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Definition
a) Match revenues and expenses;
b) Avoid management manipulation of cash flows to influence the financial statements; and
c) Keep track of resource flows as well as cash flows. |
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Term
| The purpose of a journal is |
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Definition
| to record transactions in chronological order. |
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Term
| The purpose of a ledger is |
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Definition
| The purpose of a ledger is to provide a record of the balance in each account. |
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Term
| Transactions are first recorded in the ______ and then summarized in the ______. |
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Definition
| Transactions are first recorded in the journal and then summarized in the ledger. |
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Term
| The information from the _____ is used to prepare the organization’s financial statements. |
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Definition
| The information from the ledger is used to prepare the organization’s financial statements. |
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Term
| Give an example of a transaction which involve the adjustment of 3 accounts: |
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Definition
| obtaining a loan which is to be paid off in installments starting right away: 1) Cash (a Current Asset) is increased by the loan amount; 2) Notes Payable (a Current Liability) is increased by the amount due this period; and 3) Long-Term Debt (a Non-Current Liability) is increased by the loan amount less the current portion. |
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Term
| Give 2 examples of a contra asset |
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Definition
1. Accumulated Depreciation, which is the contra asset to Plant, Properties and Equipment.
2. The Allowance for Doubtful Accounts, which is the contra asset to Accounts Receivable |
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Term
| Explain what a prepaid expense is and how it is recorded. |
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Definition
| A prepaid expense, such as rent or insurance, is a type of current asset. It is recorded by decreasing Cash and increasing the prepaid amount by the same amount. Thus, the transaction only occurs in the Asset section of the Balance Sheet, and it is a zero-sum transaction. |
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Term
| What are the major differences in recording transactions for a for-profit vs. not-for-profit org? |
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Definition
| for-profit would record certain transactions under Owner's Equity, whereas the Not-for-Profit would use Net Assets. Also, a for-profit would not show restrictions on Owners' Equity. |
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