The balance sheet, income statement, and cash flow statement each offer unique details with information that is all interconnected. Together the three statements give a comprehensive portrayal of the company’s operating activities.

Accounting I Chapter 6 Key Terms

income statement

For best results enter two or more search terms….ch 6,7,8.

Fiscal Year: A fiscal period consisting of 12 consecutive months. Most businesses use 1 year because federal and state taxes reports are based on 1 year. Fiscal periods can begin on any date.

A ledger is a list of accounts and their balances at a given time.

two accounts

No account can possibly change without some identifiable cause. Thus, every transaction must touch a minimum of two accounts. Many transactions actually affect more than two accounts but at least two are impacted by each of these financial events.

Whether inventory is sold or an account receivable is collected, at least two accounts are always affected because all such events have both a cause and a financial effect. Individual balances rise or fall depending on the nature of each transaction.

The dual effect principle is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the records of a business. This concept states that every transaction has a dual or double effect and should therefore be recorded in two places.

The Dual Effect of Transactions For example, the accounts receivable balance increases because of a sale. Cash decreases as a result of paying salary expense. Cost of goods sold increases because inventory is removed. No account balance can possibly change without some identifiable cause.

The accounting equation remains in balance as every transaction must alter both sides of the equation, A = C + L, by the same amount as a result of the duality principle. This fact that every transaction has a dual effect on the accounting equation is the basis of the double-entry system of recording transactions.

Will all transactions have a dual effect on the accounting equation? Q4-5 ANSWER: All transactions will have a dual effect on the accounting equation, which will result in debits equaling credits in the equation.

The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements.

Whether information is material is a matter of judgement. The concept of materiality works as a filter through which management sifts information. Its purpose is to make sure that the financial information that could influence investors’ decisions is included in the financial statements.

Materiality is a concept in accounting which states that firm can ignore small information which does not have any significant impact on the business. This also means that a business must include all other information in its financial statements which is material/significant enough.

The materiality threshold in audits refers to the benchmark used to obtain reasonable assurance that an audit does not detect any material misstatement that can significantly impact the usability of financial statements.

Throughout the whole process of the audit, auditors also need to review the materiality and may need to revise it if necessary. There is no specific rule on how to determine materiality. So, the process may be different from one accounting firm to another based on the auditors’ experiences and professional judgment.

Next, a percentage factor based on risk at the financial statement level is multiplied by planning materiality to determine tolerable misstatement, or performance materiality, which is the maximum amount of known error and likely error an auditor can accept in the financial statements without adjustment.