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Accounting

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Information and measurement system that identifies, records, and communicates relevant information about a company's business activities.

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Accounting Equation

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Equality involving a company's assets, liabilities, and equity; Assets = Liabilities + Equity

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Assets

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Resources that a company owns or controls that are expected to provide current and future benefits to the business.

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Audit

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Analysis and report of an organization's accounting system, its records, and its reports using various tests.

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Auditors

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Individuals hired to review financial reports and information systems of organizations.

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Balance Sheet

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Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.

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Bookkeeping

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The part of accounting that involves recording transactions and events either manually or electronically. Also called Recordkeeping.

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Business Entity Assumption

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Principle that requires a business to be accounted for separately from its owner(s) and from any other entity.

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Common Stock

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A corporation's basic ownership share.

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Conceptual Framework

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A written framework to guide the development, preparation, and interpretation of financial accounting information.

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Corporation

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Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.

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Cost-benefit Constraint

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The notion that only information with benefits of disclosure greater than the costs of disclosure need to be disclosed.

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Cost Principle

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Accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions.

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Equity

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Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities. Also called net assets.

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Ethics

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Code of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

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Events

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Happenings that both affect an organization's financial position and can be reliably measured.

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Expanded Accounting Equation

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Assets = Liabilities + Equity; Equity equals [Owner capital - owner withdrawal + revenue - expenses] for a non-corporation; Equity equals [Contributed capital - retained earnings + revenue - expenses] for a corporation where dividends are subtracted from retained earnings.

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Expense Recognition Principle

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Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Matching Principle.

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Expenses

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Outflows or using up of assets as part of operations of business to generate sales.

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External Transactions

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Exchanges of economic value between one entity and another entity.

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External Users

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Persons using accounting information who are not directly involved in running the organization.

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Financial Accounting

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Area of accounting aimed mainly at serving external users.

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Financial Accounting Standards Board

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Independent group of full-time members responsible for setting accounting rules.

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Full Disclosure Principle

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Principle that prescribes financial statements (including notes) to report all relevant information about an entity's operations and financial condition.

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Generally Accepted Accounting Principles

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Rules that specify acceptable accounting practices.

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Going-concern Assumptions

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Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

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Income Statement

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Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.

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Internal transactions

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Activities within an organization that can affect the accounting equation.

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Internal users

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Persons using accounting information who are directly involved in managing the organization.

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International Accounting Standards Board

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Group that identifies preferred accounting practices and encourages global acceptance; issues the International Financial Reporting Standards.

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International Financial Reporting Standards

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Accounting standards set by the IASB which aim to develop a single set of global standards, to promote those standards, and converge national and international standards globally.

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Liabilities

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Creditors' claims on an organization's assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

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Managerial Accounting

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Area of accounting aimed mainly at serving the decision-making needs of internal users.

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Matching Principle

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Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Expense Recognition Principle.

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Materiality Constraint

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Prescribes that accounting for items that significantly impact a financial statement and any inferences from them adhere strictly to GAAP.

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Measurement Principle

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Accounting information is based on cost with potential subsequent adjustments to fair value.

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Monetary Unit Assumption

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Principle that assumes transactions and events can be expressed in money units.

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Net Income

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Amount earned after subtracting all expenses necessary for and matched with sales for a period.

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Net Loss

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Excess of expenses over revenues for a period.

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Owner, Capital

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Account showing the owner's claim on company assets; equals owner investments plus net income (or less net loss) minus owner withdrawals since the company's inception. Also called Equity.

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Owner Investment

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Assets put into the business by the owner.

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Owner Withdrawals

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Assets pulled out of the business by the owner.

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Partnership

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Unincorporated association of two or more persons to pursue a business for profit as co-owners.

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Recordkeeping

answer

The part of accounting that involves recording transactions and events either manually or electronically. Also called Bookkeeping.

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Return

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Monies (or sums of money) received from an investment; often in percent form.

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Return on Assets

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Ratio reflecting operating efficiency; defined as net income divided by average total assets for that period.

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Revenue Recognition Principle

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The principle prescribing that revenue is recognized when earned.

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Revenues

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Gross increase in equity from a company's business activities that earn income.

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Risk

answer

Uncertainty about expected return.

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Sarbanes-Oxley Act (SOX)

answer

Create the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.

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Securities and Exchange Commission

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Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

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Shareholders

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Owners of a corporation who usually receive dividends. Also called stockholders.

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Shares

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Equity of a corporation divided into ownership units that usually give dividends. Also called Stock.

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Sole Proprietorship

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Business owned by one person that is not organized as a corporation.

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Statement of Cash Flows

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A financial statement that lists cash inflows and cash outflows during a period; arranged by operating, investing, and financing.

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Statement of Owner's Equity

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Report of changes in equity over a period; adjusted for increases and for decreases.

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Stock

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Equity of a corporation divided into ownership units that usually give dividends. Also called Shares.

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Stockholders

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Owners of a corporation who usually receive dividends. Also called shareholders.

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Time Period Assumptions

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Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.

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Account

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Record within an accounting system in which increases and decreases are entered and stored in a specific asset, liability, equity, revenue, or expense.

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Account Balance

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Difference between total debits and total credits (including the beginning balance) for an account.

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Balance Column Account

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Account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry.

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Chart of Accounts

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List of accounts used by a company' includes and identification number for each account.

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Compound Journal Entries

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Journal entries that affect at least three accounts.

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Credit

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Recorded on the right side; an entry that decreases asset and expense accounts, and increases liability, revenue and most equity accounts. Abbreviated Cr.

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Creditors

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Individuals or organizations entitled to receive payments

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Debit

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Recorded on the left side; an entry that increases asset and expense accounts, and decreases liability, revenue and most equity accounts. Abbreviated Dr.

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Debtors

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Individuals or organizations that owe money.

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Debt Ratio

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Ratio of total liabilities to total assets; used to reflect risk associated with a company's debts.

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Double Entry Accounting

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Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

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General Journal

answer

All purpose journal for recording the debits and credits of transactions and events.

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Journal

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Record in which trans actions are entered before they are posted to ledger accounts; also called the book of original entry.

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Journalizing

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Process of recording transactions in a journal.

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Ledger

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Record containing all accounts (with amounts) for a business.

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Posting

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Process of transferring journal entry information to the ledger; computerized systems automate this process.

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Posting Reference Column

answer

A column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts.

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Source Documents

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Sources of information in accounting entries that can be in either paper or electronic form. Also called business papers.

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T Account

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Tool used to show the effects of transactions and events on individual accounts.

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Trial balance

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List of accounts and their balances at a point in time; total debit balances must equal total credit balances.

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Unearned Revenue

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Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

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Accounting Period

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Length of time covered by financial statements; also called reporting period.

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Accrual Basis Accounting

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Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP.

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Accrued Expenses

answer

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses and increasing liabilities.

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Accrued Revenues

answer

Revenues earned in a period that both unrecorded and not yet received in cash (or other assets; adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.

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Adjusted Trial Balance

answer

List of accounts and balances prepared after period-end adjustments are recorded and posted.

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Adjusting Entry

answer

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expenses or revenue account.

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Annual Financial Statements

answer

Financial statements covering one-year period; often based on a calendar year, but any consecutive 12-month (or 52 week) period is acceptable.

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Book Value

answer

Assets acquisition costs less its accumulated depreciation, depletion, or amortization. Also sometimes used synonymously as the carrying value of an account.

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Cash Basis Accounting

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Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

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Contra Account

answer

Account linked with another account and having an opposite normal balance. Reported as a subtraction from the other account's normal balance.

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Depreciation

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Expense created by allocating the cost of plant and equipment to periods in which they are used. Represents the expense of using the asset.

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Fiscal Year

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Consecutive 12-month (or 52 week) period chosen as the organization's annual accounting period.

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Interim Financial Statements

answer

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

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Matching Principle (or Expense Recognition Principle)

answer

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

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Natural Business Years

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The twelve month period that ends when a company's sales activities are at their lowest point.

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Plant Assets

answer

Tangible long lived assets used to produce or sell products and services; also called property, plant, and equipment or fixed assets.

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Prepaid Expenses

answer

Items paid for in advance of receiving their benefits. Classified as assets.

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Profit Margin

answer

Ratio of a company's net income to its net sales. The percent of income in each dollar of revenue.

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Straight-line Depreciation Method

answer

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

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Time Period Assumptions

answer

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, and years.

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Unadjusted Trial Balance

answer

List of accounts and balances prepared before accounting adjustments are recorded and posted.

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Unearned Revenues

answer

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

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Accounting Cycle

answer

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post closing trial balance (or reversing entries).

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Classified Balance Sheet

answer

Balance sheet that presents assets and liabilities in relevant subgroups, including current and non-current classifications.

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Closing Entries

answer

Entries recorded at the end of each accounting period to transfer end of period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retain earnings for a corporation).

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Closing process

answer

Necessary end of period steps to prepare the accounts for recording the transactions of the next period.

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Current Assets

answer

Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.

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Current Liabilities

answer

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

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Current Ratio

answer

Ratio used to evaluate a company's ability to pay its short term obligations, calculated by dividing current assets by current liabilities.

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Income Summary

answer

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred. Its balance is transferred to the capital account (or retained earnings for a corporation).

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Intangible assets

answer

Long Term assets (resources) used to produce or sell products or services. Usually lack physical form and have uncertain benefits.

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Long Term Investments

answer

Long term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

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Long Term Liabilities

answer

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

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Operating Cycle

answer

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

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Permanent Accounts

answer

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed. Also called real accounts.

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Post Closing Trial Balance

answer

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

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Pro Forma Financial Statement

answer

Statements that show the effect of proposed transactions and events as if they had occurred.

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Reversing Entries

answer

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.

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Temporary Accounts

answer

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation). They are closed at the end of each period.

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Unclassified Balance Sheets

answer

Balance sheet that broadly groups assets, liabilities, and equity accounts.

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Working Papers

answer

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.

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Work Sheet

answer

Spreadsheets used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.

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