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Accounting

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A system of analyzing, recording, and summarizing the results of a business's operating, investing, and financing activities and then reporting them to decision makers.

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Accounts

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A standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement item.

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Balance Sheet (Statement of Financial Position)

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Reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time.

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Basic Accounting Equation (Balance Sheet Equation)

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Assets = Liabilities + Stockholders' Equity

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Financial Statements

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Reports that summarize the financial results of business activities.

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Generally Accepted Accounting Principles (GAAP)

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The rules used in the United States to calculate and report information in the financial statements.

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Income Statement (Statement of Operations)

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Reports the revenues less the expenses of the accounting period.

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International Financial Reporting Standards (IFRS)

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The rules used internationally to calculate and report information in the financial statements.

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Sarbanes-Oxley Act (SOX)

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A set of laws established to strengthen corporate reporting in the United States.

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Separate Entity Assumption

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States that business transactions are separate from and should be excluded from the personal transactions of the owners.

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Statement of Cash Flows

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Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

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Statement of Retained Earnings

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Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

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Unit of Measure Assumption

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States that accounting information should be measured and reported in the national monetary unit.

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Financing Activities

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Related to exchanging money with lenders or owners.

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Investing Activities

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Involve buying or selling long-lived items such as land, buildings, and equipment.

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Operating Activities

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The day-to-day events involved in running a business.

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Fiscal

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Any matters relating to money; typically used to describe a specified period of time used for financial reporting.

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Assets

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Probable future economic benefits owned by the business as a result of past transactions.

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Chart of Accounts

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A summary of all account names and corresponding account numbers used to record financial results in the accounting system.

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Classified Balance Sheet

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A balance sheet that classifies assets and liabilities into current and long-term categories.

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Cost Principle

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Requires assets to be recorded at the historical cash-equivalent cost, which is the amount paid or payable on the date of the transaction.

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Credit

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The right side of an account, or the act of entering an amount into the right side of an account.

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Current Assets

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Assets that will be used up or turned into cash within 12 months or the next operating cycle, whichever is longer.

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Current Liabilities

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Short-term obligations that will be paid in cash (or fulfilled with other current assets) within 12 months or the next operating cycle, whichever is longer.

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Current Ratio

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Ratio of current assets to current liabilities, used to evaluate liquidity.

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Debit

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The left side of an account, or the act of entering an amount into thee left side of an account.

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Journal

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A record of each day's transactions.

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Journal Entry

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An accounting method for expressing the effects of a transaction on accounts in debits-equal-credits format.

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Ledger

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A collection of records that summarizes the effects of transactions entered in the journal.

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Liabilities

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Probable debts or obligations of the entity that result from past transactions, which will be fulfilled by providing assets or services.

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Noncurrent

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Long-term; assets and liabilities that do not meet the definition of current.

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Normal Balance

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The side of the account (debit or credit) that increases the account.

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Stockholders' Equity

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The financing provided by the owners and the operations of the business.

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T-account

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A simplified version of a ledger account used for summarizing transaction effects and determining balances for each account.

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Transaction

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An exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders' equity of a business.

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Trial Balance

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A list of all accounts with their balances to provide a check on the equality of the debits and credits.

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Post

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Transferring amounts from the journal to the ledger.

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Accrual Basis Accounting

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Recording revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments.

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Cash Basis Accounting

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Recording revenues when dash is received and expenses when cash is paid.

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Expense Recognition Principle (Matching Principle)

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Expenses are recorded when incurred in earning revenue.

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Expenses

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Decreases in assets or increases in liabilities from ongoing operations, incurred to generate revenues during the current period.

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Net Income

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Equal to revenues minus expenses.

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Net Profit Margin

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Profit earned from each dollar of revenue.

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Revenue

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Increase in assets or settlement of liabilities arising from ongoing operations.

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Revenue Recognition Principle

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Revenues are recorded when goods or services are delivered, there is evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured.

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Time Period Assumption

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The assumption that allows the long life of a company to be reported in shorter time periods.

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Unadjusted Trial Balance

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An internal report, prepared before end-of-period adjustments, listing the unadjusted balances of each account to check the equality of total debits and credits.

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Unearned Revenue

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A liability representing a company's obligation to provide goods or services to customers in the future.

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Adjusted Trial Balance

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A list of all accounts and their adjusted balances to check on the equality of recorded debits and credits.

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Adjusting Journal Entries

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Entries necessary at the end of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts.

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Carrying Value (Net Book Value, Book Value)

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The amount at which an asset or liability is reported after deducting any contra-accounts.

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Contra-Account

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An account that is an offset to, or reduction of, another account.

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Depreciation

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Process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method of allocation.

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Permanent Accounts

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The balance sheet accounts that carry their ending balances into the next accounting period.

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Post-Closing Trial Balance

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Prepared to check that debits equal credits and that all temporary accounts have been closed.

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Temporary Accounts

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Income statement accounts that are closed to Retained Earnings at the end of the accounting period.

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Bank Reconciliation

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Process of using both the bank statement and the cash accounts of a business to determine the appropriate amount of cash in a bank account, after taking into consideration delays or errors in processing cash transactions.

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Cash Basis Accounting

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Recording revenues when dash is received and expenses when cash is paid.

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Cash Equivalents

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Short-term, highly liquid investments purchased within three months of maturity.

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Fraud

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An attempt to deceive others for personal gain.

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Imprest System

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A process that controls the amount paid to others by limiting the total amount of money available for making payments to others.

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Internal Controls

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Processes by which a company provides reasonable assurance regarding the reliability of the company's financial reporting, the effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations.

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Loan Covenants

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Terms of a loan agreement that, if broken, entitle the lender to renegotiate terms of the loan, including its due date.

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NSF (Not Sufficient Funds) Check

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Checks written for an amount greater than the funds available to cover them.

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Petty Cash

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Cash on hand typically used for making small cash disbursements.

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Restricted Cash

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Not available for general use but rather restricted for a specific purpose.

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Sarbanes-Oxley Act (SOX)

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A set of laws established to strengthen corporate reporting in the United States.

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Segregation of Duties

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An internal control that involves separating employees' duties so that the work of one person can be used to check the work of another person.

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Voucher System

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A process for approving and documenting all purchases and payments on account.

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Cost of Goods Sold Equation

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Expresses the relationship between inventory on hand, purchased, and sold: BI + P - EI = CGS or BI + P - CGS = EI.

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FOB Destination

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Term of sale indicating that goods are owned by the seller until delivered to the buyer.

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FOB Shipping Point

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Terms of sale indicating that goods are owned by the buyer the moment they leave the seller's premises.

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Goods Available for Sale

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The sum of beginning inventory and purchases for the period.

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Gross Profit (or Gross Margin)

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Net sales less cost of goods sold.

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Gross Profit Percentage

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Indicates how much above cost a company sells its products; calculated as Gross Profit divided by Net Sales.

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Inventory

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Tangible property held for sale in the normal course of business or used in production goods or services for sale.

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Merchandising Company

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A company that sells goods that have been obtained from a supplier.

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Multistep Income Statement

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Reports alternative measures of income by calculating subtotals for core and peripheral business activities.

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Periodic Inventory System

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A system in which ending inventory and cost of goods sold are determined only at the end of the accounting period based on a physical inventory count.

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Perpetual Inventory System

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A system in which a detailed inventory record is maintained by recording each purchase and sale of inventory during the accounting period.

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Purchase Discount

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Cash discount received for prompt payment of an account.

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Purchase Returns and Allowances

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A reduction in the cost of purchases associated with unsatisfactory goods.

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Sales Discount

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Discount offered to customers to encourage prompt payment of an account receivable.

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Sales Returns and Allowances

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Reduction of sales revenues for return of or allowances for unsatisfactory goods.

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Service Company

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A company that sells services rather than physical goods.

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Shrinkage

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The cost of inventory lost to theft, fraud, and error.

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