Financial Accounting Chapter 1-6

Accounting
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.
Accounts
A standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement item.
Balance Sheet (Statement of Financial Position)
Reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time.
Basic Accounting Equation (Balance Sheet Equation)
Assets = Liabilities + Stockholders’ Equity
Financial Statements
Reports that summarize the financial results of business activities.
Generally Accepted Accounting Principles (GAAP)
The rules used in the United States to calculate and report information in the financial statements.
Income Statement (Statement of Operations)
Reports the revenues less the expenses of the accounting period.
International Financial Reporting Standards (IFRS)
The rules used internationally to calculate and report information in the financial statements.
Sarbanes-Oxley Act (SOX)
A set of laws established to strengthen corporate reporting in the United States.
Separate Entity Assumption
States that business transactions are separate from and should be excluded from the personal transactions of the owners.
Statement of Cash Flows
Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.
Statement of Retained Earnings
Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.
Unit of Measure Assumption
States that accounting information should be measured and reported in the national monetary unit.
Financing Activities
Related to exchanging money with lenders or owners.
Investing Activities
Involve buying or selling long-lived items such as land, buildings, and equipment.
Operating Activities
The day-to-day events involved in running a business.
Fiscal
Any matters relating to money; typically used to describe a specified period of time used for financial reporting.
Assets
Probable future economic benefits owned by the business as a result of past transactions.
Chart of Accounts
A summary of all account names and corresponding account numbers used to record financial results in the accounting system.
Classified Balance Sheet
A balance sheet that classifies assets and liabilities into current and long-term categories.
Cost Principle
Requires assets to be recorded at the historical cash-equivalent cost, which is the amount paid or payable on the date of the transaction.
Credit
The right side of an account, or the act of entering an amount into the right side of an account.
Current Assets
Assets that will be used up or turned into cash within 12 months or the next operating cycle, whichever is longer.
Current Liabilities
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.
Current Ratio
Ratio of current assets to current liabilities, used to evaluate liquidity.
Debit
The left side of an account, or the act of entering an amount into thee left side of an account.
Journal
A record of each day’s transactions.
Journal Entry
An accounting method for expressing the effects of a transaction on accounts in debits-equal-credits format.
Ledger
A collection of records that summarizes the effects of transactions entered in the journal.
Liabilities
Probable debts or obligations of the entity that result from past transactions, which will be fulfilled by providing assets or services.
Noncurrent
Long-term; assets and liabilities that do not meet the definition of current.
Normal Balance
The side of the account (debit or credit) that increases the account.
Stockholders’ Equity
The financing provided by the owners and the operations of the business.
T-account
A simplified version of a ledger account used for summarizing transaction effects and determining balances for each account.
Transaction
An exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders’ equity of a business.
Trial Balance
A list of all accounts with their balances to provide a check on the equality of the debits and credits.
Post
Transferring amounts from the journal to the ledger.
Accrual Basis Accounting
Recording revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments.
Cash Basis Accounting
Recording revenues when dash is received and expenses when cash is paid.
Expense Recognition Principle (Matching Principle)
Expenses are recorded when incurred in earning revenue.
Expenses
Decreases in assets or increases in liabilities from ongoing operations, incurred to generate revenues during the current period.
Net Income
Equal to revenues minus expenses.
Net Profit Margin
Profit earned from each dollar of revenue.
Revenue
Increase in assets or settlement of liabilities arising from ongoing operations.
Revenue Recognition Principle
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.
Time Period Assumption
The assumption that allows the long life of a company to be reported in shorter time periods.
Unadjusted Trial Balance
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.
Unearned Revenue
A liability representing a company’s obligation to provide goods or services to customers in the future.
Adjusted Trial Balance
A list of all accounts and their adjusted balances to check on the equality of recorded debits and credits.
Adjusting Journal Entries
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.
Carrying Value (Net Book Value, Book Value)
The amount at which an asset or liability is reported after deducting any contra-accounts.
Contra-Account
An account that is an offset to, or reduction of, another account.
Depreciation
Process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method of allocation.
Permanent Accounts
The balance sheet accounts that carry their ending balances into the next accounting period.
Post-Closing Trial Balance
Prepared to check that debits equal credits and that all temporary accounts have been closed.
Temporary Accounts
Income statement accounts that are closed to Retained Earnings at the end of the accounting period.
Bank Reconciliation
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.
Cash Basis Accounting
Recording revenues when dash is received and expenses when cash is paid.
Cash Equivalents
Short-term, highly liquid investments purchased within three months of maturity.
Fraud
An attempt to deceive others for personal gain.
Imprest System
A process that controls the amount paid to others by limiting the total amount of money available for making payments to others.
Internal Controls
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.
Loan Covenants
Terms of a loan agreement that, if broken, entitle the lender to renegotiate terms of the loan, including its due date.
NSF (Not Sufficient Funds) Check
Checks written for an amount greater than the funds available to cover them.
Petty Cash
Cash on hand typically used for making small cash disbursements.
Restricted Cash
Not available for general use but rather restricted for a specific purpose.
Sarbanes-Oxley Act (SOX)
A set of laws established to strengthen corporate reporting in the United States.
Segregation of Duties
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.
Voucher System
A process for approving and documenting all purchases and payments on account.
Cost of Goods Sold Equation
Expresses the relationship between inventory on hand, purchased, and sold: BI + P – EI = CGS or BI + P – CGS = EI.
FOB Destination
Term of sale indicating that goods are owned by the seller until delivered to the buyer.
FOB Shipping Point
Terms of sale indicating that goods are owned by the buyer the moment they leave the seller’s premises.
Goods Available for Sale
The sum of beginning inventory and purchases for the period.
Gross Profit (or Gross Margin)
Net sales less cost of goods sold.
Gross Profit Percentage
Indicates how much above cost a company sells its products; calculated as Gross Profit divided by Net Sales.
Inventory
Tangible property held for sale in the normal course of business or used in production goods or services for sale.
Merchandising Company
A company that sells goods that have been obtained from a supplier.
Multistep Income Statement
Reports alternative measures of income by calculating subtotals for core and peripheral business activities.
Periodic Inventory System
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.
Perpetual Inventory System
A system in which a detailed inventory record is maintained by recording each purchase and sale of inventory during the accounting period.
Purchase Discount
Cash discount received for prompt payment of an account.
Purchase Returns and Allowances
A reduction in the cost of purchases associated with unsatisfactory goods.
Sales Discount
Discount offered to customers to encourage prompt payment of an account receivable.
Sales Returns and Allowances
Reduction of sales revenues for return of or allowances for unsatisfactory goods.
Service Company
A company that sells services rather than physical goods.
Shrinkage
The cost of inventory lost to theft, fraud, and error.
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