Accounting Basics

Perpetual inventory system

Continuous records of inventory cost and goods sold

Allowance for doubtful accounts

Contra asset account for uncollectible accounts

Accrued expenses

Costs incurred but unpaid and unrecorded

Adjusting entry

Journal entry to update asset/liability accounts

Market value per share

Price of stock at a given point in time

Contra account

Account linked with opposite normal balance

Measurement/Cost principle

Accounting information measured on cash basis

Closing entries

Entries to transfer end-of-period balances

Retained earnings

Equity increased by revenues and decreased by expenses

Salvage value

Estimated value at the end of an asset's useful life

Allowance method

Estimating bad debts expense and reporting accounts receivable

Audit

Examination of financial statements for proper use of concepts and rules

Depreciation

Expense of using a plant asset

Statement of retained earnings

Explains changes in equity over a period

Bank reconciliation

Explains difference between book and bank cash balances

Fraud triangle

Factors leading to illegal acts: opportunity, pressure, rationalization

Balance sheet

Financial position at a point in time

Statement of cash flows

Financial statement showing cash activities

Income statement

Financial statement showing company profitability

Merchandise inventory

Goods owned and expected to be sold

Revenues

Increase equity from providing products/services

Common stock

Increase in equity from owner's investment

Debit

Left side of an account, increases assets

Adjusted trial balance

List of accounts after period-end adjustments

Unadjusted trial balance

List of accounts before adjustments

Chart of accounts

List of all ledger accounts with identification numbers

Trial balance

List of ledger accounts and balances

Post-closing trial balance

List of permanent accounts after closing entries

Mortgage

Loan agreement using borrower's assets as collateral

Plant assets

Long-lived assets used to produce/sell products/services

Profit margin

Net income as a percentage of net sales

Gross profit

Net sales minus cost of goods sold

Intangible assets

Noncurrent resources used to produce/sell products/services

Sales returns and allowances

Refunds or credits for unsatisfactory merchandise

Assets

Resources owned or controlled by a company

Accrued revenues

Revenues earned but unrecorded and not yet received

Credit

Right side of an account, increases revenue

Corporation

Separate entity with same rights as a person

Financial Accounting Standards Board (FASB)

Sets concepts and rules for financial reporting in the US

Cash equivalents

Short-term investments easily convertible to cash

Normal balance

Side that increases an account's balance

Classified balance sheet

Balance sheet with grouped accounts

Temporary accounts

Accounts closed at the end of each period

Operating activities

Activities involving production and sale of goods/services

Capital expenditures

Additional costs of plant assets

Straight-line depreciation

Allocating equal portion of asset cost to each period

Amortization

Allocating intangible asset cost over its life

Payable

Amount owed in the future for provided products/services

Receivable

Amount owed to the company for provided products/services

Principal of a note

Amount to be paid back when a note matures

Accounts receivable

Amounts due from customers for credit sales

Book value

Asset's cost minus accumulated depreciation

Expanded accounting equation

Assets = Liabilities + Contributed capital + Retained earnings + Revenues − Expenses − Dividends

Accounting equation

Assets = Liabilities + Equity

Liquidity

Availability of resources for short-term cash needs

Permanent accounts

Balance sheet accounts not closed

Paid-in capital

Cash and assets received from stockholders

Current assets

Cash and resources expected to be used within a year

Purchases discount

Cash discount for purchaser paying early

Aging of accounts receivable

Classifying past-due accounts for estimating uncollectible accounts

Generally Accepted Accounting Principles (GAAP)

Concepts and rules for financial accounting in the US

Liabilities

Creditors' claims on an organization's assets

Expenses

Decrease in equity from providing products/services

Account balance

Difference between total debits and credits

Dividends

Distributions to owners, not an expense

Time period assumption

Dividing company life into set periods for reporting

Net income

Earnings after subtracting expenses from revenues

Net pay

Employee compensation after deductions

Current liabilities

Obligations due within one year

Long-term liabilities

Obligations not due within one year

Equity

Owner's claims on company assets

Unearned revenue

Payment for future products/services

Prepaid expense

Payment for product or service before use

Internal controls

Procedures to protect assets and ensure reliable accounting

Bond

Promise to pay par value and interest

Financial accounting

Provides information for external users

Revenue recognition principle

Recognizing revenue when goods/services are delivered

Accrual basis accounting

Recognizing revenues when provided and expenses when incurred

General ledger

Record of all company accounts

Materiality

Recording all items impacting investor decision-making

Expense recognition/matching principle

Recording expenses in the same period as generated revenue

Journalizing

Recording transactions in company records

Bookkeeping

Recording transactions, not preparing financial statements

Direct write-off method

Recording uncollectible accounts as they become uncollectible

General journal

Records transactions changing balances in multiple accounts

Accounting cycle

Recurring steps in each accounting period

Cash discount

Reduction in merchandise price for early payment

Accumulated depreciation

Sum of all expense recorded for a plant asset

Double-entry accounting

System requiring balanced accounting equation

Supplies

Tangible resources used within a year

Federal Insurance Contributions Act (FICA) taxes

Taxes for Social Security and Medicare programs

Useful life

Time asset will be productively used

Gross pay

Total compensation earned by an employee

Investing activities

Transactions involving long-term assets

Financing activities

Transactions with owners and creditors

Posting

Transferring journal entry information to the ledger

Securities and Exchange Commission (SEC)

US agency overseeing proper financial reporting

Par value of stock

Value assigned to stock by corporate charter

Cost of goods sold

Value of inventory sold to customers

Notes receivable

Written promise to pay a specific sum on a future date