Accounting I Exam 2

fiscal year

A 12-month period for which financial reports are prepared.

classified balance sheet

A balance sheet with separate categories for current assets; property, plant, and equipment; current liabilities; and long-term liabilities.

general ledger

A complete set of all the accounts used by a business. The general ledger accumulates a complete record of the debits and credits made to each account as a result of entries made in the journal.

journal

A day-by-day listing of the transactions of a business.

work sheet

A form used to pull together all of the information needed to enter adjusting entries and prepare the financial statements.

compound entry

A general journal entry that affects more than two accounts.

two-column general journal

A journal with only two amount columns, one for debit amounts and one for credit amounts.

trial balance

A list used to prove that the totals of the debit and credit balances in the ledger accounts are equal.

modified cash basis

A method of accounting that combines aspects of the cash and accrual methods. It uses the cash basis for recording revenues and most expenses. Exceptions are made when cash is paid for assets with useful lives greater than one accounting period.

cash basis of accounting

A method of accounting under which revenues are recorded when cash is received and expenses are recorded when cash is paid.

accrual basis of accounting

A method of accounting under which revenues are recorded when earned and expenses are recorded when incurred.

ruling method

A method of correcting an entry in which a line is drawn through the error and the correct information is placed above it.

Historical Cost Principle

A principle that requires assets to be recorded at their actual cost.

Income Summary

A temporary account used in the closing process to summarize the effects of all revenue and expense accounts.

temporary accounts

Accounts that do not accumulate information across accounting periods but are closed, such as the drawing account and all income statement accounts.

contra-asset

An account with a credit balance that is deducted from the related asset account on the balance sheet.

general ledger account

An account with columns for the debit or credit transaction and columns for the debit or credit running balance.

correcting entry

An entry to correct an incorrect entry that has been journalized and posted to the wrong account.

slide error

An error that occurs when debit or credit amounts "slide" a digit or two to the left or right.

transposition error

An error that occurs when two digits are reversed.

source document

Any document that provides information about a business transaction.

plant assets

Assets of a durable nature that will be used for operations over several years. Examples include buildings and equipment.

property, plant, and equipment

Assets that are expected to serve the business for many years. Also called plant assets or long-term assets.

current assets

Cash and assets that will be converted into cash or consumed within either one year or the normal operating cycle of the business, whichever is longer.

posting

Copying the debits and credits from the journal to the ledger accounts.

journalizing

Entering the transactions in a journal.

expense recognition principle

Expenses should be recognized when incurred, regardless of when cash is paid. Expenses are generally considered to be incurred when services are received or assets consumed.

current liabilities

Liabilities that are due within either one year or the normal operating cycle of the business, whichever is longer, and that are to be paid out of current assets.

long-term liabilities

Obligations that are not expected to be paid within a year and do not require the use of current assets. Also called long-term debt.

revenue recognition principle

Revenues should be recognized when earned, regardless of when cash is received from the customer. Revenues are considered earned when a service is provided or a product is sold.

undepreciated cost

The difference between the asset account and its related accumulated depreciation account. Also known as book value.

book value

The difference between the asset account and its related accumulated depreciation account. The value reflected by the accounting records.

salvage value

The expected market value of an asset at the end of its useful life.

cross-reference

The information in the Posting Reference columns of the journal and ledger that provides a link between the journal and ledger

useful life

The period of time that an asset is expected to help produce revenues.

closing process

The process of giving zero balances to the temporary accounts so that they can accumulate information for the next accounting period.

Adjusted Trial Balance Columns

The third pair of amount columns on the work sheet. They are used to prove the equality of the debits and credits in the general ledger accounts after making all end-of-period adjustments.

Balance Sheet columns

The work sheet columns that show the amounts that will be reported in the balance sheet and the statement of owner's equity.

income statement columns

The work sheet columns that show the amounts that will be reported in the income statement.

account form of balance sheet

a balance sheet in which the assets are on the left and the liabilities and the owner's equity sections are on the right

report form of balance sheet

a balance sheet in which the liabilities and the owner's equity sections are shown below the assets section

straight line method

a depreciation method in which the depreciable cost is divided by the estimated useful life

chart of accounts

a list of all accounts used by a business

depreciation

a method of matching an asset's original cost against the revenues produced over its useful life

permanent accounts

accounts that accumulate information across accounting periods; all accounts reported on the balance sheet

plant assets

assets that are expected to serve the business for many years. Also called long-term assets

long-term assets

assets that are expected to serve the business for many years. Also called plant assets

adjusting entries

journal entries made at the end of an accounting period to reflect changes in account balances that are not the direct result of an exchange with an outside party

long-term debt

obligations that are not expected to be paid within a year and do not require the use of current assets. also called long-term liabilities

market value

the amount an item can be sold for under normal economic conditions

depreciable cost

the cost of an asset that is subject to depreciation

book of original entry

the journal or the first formal accounting record of a transaction

operating cycle

the period of time required to purchase supplies and services and convert them back into cash

matching principle

the proper matching of revenues earned during an accounting period with the expenses incurred to produce the revenues is referred to as the matching matching principle

accounting cycle

the steps involved in accounting for all of the business activities during an accounting period