Accounting

Liability

Debts or obligations of the BUSINESS that can with cash, goods or services. Examples; Accounts Payable, Notes Payable.

Book Value

The current value for accounting purposes of an asset expressed as original cost plus capital additions minus accumulated depreciation.

Salvage Value

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

Useful Life

The period of time that an asset is expected to help produce revenues. Useful life expires as a result of wear and tear, or because it no longer satisfies the needs of the business. As this happens, depreciation expense should be recognized and the value of the asset should be reduced.

Journalizing

The process of recording business transactions in a journal.

Fiscal Year

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

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Account

A separate record used to summarize changes in each asset, liability, and owner's equity of a business.

Chart of Accounts

A list of ALL accounts used by a business in numeric order used to determine which accounts are affected by a given transaction.

Long Term Liabilities

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

Double Entry Accounting

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

Current Liabilities

Accounts payable and other debts a business must pay within one year.

Permanent Accounts

Accounts that typically have a continuous balance from one accounting period to the next; these accounts include assets, liabilities, and owner's equity.

Journal

Act of entering transaction in Journal is called "Journalizing". Day by day listing of transactions, with the purpose: to provide a record of all transactions. "Book of Original Entry". Simplest form - "General Journal"

Accounts Payable

Amount of money a business owes to its suppliers for purchases made on credit.

Owners Equity

Amounts by which the business assets exceed the business liabilities. Also known as net worth or capital.

Accounts Receivable

Amounts customers owe on account.

Debit

An amount recorded on the left side of a T account.

Credit

An amount recorded on the right side of a T account.

Compound Entry

An entry requiring more than one debit and/or more than one credit.

Expenses

An expense is an outflow of money to another person or group to pay for an item or service, or for a category of costs. Example; Rent, Payroll, Taxes.

Revenue

An increase in owner's equity resulting from the operation of a business. Examples; Sales, Delivery/Consulting Fees.

Step One in the Accounting Process

Analyzing - Looking at events that have taken place and thinking about how they affect the business.

Accounting Equation

Assets = Liabilities + Equity

Historical Cost

Assets are recorded at their actual cost. The cost remains on the books as long as the business owns the asset. No adjustments are made for changes inmarket value.

Long Term Assets

Assets that are expected to be used in business operations for longer than one year.

Property, Plant, and Equipment

Assets that are expected to serve the business for many years. Also called Plant Assets or Long-Term Assets. Examples; Land, Buildings, and Equipment.

Source Documents

Begin the process of entering transactions in the accounting system. Trigger the analysis of what happened. Begin the process of entering transactions in the accounting system.

Current Assets

Cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.

Step Three in the Accounting Process

Classifying - Sorting and grouping similar items together.

Net Loss

EXPENSES Greater than REVENUE = NET LOSS

Owners Equity - Decrease

Expenses, Withdrawal.

Closing Process - REID

Gives temporary accounts zero balances so they are prepared to accumulate new information for the next accounting period. Involves four closing journal entries. Income Summary account is used to aid in the closing process.

Three Financial Statements

Income Statements, Statement of Owners Equity and Balance Sheet.

Step Six in the Accounting Process

Interpreting - Deciding the meaning and importance of the information in various reports.

Assets

Items owned by a business that will provide future benefits. Must be owned, not rented. Doesn't need to be paid off, could still be making payments on it. Examples; Cash, Merchandise, Land/Buildings.

Trial Balance

List of all accounts including their balances totaling debits and credits, proving debit equals credit. Used as an aid in prepping financial statements.

T - Account

Looks like a T with debits on the left and credits on the right / records transactions.

Notes Payable

Obligations in the form of written promissory notes.

Depreciable Cost

Original Cost - Salvage Value = Depreciable Cost

Users of Accounting Information

Owners, Managers, Creditors and Government Agencies.

Posting

Process of copying debits and credits from the journal to the ledger. Done daily as transactions arise.

Accounting Duties - Public vs. Private

Public - Offers services to public, CPA (Certified Public Account), and Auditing, Taxation, Management Advisory Services. Private - Employees of private businesses, Controller, Accounting Info. Systems; Financial, Cost and Tax Accounting; Budgeting; and Internal Auditing, CMA (Certified Managerial Accountant), and CIA (Certified Internal Auditor).

10 Column Worksheet

Pulls together all of the information needed to: enter adjusting entries and prepare financial statements. Not a financial statement Not a formal part of the accounting system, just a tool used by accountants.

Net Income

REVENUE Greater than EXPENSES = NET INCOME

Step Two in the Accounting Process

Recording - Entering financial information about events into the accounting system.

Straight Line Depreciation

Reducing a long-term asset by the same about every year until residual value is reached ((purchase price minus residual value) divided by years of use).

Step Five in the Accounting Process

Reporting - Telling the results

Temporary Accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Owners Equity - Increase

Revenues, Investments.

Three Types of Business

Service, Manufacturing and Manufacturing.

Ledger

Set of all accounts used by the business. Similar to t accounts. Used to keep record of current balances. Commonly in form of FOUR-COLUMN account.

Statement of Owners Equity

Shows beginning OE(capital), events that increase it(owner investments and Net Income), events that decrease it(withdraws and net loss).

Three Ownership Structures

Sole proprietorship, Partnership and Corporation.

Posting Steps

Step 1 - Record Date Step 2 - Enter Amount Step 3 - Enter New Balance

Step Four in the Accounting Process

Summarizing - Bringing the various items of information together to determine a result.

Trial Balence

The total of all debit account balences must equal all the credit balences.

Purpose of Accounting

To provide financial information about a business to individuals and organizations.