Int Ch 3

income statement

Financial statement that measures the results of operations during a particular period and presents those results in terms of net income or net loss.

statement of retained earnings

Financial statement that reconciles the balance of the retained earnings account from the beginning to the end of the period.

statement of cash flows

Financial statement that reports the cash provided and used by operating, investing, and financing activities during the period.

balance sheet

Financial statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and owners' equity.

book value

The difference between a depreciable asset's cost and its related accumulated depreciation. Book value of an asset generally differs from its market value because depreciation is a means of cost allocation, not of valuation.

debit

The left side of an account. Commonly abbreviated as Dr.

trial balance

The list of all open accounts, in the sequence in which they appear in the ledger, and their balances. Companies may prepare a trial balance at any time, though they usually do so at the end of an accounting period. The trial balance proves the mathematical equality of debits and credits after posting and also uncovers errors in journalizing and posting.

depreciation

The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.

journalizing

The process of entering transaction data in the journal.

posting

The process of transferring the essential facts and figures from the book of original entry (the journal) to the ledger accounts, using debits and credits made to accounts.

credit

The right side of an account. Commonly abbreviated as Cr.

post-closing trial balance

The trial balance after closing entries are made; consists only of asset, liability, and owners' equity accounts (the real accounts).

double-entry accounting

The universally used accounting system in which a company records the dual (two-sided) effect of each transaction in appropriate accounts. If a company records every transaction with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits.

general journal

A complete record of a company's transactions or other financial events, listed chronologically and expressed in terms of debits and credits made to accounts.

general ledger

A list of all of a company's asset, liability, stockholders' equity, revenue, and expense accounts.

subsidiary ledger

A list that contains the details related to a given general ledger account.

accounting information system

A system that collects and processes transaction data and then disseminates the financial information to interested parties. Accounting information systems vary widely from one business to another, depending on the nature of the business and its transactions, the size of the company, the volume of data to be handled, and the informational demands.

account

A systematic arrangement that shows the effect of transactions and other events on a specific element (asset, liability, and soon). Companies keep a separate account for each asset, liability, revenue, and expense, and for capital (stockholders' equity).

adjusted trial balance

A trial balance prepared from a company's ledger accounts after journalizing and posting all adjusting entries. It shows the effects of all financial events that occurred during the accounting period.

closing process

Accounting process at the end of the accounting period that reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions. In the closing process, the company transfers revenue and expense account balances to Income Summary, which matches expenses and revenues.

adjusting entry

Adjustments made at the end of the accounting period to ensure that a company has recorded revenues in the period in which it earns them and recognized expenses in the period in which it incurs them—in other words, that it has followed the revenue recognition and expense recognition principles. Companies often prepare adjustments after the balance sheet date but date the entries as of the balance sheet date.

contra asset account

An account that offsets an asset account on the balance sheet. An example is the accumulated depreciation account, which companies use in order to disclose both the original cost of an asset and the total expired cost to date.

real accounts

Asset, liability, and equity accounts; these accounts appear on the balance sheet. Companies do not close real accounts, also called permanent accounts.

prepaid expenses

Assets paid for and recorded before a company uses them. Prepaid expenses expire either with the passage of time (e.g., rent and insurance) or through use and consumption (e.g., supplies). Companies typically recognize prepaid expenses by making adjusting entries to record the expenses that apply to the current accounting period and to show the unexpired costs in the asset accounts.

T-account

Basic account form, shaped like the letter T, that shows the effect of transactions on particular asset, liability, stockholders' equity, revenue, and expense accounts.

accrued expenses

Expenses incurred but not yet paid or recorded at the statement date. Examples are interest, rent, taxes, and salaries. An accrued expense on the books of one company is often an accrued revenue to another company

closing entries

Journal entries made at the end of a company's annual accounting period to transfer the balances of temporary accounts to a permanent owners' equity account (retained earnings or a capital account, depending on the company's form of organization).

reversing entries

Journal entries, made at the beginning of the next accounting period, that are the exact opposite of the adjusting entries made in the previous period. Making reversing entries is an optional step in the accounting cycle.

special journals

Records of transactions possessing a common characteristic, such as cash receipts, sales, purchases, cash payments. Using such journals reduces bookkeeping time.

nominal accounts

Revenue, expense, and dividend accounts; except for dividends, these accounts appear on the income statement. Companies close nominal accounts, also called temporary accounts, at the end of the accounting period.

accrued revenues

Revenues earned but not yet received in cash or recorded at the statement date. Accrued revenues result from the passing of time (e.g., interest revenue and rent revenue) or from unbilled or uncollected services that a company performed (e.g., commissions and fees).

unearned revenues

Revenues received in cash and recorded as liabilities before a company earns them. Examples are rent, magazine subscriptions, and customer deposits for future service. Unearned revenues are the opposite of prepaid expenses.

accounting cycle

Standard set of accounting procedures to record transactions and prepare financial statements