Accounting 101 - Exam 1
Corporation
A business organized under state law that is a separate legal entity
Sole Proprietorship
A business with a single owner
Partnership
A business with two or more owners and not organized as a corporation
Limited- Liability Company ( LLC)
A company in which each member is only liable for his or her own actions
straight- line method
A deprecation method that allocates an equal amount of depreciation each year
Unearned Revenue
A liability created when a business collects cash from customers in advance of providing services or delivering goods.
Accrued Liability
A liability for which the business knows the amount owed but the bill has not been paid.
Trial Balance
A list of all ledger accounts with their balances at a point in time
Chart of Accounts
A list of all of a company's accounts with their account numbers
Prepaid expense
A payment of an expense in advance
Cost Principle
A principle that states that acquired assets and services should be recorded at their actual cost.
Journal
A record of transactions in date order
International Financial Reporting Standards (IFRS)
A set of global accounting guidelines, formulated by the IASB
T-Account
A summary device that is shaped like a capital T with debits posted on the left side of the vertical line and credits on the right side of the vertical line
Double- entry system
A system of accounting in which every transaction affects at least two accounts
Notes Payable
A written promise made by the business to pay a debt, usually involving interest, in the future.
Notes Receivable
A written promise that a customer will pay a fixed amount of money and interest by a certain date in the future.
Generally Accepted Accounting Principles (GAAP)
Accounting guidelines, currently formulated by the FASB; the main US accounting rule book
Financial Accounting
The field of accounting that focuses on providing information for external decision makers
Managerial Accounting
The field of accounting that focuses on providing information for internal decision makers
Accounting
The information system that measures business activities, processes the information into reports, and communicates the results to decision makers
Equity
The owner's claim to the assets of the business.
International Accounting Standards Board (IASB)
The private organization that oversees the creation and governance of IFRS
Financial Accounting Standards Board (FASB)
The private organization that oversees the creation and governance of accounting standards in the US.
Net Loss
The result of operations that occurs when total expenses are greater than total revenues
Credit
The right side of a T-account
Posting
Transferring data from the journal to the ledger
Securities and Exchange Commission (SEC)
US government agency that oversees the US financial markets
book value
a depreciable assets cost minus accumulated depreciation
Account
a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period
Compound Journal Entry
a journal entry that is characterized by having multiple debits and/or multiple credits
deferred revenue
a liability created when a business collects cash from customers in advance of completing a service of delivering a product.
adjusted trial balance
a list of all the accounts with their adjusted balances
accrued revenue
a revenue that has been earned by for which the cash has not yet been collected
Accounts Payable
a short-term liability that will be paid in the future
Cash Basis Accounting
accounting method that records revenue only when cash is received and expenses only when cash is paid
accrual basis accounting
accounting method that records revenue when earned and expenses when incurred
contra account
an account that is paired with, and is listed immediately after, its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the normal balance of the related account.
Fiscal year
an accounting year of any twelve consecutive month that may or may not coincide with the calendar year
adjusting entry
an entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur
Transaction
an event that affects the financial position of the business and can be measured reliably in dollar amounts
accrued expense
an expense that the business has incurred but has not yet paid
worksheet
an internal document that helps summarize data for the preparation of financial statements
Time period concept
assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year
Financial Statements
business documents that are used to communicate information needed to make business decisions
matching principle
guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period
Accounts receivable
the right to receive cash in the future from customers for goods sold or for services performed
accumulated deprecation
the sum of all the depreciation expense recorded to date for a depreciable asset
residual value
the value of a depreciable asset at the end of its useful life
Revenues
Amounts earned from delivering goods or services to customers.
Audit
An examination of a company's financial statements and records.
Economic Entity Assumption
An organization that stands apart as a separate economic unit.
Creditor
Any person or business to whom a business owes money
Accounting Equation
Assets = Liabilities + Equity
Going Concern Assumption
Assumes that the entity will remain in operation for the foreseeable future
Certified Management Accountants (CMAs)
Certified professionals who specialize in accounting and financial management knowledge. They typically work for a single company.
Liabilities
Debts that are owed to creditors.
Assets
Economic resources that are expected to benefit the business in the future. Something the business owns or has control of.
Why is accounting important?
It is the language of business. Accounting is used by decision makers unclosing individuals, businesses, investors, creditors, and taxing authorities. Accounting can be divided into two major fields; financial & managerial accounting. Financial accounting is used by external decision makers and managerial accounting is used by internal decision makers. All businesses need accountants. Accountants work in private, public, and governmental jobs. Accountants can be licensed as either a certified public accountant ( CPA ) or certified management accountant ( CMA )
Debit
Left side of a T-account
Certified Public Accountants (CPAs)
Licensed professional accountants who serve the general public
Return on Assets (ROA)
Measures how profitably a company uses its assets. Net income / Average total assets.
Owner's Capital
Owner contribution to a business
Statement of Cash Flows
Reports on a business's cash receipts and cash payments for a specific period
Balance Sheet
Reports on the assets, liabilities, and owners equity of the business as of a specific date
Sarbanes-Oxley Act ( SOX )
Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.
Statement of Owners Equity
Shows the changes in the owners capital account for a specific period
Debt Ratio
Shows the proportion of assets financed with debt. Total liabilities/total assets.
Monetary Unit Assumptions
The assumption that requires the items on the financial statements to the measured in terms of a monetary unit
Expenses
The cost of selling goods or services.
plant assets
long lived, tangible assets such as land, building, and the equipment, used in the operation of a business.
Owners Withdrawals
payments of equity to the owner
Income Statement
reports the net income or net loss of the business for a specific period
revenue recognition principle
requires companies to record revenue when it has been earned and determines the amount of revenue to record
Normal Balance
the balance that appears on the increase side of an account
depreciation
the process by which businesses spread the allocation of a plant asset's cost over its useful life
Ledger
the record holding all the accounts of a business, the changes in those accounts, and their balance.
Net income
the result of operations that occur when total revenues are greater than total expenses