Chapter 2 - Accounting: What the Numbers Mean

accounting equation

Assets = Liabilities + Owners' Equity (A = L + OE). The fundamental relationship represented by the Balance Sheet and the foundation of the bookkeeping process.

additional paid-in capital

The excess of the amount received from the sale of stock over the par value of the shares sold.

depreciation expense

The expense recognized in a fiscal period for the depreciation of an asset.

statement of cash flows

The financial statement that explains why cash has changed during a fiscal period. Cash flows from operating, investing, and financing activities are shown.

balance sheet

The financial statement that is a listing of the entity's assets, liabilities and owners' equity at a point in time.

fiscal year

The annual period used for reporting to owners (or governmental agencies).

common stock

The class of stock that represents residual ownership if the corporation.

matching concept

The concept that expense incurred in generating revenues should be deducted from revenues earned during the period for which the results are being reported.

net assets

The difference between assets and liabilities. Also referred to as "owners' equity".

income from operations

The difference between gross profit and operating expenses. Also referred to as "operating income".

owners' equity

The equity of the entity's owners in the assets of the entity. Sometimes called "net assets"; the difference between assets and liabilities.

stock

The evidence of ownership of a corporations.

net income

The excess of revenues and gains over expenses and losses for a fiscal period.

profit

The excess of revenues or gains over expenses and losses for a fiscal period; another term for "net income".

subsidiary

A corporation whose stock is more than 50 percent owned by another corporation.

dividend

A distribution of earnings to the owners of a corporation.

corporation

A form of organization in which ownership is evidences by shares of stock owned by stockholders; its features, such as limited liability of the stockholders, make this the principal form of business activity.

proprietorship

A form of organization indicating individual ownership without the limited liability and other features of a corporation.

partnership

A form of organization indicating ownership by two or more individuals or corporations without the limited liability and other features of a corporation.

accounts payable

A liability representing an amount payable to another entity, usually arising because of the purchase of goods or services on credit.

accounts receivable

A liability representing an amount payable to another entity, usually arising from selling goods or services on credit.

going concern concept

A presumption that the firm will continue in existence for the indefinite future.

account

A record in which transactions affecting individual assets, liabilities, owners' equity, revenues, and expenses are recorded.

accrual accounting

Accounting that recognizes revenues and expenses as they occur, even though the cash receipt from the revenue or the cash disbursement related to the expense may occur before or after the the event that causes the revenue or expense recognition.

accrued liabilities

Amounts that are owed by an entity on the balance sheet date.

par value

An arbitrary value assigned to a share of stock when the corporation is organized. Sometimes used to refer to the stated value ofr face amount of a security.

cash

An asset on the balance sheet that represents that amount of cash on hand an balances in bank accounts maintained by the entity.

opportunity cost

An economic concept relating to income foregone, because an opportunity to earn income was not pursued.

net worth

Another term for "net assets" or "owners equity", butnot appropriate because the term "worth" may be misleading.

balance sheet equation

Another term for the "accounting equation".

statement of financial position

Another term for the "balance sheet"; a listing of the entity's assets, liabilities, and owners' equity at a point in time.

profit and loss statement

Another term for the "income statement".

statement of operations

Another term for the "income statement".

statement of earnings

Another term for the "income statement"; it shows the revenues, expenses, gains, and losses for a period of time and thereby the entity's results of operations for that period of time.

current assets

Cash and those assets that are likely to be converted into cash or used to benefit the entity within one year of the balance sheet date.

cost of goods sold

Cost of merchandise sold during the period; an expense deducted from net sales to arrive at gross profit. A frequently used synonym is "cost of sales".

retained earnings

Cumulative net income that has not been distributed to the owners of a corporations as dividends.

net sales

Gross sales, less sales discounts, and sales returns and allowances.

losses

Decreases in net assets from incidental transactions that are not expenses or distributions to owners.

transactions

Economic interchanges between entities that are accounted for and reflected in financial statements.

gains

Increases in net assets from incidental transactions that are not revenues or investments by owners.

revenues

Inflows of cash or increases in other assets, or the settlement of liabilities during a period, from delivering or producing goods, rendering services, or performing other activities that constitute the entity's major operations.

merchandise inventory

Items hold by an entity for sale to customers in the normal course of business.

earnings per share of common stock outstanding (EPS)

Net income available to the common stockholders divided by the number of shares outstanding during the period. Usually referred to simply as "EPS".

gross profit

Net sales less cost of goods sold. Sometimes called "gross margin".

expenses

Outflows or other using up of assets, or incurring a liability during a period from delivering or producing goods, rendering services, or carrying out other activities the constitute the entity's major operations (e.g. Income Statement title "selling general, and administrative expense".)

assets

Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions.

depreciation

The accounting process of recognizing the cost of an asset that is used up over its useful life to the entity.

paid-in capital

The amount invested in the entity by the owners.

statement of changes in capital stock

The financial statement that summarizes changes during a fiscal period in capital stock and additional paid-in capital. This information may be included on the statement of changes in owners' equity.

statement of changes in owners' equity

The financial statement that summarizes changes during a fiscal period in capital stock, additional paid-in capital, retained earnings, and other elements of owners' equity.

statement of changes in retained earnings

The financial statement that summarizes changes during a fiscal period in retained earnings. This information may be included in the statement of changes in owners' equity.

income statement

The financial statement that summarizes the entity's revenues, expenses, gains, and losses for a period of time and thereby reports the entity's results of operations for that period of time.

stockholders

The owners of a corporation's stock; sometimes called "shareholders".

equity

The ownership right associated with an asset. See "owners' equity".

accumulated depreciation

The sum of the depreciation expense that has been recognized over time. Accumulated depreciation is a contra-asst---an amount that is subtracted from the cost of the related asset on the balance sheet.

current liabilities

Those liabilities due to be paid within one year of the balance sheet date.