accounting 22e all terms 1-18

Certified Public Accountant (CPA)

A public accountant who has met certain educational and experience requirements and has passed an examination prepared by the American Institute of Certified Public Accountants.

account

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

Forensic Accounting

A specialized field that combines fraud detection, fraud prevention, litigation support, expert witnessing, business valuations, and other investigative activities.

Accounting Standards Update

A standard issued by the Financial Accounting Standards Board. These standards must be followed when preparing financial statements. The updates are included in the FASB Accounting Standards Codification.

Accounting

A system of gathering financial information about a business and reporting this information to users.

Income Summary

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

partnership

A type of ownership structure in which more than one person owns the business.

sole proprietorship

A type of ownership structure in which one person owns the business.

corporation

A type of ownership structure in which stockholders own the business. The owners' risk is usually limited to their initial investment, and they usually have very little influence on the business decisions.

Summarizing

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

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.

Interpreting

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

Accountants

Designs the accounting information system and focuses on analyzing and interpreting information.

Cost Accounting

Determining the cost of producing specific products or providing services and analyzing for cost effectiveness.

Recording

Entering financial information about events affecting the company into the accounting system.

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.

public hearings

Following the issuance of a discussion memorandum, public meetings are often held by FASB to gather opinions on the accounting issue.

Bookkeepers

Generally supervises the work of accounting clerks, helps with daily accounting work, and summarizes accounting information.

sum-of-the-years'-digits depreciation method

If an asset has a five-year life, the sum-of-the-years'-digits is computed as follows: 5 + 4 + 3 + 2 + 1 = 15.

Financial Accounting

Includes preparing various reports and financial statements and analyzing operating, investing, and financing decisions.

Internal Auditing

Reviewing the operating and accounting control procedures adopted by management to make sure the controls are adequate and being followed; assuring that accurate and timely information is provided.

long-term debt

See long-term liabilities.

long-term assets

See property, plant, and equipment.

plant assets

See property, plant, and equipment.

Tax Accounting/Taxation

Services focused on tax planning, preparing tax returns, and dealing with the Internal Revenue Service and other governmental agencies.

Classifying

Sorting and grouping similar items together rather than merely keeping a simple, diary-like record of numerous events.

Reporting

Telling the results of the financial information.

Financial Accounting Standards Board Accounting Standards Codification

This Codification is an electronic database that provides one authoritative source for the standards which must be followed by U.S. companies.

exposure draft

This document explains the rules that FASB believes firms should follow in accounting for a particular event. Based on the responses to the exposure draft, the Board will decide if any changes are necessary before issuing a final standard.

Financing activities

Those transactions dealing with the exchange of cash between the business and its owners and creditors.

Investing activities

Those transactions involving the purchase and sale of long-term assets, lending money, and collecting the principal on the related loans.

operating activities

Those transactions related to the revenues and expenses reported on the income statement.

drawing

Withdrawals that reduce owner's equity as a result of the owner taking cash or other assets out of the business for personal use.

historical cost principle

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

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.

fiscal year

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

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.

classified balance sheet

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

merchandising business

A business that buys products to sell.

manufacturing business

A business that makes a product to sell.

service business

A business that provides a service.

Modified Accelerated Cost Recovery System (MACRS)

A depreciation method in which rates determined by the IRS are multiplied by the cost of the asset to determine depreciation expense for the year.

straight-line method

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

straight-line depreciation method

A depreciation method that recognizes an equal amount of depreciation each year.

sum-of-the-years'-digits

A depreciation method that recognizes depreciation each year by multiplying a fraction by the depreciable cost. The numerator of the fraction is the remaining life of the asset, measured from the beginning of the year. The denominator is the sum-of-the-years'-digits.

double-declining-balance depreciation method

A depreciation method that recognizes depreciation each year by multiplying a rate (typically double the straight-line rate) by the book value of the asset.

Certified Fraud Examiner (CFE)

A forensic accountant who has passed the exam offered by the Association of Certified Fraud Examiners.

work sheet

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

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.

Depreciation

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

Para-accountants

A paraprofessional who provides many accounting, auditing, or tax services under the direct supervision of an accountant.

Accounting Information Systems

Accountants in this area design and implement manual and computerized accounting systems.

permanent accounts

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

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.

Certified Management Accountant (CMA)

An accountant who has passed an examination offered by the Institute of Management Accountants.

Sarbanes-Oxley Act (SOX)

An act passed by Congress to help improve reporting practices of public companies.

accounts receivable

An amount owed to a business by its customers as a result of the sale of goods or services.

business transaction

An economic event that has a direct impact on the business.

business entity

An individual, association, or organization that engages in economic activities and controls specific economic resources.

Certified Internal Auditor (CIA)

An internal auditor who has achieved professional recognition by passing the uniform examination offered by the Institute of Internal Auditors.

Assets

An item that is owned by a business and will provide future benefits.

account payable

An unwritten promise to pay a supplier for assets purchased or services received.

capital

Another term for owner's equity, the amount by which the business assets exceed the business liabilities.

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.

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.

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.

Analyzing

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

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.

post-closing trial balance

Prepared after posting the closing entries to prove the equality of the debit and credit balances in the general ledger accounts.

generally accepted accounting principles (GAAP)

Procedures and guidelines developed by the Financial Accounting Standards Board to be followed in the accounting and reporting process.

Account titles

Provides a description of the particular type of asset, liability, owner's equity, revenue, or expense.

Management Advisory Services

Providing advice to businesses on a wide variety of managerial issues.

accounting clerks

Records, sorts, and files accounting information.

balance sheet

Reports assets, liabilities, and owner's equity on a specific date. It is called a balance sheet because it confirms that the accounting equation is in balance.

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.

Auditing

Reviewing and testing to be certain that proper accounting policies and practices have been followed.

controller

The accountant who oversees the entire accounting process and is the principal accounting officer of a company.

accounting equation

The accounting equation consists of the three basic accounting elements: Assets = Liabilities + Owner's Equity.

market value

The amount an item can be sold for under normal economic conditions.

accounting period concept

The concept that income determination can be made on a periodic basis.

business entity concept

The concept that nonbusiness assets and liabilities are not included in the business entity's accounting records.

depreciable cost

The cost of an asset that is subject to depreciation.

Expenses

The decrease in assets (or increase in liabilities) as a result of efforts to produce revenues.

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.

Preliminary Views

The first document issued by FASB when developing an accounting standard. This document identifies the pros and cons of various accounting treatments for an event and invites others to comment.

operating cycle

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

useful life

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

Budgeting

The process in which accountants help managers develop a financial plan.

closing process

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

matching principle

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

accounting cycle

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

Income Statement columns

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