Chapter 1 - Wiley Plus - Financial Accounting - Vocab

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account receivable

A claim against the customer created by selling merchandise or services on credit.

Accumulated Depreciation

A contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Balance Sheet

A financial statement that reports the assets and claims to those assets at a specific point in time.

Retained earnings statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

ledger

A group of accounts for a business.

chart of accounts

A list of the accounts in the ledger.

Auditor's Report

A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

Annual Report

A report prepared by corporate management that presents financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor's report.

Management discussion and analysis

A section of the annual report that presents management's views of the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Book Value

Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account.

Basic Accounting Equation

Assets = Liabilities + Stockholder's Equity

Prepaid Expenses

Assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entries are made to transfer the related costs from the asset account to an expense account.

expenses

Assets used up or services consumed in the process of generating revenues.

Time Period Assumption

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Unclassified Balance Sheet

Balance sheet that broadly groups assets, liabilities, and equity accounts.

Classified Balance Sheet

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.

Current Assets

Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.

Fiscal Year

Consecutive 12-month (or 52-week) period chosen as the organization's annual accounting period.

Accrued Expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

dividends

Distribution of a corporation's earning to stockholders.

Adjusting Entries

Entries made at the end of the accounting period for the purpose of recognizing revenue and expenses that are not properly measured as a result of journalizing transactions as they occur.

Closing Entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expenses, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retained earnings for a corporation).

Depreciation

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

horizontal analysis

Financial analysis that compares an item in a current statement with the same item in prior statements.

Annual Financial Statements

Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.

Interim Financial Statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Straight-line Depreciation Method

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Closing Process

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.

Operating Cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

Notes to the financial statements

Notes clarify information presented in the financial statements and provide additional detail.

Current Liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

Long-term Liabilities

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

Equity

Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities; also called net assets.

Dividends

Payments of cash from a corporation to its stockholders.

Expense Recognition (or matching)

Prescribes expenses to be reported in the same as the revenues that were earned as a result of the expenses.

Profit Margin

Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin.

Current Ratio

Ratio used to evaluate a company's ability to pay its short-term obligations calculated by dividing current assets by current liabilities.

Accounting Cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries).

Sarbanes-Oxley Act (SOX)

Regulations passed by Congress to reduce unethical corporate behavior.

Assets

Resources owned by a business.

Accrued Revenues

Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.

journal entry

The form of recording a transaction in a journal.

Depreciation

The systematic allocation of the cost of an asset to expense over the years of its estimated useful life.

Straight-line Method of Depreciation

The widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable asset's useful life.

Natural Business Year

Twelve-month period that ends when a company's sales activities are at their lowest point.

Partnership

A business owned by two or more persons associated as partners.

Corporation

A business organized as a separate legal entity owned by stockholders.

Sole Proprietorship

A business owned by one person.

unadjusted trial balance

A summary listing of the titles and balances of accounts in the ledger prior to the posting of adjusting entries.

trial balance

A summary listing of the titles and balances of accounts in the ledger.

double-entry accounting system

A system of accounting for recording transactions, based on recording increases and decreases in accounts so that debits equal credits.

Contra Account

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance.

Cash Basis Accounting

Accounting System that recognizes revenues when cash is received and records expenses when cash is paid.

Accrual Basis Accounting

Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP.

Permanent Accounts

Accounts hat reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called real accounts.

Temporary Accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called nominal accounts.

debit

Amount entered on the left side of an account.

credit

Amount entered on the right side of an account.

Liabilities

Amounts owed to creditors in the form of debts and other obligations.

Contra-Asset Account

An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset.

account

An accounting form that is used to record the increases and decreases in each financial statement item.

correcting journal entry

An entry that is prepared when an error has already been journalized and posted.

slide

An error in which the entire number is moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00.

transposition

An error in which the order of the digits is changed, such as writing $542 as $452 or $524.

Certified Public Accountant

An individual who has met certain criteria and is thus allowed to perform audits of corporations.

rules of debit and credit

In the double-entry accounting system, specific rules for recording debits and credits based on the type of account.

revenue

Increase in owner's equity as a result of selling services or products to customers.

Prepaid Expenses

Items paid for in advance of receiving their benefits; classified as assets.

Adjusting Entry

Journal Entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Accounting Period

Length of time covered by financial statements; also called reporting period.

Unearned revenues

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Adjusted trial balance

List of accounts and balances prepared after period and adjustments are recorded and posted.

Unadjusted Trial Balance

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Intangible Assets

Long-term assets (resources) used to produced or sell products or services; usually lack physical form and have uncertain benefits.

Long-term investments

Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

Plant assets

Tangible long-lived assets used to produce or sell products and services; also called property, plan and equipment (PP&E) or fixed assets.

Plant Assets

Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets.

Income Summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Net Loss

The amount by which expenses exceed revenues.

Net Income

The amount by which revenues exceed expenses.

Retained Earnings

The amount of net income retained in the corporation.

balance of the account

The amount of the difference between the debits and the credits that have been entered into an account.

Book Value

The cost of a plant asset minus the total recorded depreciation, as shown by the Accumulated Depreciation account. The remaining undepreciated cost is also known as carrying value.

Expenses

The cost of assets consumed or services used in the process of generating revenues.

Revenue

The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

journal

The initial record in which the effects of a transaction are recorded.

unearned revenue

The liability created by receiving revenue in advance.

normal balance of an account

The normal balance of an account can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

Stockholder's Equity

The owners' claim to assets.

stockholders' equity

The owners' equity in a corporation.

Useful Life

The period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of the asset is allocated to depreciation expense.

journalizing

The process of recording a transaction in the journal.

posting

The process of transferring the debits and credits from the journal entries to the accounts.

assets

The resources owned by a business.

liabilities

The rights of creditors that represent debts of the business.

T account

The simplest form of an account.


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