Financial Accounting Chapter 3

Journal

A chronological record of transactions, showing for each transaction the debits and credits to be entered in specific ledger accounts. The simplest type of journal is called a general journal.

Net Loss

A decrease in owners' equity resulting from unprofitable operations.

Dividends

A distribution of resources by a corporation to its stockholders. The resource most often distributed is cash.

Income Statement

A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for a particular accounting period. Shows the net income or net loss.

Account

A record used to summarize all increases and decreases in a particular asset, such as cash, or any other type of asset, liability, owners' equity, revenue, or expense.

Double-Entry Accounting

A system of recording every business transaction with equal dollar amounts of both debit and credit entries. As a result of this system, the accounting equation always remains in balance; in addition, the system makes possible the measurement of net income and also the use of error-detecting devices such as a trial balance.

Trial Balance

A two-column schedule listing the names and the debit or credit balances of all accounts in the ledger.

Objectivity

Accountants' preference for using dollar amounts that are relatively factual--as opposed to merely matters of personal opinion. Objective measurements can be verified.

Ledger

An accounting system includes a separate record for each item that appears in the financial statements. Collectively, these records are referred to as a company's ledger. Individually, these records are often referred to as ledger accounts.

Debit

An amount entered on the left side of a ledger account. A debit is used to record an increase in an asset or a decrease in a liability or in owners' equity.

Net Income

An increase in owners' equity resulting from profitable operations. Also, the excess of revenue earned over the related expenses for a given period.

Fiscal Year

Any 12-month accounting period adopted by a business.

Accrual Basis of Accounting

Calls for recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred. The effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.

Retained Earnings

That portion of stockholders' (owners') equity resulting from profits earned and retained in the business.

Credit

The amount entered on the right side of a ledger account. A credit is used to record a decrease in an asset or an increase in a liability or in owners' equity.

Accountability

The condition of being held responsible for one's actions by the existence of an independent record of those actions. Establishing accountability is a major goal of accounting records and of internal control procedures.

Expenses

The cost of the goods and services used up in the process of obtaining revenue.

Matching Principle

The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The revenue earned during an accounting period is matched (offset) with the expenses incurred in generating that revenue.

Realization Principle

The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.

Revenue

The price of goods and services charged to customers for goods and services rendered by a business.

Posting

The process of transferring information from the journal to individual accounts in the ledger.

Accounting Cycle

The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements.

General Journal

The simplest type of journal, it has only two money columns--one for credit and one for debits. This journal may be used for all types of transactions, which are later posted to the appropriate ledger accounts.

Accounting Period

The span of time covered by an income statement. One year is the accounting period for much financial reporting, but financial statements are also prepared by companies for each quarter if the year and for each month.

Conservatism

The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower (more conservative) amount of income being recognized in the current accounting period. This concept is designed to avoid overstatement of financial strength or earnings.

Time Period Peinciple

To provide the users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The period of time covered by an income statement is termed the company's accounting period.