Accounting Basics
Perpetual inventory system
Continuous records of inventory cost and goods sold
Allowance for doubtful accounts
Contra asset account for uncollectible accounts
Accrued expenses
Costs incurred but unpaid and unrecorded
Adjusting entry
Journal entry to update asset/liability accounts
Market value per share
Price of stock at a given point in time
Contra account
Account linked with opposite normal balance
Measurement/Cost principle
Accounting information measured on cash basis
Closing entries
Entries to transfer end-of-period balances
Retained earnings
Equity increased by revenues and decreased by expenses
Salvage value
Estimated value at the end of an asset's useful life
Allowance method
Estimating bad debts expense and reporting accounts receivable
Audit
Examination of financial statements for proper use of concepts and rules
Depreciation
Expense of using a plant asset
Statement of retained earnings
Explains changes in equity over a period
Bank reconciliation
Explains difference between book and bank cash balances
Fraud triangle
Factors leading to illegal acts: opportunity, pressure, rationalization
Balance sheet
Financial position at a point in time
Statement of cash flows
Financial statement showing cash activities
Income statement
Financial statement showing company profitability
Merchandise inventory
Goods owned and expected to be sold
Revenues
Increase equity from providing products/services
Common stock
Increase in equity from owner's investment
Debit
Left side of an account, increases assets
Adjusted trial balance
List of accounts after period-end adjustments
Unadjusted trial balance
List of accounts before adjustments
Chart of accounts
List of all ledger accounts with identification numbers
Trial balance
List of ledger accounts and balances
Post-closing trial balance
List of permanent accounts after closing entries
Mortgage
Loan agreement using borrower's assets as collateral
Plant assets
Long-lived assets used to produce/sell products/services
Profit margin
Net income as a percentage of net sales
Gross profit
Net sales minus cost of goods sold
Intangible assets
Noncurrent resources used to produce/sell products/services
Sales returns and allowances
Refunds or credits for unsatisfactory merchandise
Assets
Resources owned or controlled by a company
Accrued revenues
Revenues earned but unrecorded and not yet received
Credit
Right side of an account, increases revenue
Corporation
Separate entity with same rights as a person
Financial Accounting Standards Board (FASB)
Sets concepts and rules for financial reporting in the US
Cash equivalents
Short-term investments easily convertible to cash
Normal balance
Side that increases an account's balance
Classified balance sheet
Balance sheet with grouped accounts
Temporary accounts
Accounts closed at the end of each period
Operating activities
Activities involving production and sale of goods/services
Capital expenditures
Additional costs of plant assets
Straight-line depreciation
Allocating equal portion of asset cost to each period
Amortization
Allocating intangible asset cost over its life
Payable
Amount owed in the future for provided products/services
Receivable
Amount owed to the company for provided products/services
Principal of a note
Amount to be paid back when a note matures
Accounts receivable
Amounts due from customers for credit sales
Book value
Asset's cost minus accumulated depreciation
Expanded accounting equation
Assets = Liabilities + Contributed capital + Retained earnings + Revenues − Expenses − Dividends
Accounting equation
Assets = Liabilities + Equity
Liquidity
Availability of resources for short-term cash needs
Permanent accounts
Balance sheet accounts not closed
Paid-in capital
Cash and assets received from stockholders
Current assets
Cash and resources expected to be used within a year
Purchases discount
Cash discount for purchaser paying early
Aging of accounts receivable
Classifying past-due accounts for estimating uncollectible accounts
Generally Accepted Accounting Principles (GAAP)
Concepts and rules for financial accounting in the US
Liabilities
Creditors' claims on an organization's assets
Expenses
Decrease in equity from providing products/services
Account balance
Difference between total debits and credits
Dividends
Distributions to owners, not an expense
Time period assumption
Dividing company life into set periods for reporting
Net income
Earnings after subtracting expenses from revenues
Net pay
Employee compensation after deductions
Current liabilities
Obligations due within one year
Long-term liabilities
Obligations not due within one year
Equity
Owner's claims on company assets
Unearned revenue
Payment for future products/services
Prepaid expense
Payment for product or service before use
Internal controls
Procedures to protect assets and ensure reliable accounting
Bond
Promise to pay par value and interest
Financial accounting
Provides information for external users
Revenue recognition principle
Recognizing revenue when goods/services are delivered
Accrual basis accounting
Recognizing revenues when provided and expenses when incurred
General ledger
Record of all company accounts
Materiality
Recording all items impacting investor decision-making
Expense recognition/matching principle
Recording expenses in the same period as generated revenue
Journalizing
Recording transactions in company records
Bookkeeping
Recording transactions, not preparing financial statements
Direct write-off method
Recording uncollectible accounts as they become uncollectible
General journal
Records transactions changing balances in multiple accounts
Accounting cycle
Recurring steps in each accounting period
Cash discount
Reduction in merchandise price for early payment
Accumulated depreciation
Sum of all expense recorded for a plant asset
Double-entry accounting
System requiring balanced accounting equation
Supplies
Tangible resources used within a year
Federal Insurance Contributions Act (FICA) taxes
Taxes for Social Security and Medicare programs
Useful life
Time asset will be productively used
Gross pay
Total compensation earned by an employee
Investing activities
Transactions involving long-term assets
Financing activities
Transactions with owners and creditors
Posting
Transferring journal entry information to the ledger
Securities and Exchange Commission (SEC)
US agency overseeing proper financial reporting
Par value of stock
Value assigned to stock by corporate charter
Cost of goods sold
Value of inventory sold to customers
Notes receivable
Written promise to pay a specific sum on a future date