ACCT 042 Final

Corporation

A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation.

Proprietorship

A business owned by one person is generally a proprietorship.

Partnership

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

Account

An account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholders' equity item.

Income Statement

An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time.

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

Assets

Assets are resources owned by a business. They are used in carrying out such activities as production and sales. All assets have the capacity to produce future benefits.

Current Assets

Assets that a company expects to convert to cash or use up within one year of the balance sheet date or the company's operating cycle, whichever is longer.

Property, Plant, and Equipment

Assets with relatively long useful lives that a company is currently using in operating the business.

Common Stock

Common stock is the term used to describe the total amount paid in by stockholders for the shares they purchase.

General Ledger

Contains all the assets, liabilities, and stockholder's equity accounts.

Historical Cost Principle

Dictates that companies record assets at their cost at the time the assets were purchased.

Dividends

Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings but dividends are not an expense.

Transactions

Events that must be recorded in the financial statements.

Expenses

Expenses are the decreases in stockholders' equity that result from operating the business. They are the cost of assets consumed or services used in the process of generating revenue.

Fair Value Principle

Indicates that assets and liabilities should be reported at fair value. Fair value is the price received to sell an asset or settle a liability.

Deferrals

Prepaid expenses or unearned revenues.

Sarbanes-Oxley Act (SOX) of 2002

Requires top management to certify accuracy of financial information, severe penalties for fraudulent financial activity, increased independence of auditors., increased responsibility for board of directors.

Credit

Right

Accumulated Depreciation Account

Shows the total amount of depreciation that the company has expensed thus far in the asset's life.

FASB

The Financial Accounting Standards Board (FASB) is the primary accounting standard-setting body in the United States.

IASB

The International Accounting Standards Board (IASB) issues international reporting standards (IFRS) that have been adopted by many countries outside the United States.

SEC

The Securities and Exchange Commission (SEC) is the agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Fiscal Year

The accounting time period of one year in length.

Depreciation

The allocation of the cost of an asset to expense over its useful life in a rational and systematic manner.

Ledger

The entire group of accounts maintained by a company.

Expense Recognition Principle

The expense recognition principle requires that companies recognize expenses in the period when they make efforts (consume assets or incur liabilities) to generate revenue.

Stockholders' Equity

The ownership claim on total assets is known as stockholders' equity. The stockholder's equity section of a corporation's balance sheet consists of common stock and retained earnings.

Retained Earnings

The retained earnings section of the balance sheet is determined by three items: revenues, expenses, and dividends.

Revenue Recognition Principle

The revenue recognition principle requires that companies record revenue in the period in which the performance obligation is satisfied.

Time Period Assumption

The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods.

Posting

Transferring journal entries to the ledger accounts.

Accrual Basis Accounting

Under accrual basis accounting, transactions that change a company's financial statements are recorded in the periods in which the events occur.

Cash Basis Accounting

Under cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid.

Compound Entry

When three or more accounts are required in one journal entry.

Cash Flow Statement

A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

Accounting

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

Accruals

Accrued revenues or accrued expenses.

Economic Entity Assumption

Activities of one entity be kept separate and distinct from all others.

Simple Entry

If an entry involves only two accounts, one debit and one credit.

Double-Entry System

In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the total debits will always equal the total credits, and the accounting equation will always stay in balance.

Intangible Assets

Noncurrent resources that do not have physical substance.

Balance Sheet

A balance sheet reports the assets, liabilities, and stockholders' equity of a business enterprise at a specific date.

Trial Balance

A list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.

Retained Earnings Statement

A retained earnings statement summarizes the changes in retained earnings for a specific period of time.

GAAP

Generally Accepted Accounting Principles

Bookkeeping

Involves only the recording of economic events.

Debit

Left

Liabilities

Liabilities are claims against assets. They are existing debts and obligations.

Long-Term Assets

Long-term investments are generally investments in stocks and bonds of other companies that are normally held for many years, long-term assets such as land or buildings that a company is not currently using in its operating activities, and long-term notes receivable.

Long-Term Liabilities

Obligations expected to be paid after one year.

Current Liabilities

Obligations that the company is to pay within the coming year or its operating cycle, whichever is longer.

Monetary Unit Assumption

Only transaction data that can be expressed in terms of money is included in the accounting record.