Accounting 101 - Exam 1

Corporation

A business organized under state law that is a separate legal entity

Sole Proprietorship

A business with a single owner

Partnership

A business with two or more owners and not organized as a corporation

Limited- Liability Company ( LLC)

A company in which each member is only liable for his or her own actions

straight- line method

A deprecation method that allocates an equal amount of depreciation each year

Unearned Revenue

A liability created when a business collects cash from customers in advance of providing services or delivering goods.

Accrued Liability

A liability for which the business knows the amount owed but the bill has not been paid.

Trial Balance

A list of all ledger accounts with their balances at a point in time

Chart of Accounts

A list of all of a company's accounts with their account numbers

Prepaid expense

A payment of an expense in advance

Cost Principle

A principle that states that acquired assets and services should be recorded at their actual cost.

Journal

A record of transactions in date order

International Financial Reporting Standards (IFRS)

A set of global accounting guidelines, formulated by the IASB

T-Account

A summary device that is shaped like a capital T with debits posted on the left side of the vertical line and credits on the right side of the vertical line

Double- entry system

A system of accounting in which every transaction affects at least two accounts

Notes Payable

A written promise made by the business to pay a debt, usually involving interest, in the future.

Notes Receivable

A written promise that a customer will pay a fixed amount of money and interest by a certain date in the future.

Generally Accepted Accounting Principles (GAAP)

Accounting guidelines, currently formulated by the FASB; the main US accounting rule book

Financial Accounting

The field of accounting that focuses on providing information for external decision makers

Managerial Accounting

The field of accounting that focuses on providing information for internal decision makers

Accounting

The information system that measures business activities, processes the information into reports, and communicates the results to decision makers

Equity

The owner's claim to the assets of the business.

International Accounting Standards Board (IASB)

The private organization that oversees the creation and governance of IFRS

Financial Accounting Standards Board (FASB)

The private organization that oversees the creation and governance of accounting standards in the US.

Net Loss

The result of operations that occurs when total expenses are greater than total revenues

Credit

The right side of a T-account

Posting

Transferring data from the journal to the ledger

Securities and Exchange Commission (SEC)

US government agency that oversees the US financial markets

book value

a depreciable assets cost minus accumulated depreciation

Account

a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period

Compound Journal Entry

a journal entry that is characterized by having multiple debits and/or multiple credits

deferred revenue

a liability created when a business collects cash from customers in advance of completing a service of delivering a product.

adjusted trial balance

a list of all the accounts with their adjusted balances

accrued revenue

a revenue that has been earned by for which the cash has not yet been collected

Accounts Payable

a short-term liability that will be paid in the future

Cash Basis Accounting

accounting method that records revenue only when cash is received and expenses only when cash is paid

accrual basis accounting

accounting method that records revenue when earned and expenses when incurred

contra account

an account that is paired with, and is listed immediately after, its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the normal balance of the related account.

Fiscal year

an accounting year of any twelve consecutive month that may or may not coincide with the calendar year

adjusting entry

an entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur

Transaction

an event that affects the financial position of the business and can be measured reliably in dollar amounts

accrued expense

an expense that the business has incurred but has not yet paid

worksheet

an internal document that helps summarize data for the preparation of financial statements

Time period concept

assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year

Financial Statements

business documents that are used to communicate information needed to make business decisions

matching principle

guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Accounts receivable

the right to receive cash in the future from customers for goods sold or for services performed

accumulated deprecation

the sum of all the depreciation expense recorded to date for a depreciable asset

residual value

the value of a depreciable asset at the end of its useful life

Revenues

Amounts earned from delivering goods or services to customers.

Audit

An examination of a company's financial statements and records.

Economic Entity Assumption

An organization that stands apart as a separate economic unit.

Creditor

Any person or business to whom a business owes money

Accounting Equation

Assets = Liabilities + Equity

Going Concern Assumption

Assumes that the entity will remain in operation for the foreseeable future

Certified Management Accountants (CMAs)

Certified professionals who specialize in accounting and financial management knowledge. They typically work for a single company.

Liabilities

Debts that are owed to creditors.

Assets

Economic resources that are expected to benefit the business in the future. Something the business owns or has control of.

Why is accounting important?

It is the language of business. Accounting is used by decision makers unclosing individuals, businesses, investors, creditors, and taxing authorities. Accounting can be divided into two major fields; financial & managerial accounting. Financial accounting is used by external decision makers and managerial accounting is used by internal decision makers. All businesses need accountants. Accountants work in private, public, and governmental jobs. Accountants can be licensed as either a certified public accountant ( CPA ) or certified management accountant ( CMA )

Debit

Left side of a T-account

Certified Public Accountants (CPAs)

Licensed professional accountants who serve the general public

Return on Assets (ROA)

Measures how profitably a company uses its assets. Net income / Average total assets.

Owner's Capital

Owner contribution to a business

Statement of Cash Flows

Reports on a business's cash receipts and cash payments for a specific period

Balance Sheet

Reports on the assets, liabilities, and owners equity of the business as of a specific date

Sarbanes-Oxley Act ( SOX )

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

Statement of Owners Equity

Shows the changes in the owners capital account for a specific period

Debt Ratio

Shows the proportion of assets financed with debt. Total liabilities/total assets.

Monetary Unit Assumptions

The assumption that requires the items on the financial statements to the measured in terms of a monetary unit

Expenses

The cost of selling goods or services.

plant assets

long lived, tangible assets such as land, building, and the equipment, used in the operation of a business.

Owners Withdrawals

payments of equity to the owner

Income Statement

reports the net income or net loss of the business for a specific period

revenue recognition principle

requires companies to record revenue when it has been earned and determines the amount of revenue to record

Normal Balance

the balance that appears on the increase side of an account

depreciation

the process by which businesses spread the allocation of a plant asset's cost over its useful life

Ledger

the record holding all the accounts of a business, the changes in those accounts, and their balance.

Net income

the result of operations that occur when total revenues are greater than total expenses