Chapter 1 - Wiley Plus - Financial Accounting - Vocab
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.