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223 Cards in this Set
- Front
- Back
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Accounting
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The means whereby a company's financial transactions are identified, recorded, summarized and reported for the benefit of those who have an interest in the business. Users of business financial information might include owners, managers, creditors, government regulatory bodies and others. Accounting is sometimes referred to as the language of business because its ultimate purpose is to communicate business information.
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Business
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An organization created for the purpose of providing goods or services to customers. All businesses provide some kind(s) of goods or services to customers, whether for profit or not. A business is often referred to as a company.
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Manufacturing business
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A business that assembles or constructs a tangible product for sale to customers. Manufacturing business customers are typically wholesale or retail merchandisers involved in the distribution of manufactured products to the ultimate end user or consumer
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Merchandising business
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A company involved in the purchase and sale of finished products. Merchandisers are also referred to as "distributors." Wholesale merchandisers typically purchase finished products from manufacturers and then sell those products to retail merchandisers. Retail merchandisers sell products to the end user or consumer.
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Retail merchandiser
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A distribution business that typically purchases finished goods from manufacturers or wholesale merchandisers for the purpose of selling those goods to the end user or consumer.
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Wholesale merchandiser
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A distribution or merchandising business that typically purchases finished products from manufacturers and then sells those products to retail merchandisers.
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Service business
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A company devoted to providing services to clients or customers rather than tangible products. Examples of service businesses include consulting firms, law firms, hospitals and car washes. Some companies are involved in providing both goods and services. A car dealership is both a merchandiser and a service business if they provide repair and maintenance services as well as car sales. In some ways, restaurants may be manufacturers, merchandisers and service businesses. They make meals from raw materials, deliver the product to the end user and provide service in the process. Some restaurants provide more service than others and have higher menu prices as a result.
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Non-profit business
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A business operated with no intent to produce a profit for the business owners. Non-profit businesses are generally operated to fulfill some charitable or social purpose of interest to the business owners. Many hospitals are operated on a non-profit basis.
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Capital
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Money or other assets owned by a company. Most businesses require capital to operate. In other words, it usually takes money to make money. Companies access capital from creditors through the borrowing of assets (debt financing) or from owners' through capital contributions and/or retained earnings (equity financing). The cost of capital to a company and its owners are the interest costs on debt and the value of ownership rights given to those providing equity. The true cost of equity financing is difficult to determine because the valuation of ownership rights can be very subjective.
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Financing
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The way a company gets the capital or assets necessary to operate. Companies obtain assets through either debt or equity financing. Debt financing refers to the borrowing of assets and equity financing comes from owners' capital contributions and retained earnings. A company's balance sheet reports its total assets and the amount of those assets financed through debt (liabilities) and equity (owners' equity).
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Debt financing
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The acquiring of business assets through borrowing or the incurring of liabilities. The only alternative to debt in the financing of a business is equity financing, which refers to the amount of owners' capital contributions plus retained earnings. Debt financing is also referred to as "temporary financing" due to the fact that any borrowed assets must be repaid in the future. Only equity financing is permanent.
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Creditor
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Any entity to whom a company has an obligation is a creditor of the company. Creditors are providers of a company's debt financing.
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Bankruptcy
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A legal status resulting from a company's inability to pay its debts. Bankruptcy may be voluntarily declared by an insolvent company or it may be imposed by creditors due to defaults on loans or other debts. The resolution of bankruptcy may require liquidation of certain assets, dissolution of the company or the restructuring of debt and/or equity interests in the company.
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Foreclosure
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The forced sale of an asset(s) intended to generate cash in full or partial payoff of a loan. Foreclosure typically takes place when a borrower is in default on a loan secured with collateral.
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Equity financing
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The acquiring of assets or resources for a business through either owners' capital contributions or retained earnings. Because all business financing comes through either debt or equity financing, the amount of a company's equity financing is equal to the amount of its total assets less total liabilities which is also equal to the amount of its total owners' equity. Equity financing is also referred to as permanent financing because there is no obligation for a company to repay the assets provided through owners' capital contributions and retained earnings, except in the event of business dissolution.
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Investor
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A provider of capital to a company. The term "investor" is most commonly associated with providers of equity financing ; however, providers of debt financing might also refer to a loan as an "investment."
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Shares
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A share of stock represents a single unit of ownership in a corporation and has equal voting and dividend rights with every other share of stock in its class, either common or preferred. The actual percentage ownership rights (voting influence and participation in dividends) represented in a share of stock depends entirely on the total number of shares that have been issued and are outstanding at any point in time. An owner of one share of stock in a company that has only two shares outstanding is a 50% owner and can effectively control the company. However, an owner of one share in a company that has a million shares outstanding has very little voting influence and percentage rights to dividends. The fair market value of a share of stock (trading price in a secondary market) is dependent on the amount of percentage ownership represented in each share. Most companies have large numbers of shares outstanding, and the resulting price of a share of stock is affordable for most individual investors. In the event that additional shares of stock are issued to raise additional capital for a company, the percentage rights of existing owners are diluted and the value of their stock decreases accordingly. As a result, any additional issuance may require stockholder approval or the existing stockholders will have an automatic right of first refusal to buy a portion of the additional shares such that their percentage ownership will remain the same.
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Stock
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Shares of ownership in a corporation. Stock ownership takes the form of either common stock or preferred stock.
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Dissolution
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The process of closing a company's operations, liquidating its assets, paying off its debts, distributing any residual assets to owners and legally terminating the company.
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Distributions in the event of dissolution
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Amounts paid to a company's owners upon dissolution of the company. The amount paid to owners will be the amount of any assets left after liquidation of a company's assets and payoff of all company debts.
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NYSE
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New York Stock Exchange. The oldest and largest stock exchange in the U.S., located on Wall Street in New York City. The NYSE is a secondary market for the trading of securities (stocks and bonds) listed with the exchange.
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NASDAQ
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National Association of Securities Dealers Automated Quotations system. A computerized system established to facilitate public trading of securities.
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Financial accounting
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The system of accounting designed to provide a company's financial information to users who are external to the company's management. Primary external users are current or prospective investors and creditors (providers of capital) and government regulatory agencies such as the SEC, IRS and FTC. Financial accounting information is provided through the general purpose financial statements which include an income statement, balance sheet, statement of cash flows and supplemental notes to the financial statements to be prepared in accordance with GAAP.
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Managerial accounting
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The system of accounting designed to provide information useful to a company's managers in improving operations. Managerial accounting information is rarely made public and is not governed by any rules of accounting or GAAP. The SEC has no role in managerial accounting information. Management reports are often produced daily and may include considerable detail required in the day-to-day monitoring of business operations. Much of managerial accounting information involves budgets and forecasts for planning purposes along with follow-up reports noting budget and actual variances. Whereas financial accounting is based entirely on historical reporting of completed operations, much of managerial accounting focuses on the future.
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Financial statements
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Also referred to as "general purpose financial statements." Financial statements required under GAAP include a company's balance sheet, income statement, and statement of cash flows. An optional statement that is not required under GAAP but is often provided is a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the financial statements that provide supplemental information.
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General purpose financial statements
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The financial statements, including balance sheet, income statement, and statement of cash flows, required under GAAP. An additional statement that may be optionally included is a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the financial statements that provide supplemental financial statement information.
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Balance sheet
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Also referred to as a "statement of financial position." The balance sheet is a general purpose financial statement which lists, as of the end of an accounting period, all of an entity's assets, liabilities and owners' equity. Simply stated, the balance sheet reports a company's assets and the amount of those assets financed by creditors (debt financing) and the amount financed by owners (equity financing) through capital contributions and retained earnings/deficits. The balance sheet mirrors the basic accounting equation which is: Assets = Liabilities + Owners' equity.
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Income statement
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Sometimes referred to as a "statement of operations," "statement of profit and loss," "P & L statement" or "statement of earnings." An income statement is a general purpose financial statement which lists a company's revenues less expenses and the resulting net income or net loss for a period of time. A company's earnings per share must also be disclosed in the income statement.
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Statement of cash flows
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One of the three general purpose financial statements required under GAAP. The statement of cash flows is designed to highlight a company's change in cash during an accounting period with a summary of the major factors giving rise to cash increases and decreases during the period. The statement discloses a company's cash flows under each of the three basic activities of a business: operating, investing and financing activities. Because cash is such a critical asset in sustaining a company's operations and growth, most financial analysts utilize the statement of cash flows to understand the causes of past changes in cash for purposes of projecting a company's future operations.
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Annual report
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A public report prepared by a company's management at the end of each year describing the company's results of operations and financial position through audited general purpose financial statements. In addition, the report usually includes a section where management gives their take on the company's current operations and prospects for the future.
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GAAP
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Stands for generally accepted accounting principles, which are the standards or rules of accounting used in the United States in preparation of general purpose financial statements. The SEC has the legislated authority to establish GAAP for publicly held companies in the U.S.; however, the SEC has delegated that role to the FASB which is a private organization devoted entirely to the establishment of GAAP.
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SEC
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Securities and Exchange Commission. A federal regulatory agency charged with the responsibility of regulating the issuance and trading of securities of publicly held companies in the United States. The SEC requires that all public companies register with and provide specified periodic information to the SEC that is then made available to the public through the SEC's internet website. Included in those information requirements are annual general purpose financial statements which must be prepared in accordance with GAAP and audited by an independent CPA firm.
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Publicly held company
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A company that has shares of ownership available for purchase in a public secondary market such as the NYSE or NASDAQ. Publicly held companies are subject to federal securities laws and the rules and regulations of the SEC.
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FASB
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Financial Accounting Standards Board. A private organization funded by the FAF and currently responsible for the establishment of GAAP in the United States. The FASB is recognized by the SEC, however, it is the SEC that has the ultimate legal authority to determine what information must be provided by publicly held companies in the United States. As a result, the SEC exercises considerable influence in any decisions made by the FASB.
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FAF
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Financial Accounting Foundation. A private organization established to support and direct the activities of the FASB.
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AICPA
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American Institute of Certified Public Accountants. The AICPA is a private professional organization for CPAs (Certified Public Accountants). The organization establishes standards of conduct for its members including GAAS (generally accepted auditing standards). In addition, the AICPA lobbies on behalf of the profession, provides continuing professional education and performs a variety of other services for its members.
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CPA
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Certified Public Accountant. CPAs are individuals who have been licensed by a state and are authorized to provide certain services to customers, including the certified audit of a company's general purpose financial statements. CPAs do much more than perform certified audits. They often provide tax advice, prepare tax returns, advise businesses and individuals in their financial affairs, consult and assist businesses in improvements of their accounting information systems, and provide consulting services in a wide variety of business areas.
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Auditor's report
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A letter issued by a CPA firm subsequent to their audit of a company's financial statements. The letter is included in the company's annual report and declares the auditor's opinion as to the fairness of the company's financial statements in properly disclosing the company's financial position, results of operations and cash flows for the periods reflected in accordance with GAAP.
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GAAS
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Stands for generally accepted auditing standards, which detail the audit procedures and guidelines prescribed by the AICPA for the performance of a CPAs certified audit of a company's financial statements.
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Company
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A business is often referred to as a company regardless of its legal form of ownership. A business operating as a proprietorship, partnership or corporation may be referred to as a company.
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Proprietorship
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A form of business ownership in which a single individual owns all of the business assets, bears all of the business liabilities, and is the sole beneficiary of any net income or losses from business operations. A major disadvantage of a proprietorship form of ownership is the lack of any separate legal liability between the business and the owner. This means that if claims exist against the business and the business has insufficient resources to satisfy those claims, the personal assets of the owner may be taken to satisfy those claims. Proprietorships do not pay federal or state income taxes on profits. Instead, all of the business profits are taxable to the owner and any losses are deductible on the owner's personal income tax return. Individuals may alternatively choose to operate a business as a corporation rather than as a proprietorship.
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Partnership
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A form of business ownership in which two or more individuals and/or organizations share in the ownership of all of the business assets, liabilities and profits or losses. Partnerships can be formed verbally, although a written partnership agreement spelling out the roles, responsibilities and rights of the partners is highly recommended. A major disadvantage of the partnership form is the lack of any separate legal liability between the business and the partners. This means that if claims exist against the business and the business has insufficient resources to satisfy those claims, the personal assets of the partners may be taken to satisfy those claims. This can be avoided through alternative partnership forms such as an LLP. Partnerships do not pay federal or state income taxes on profits. Instead, all partnership profits and losses are allocated to the partners for inclusion on their personal income tax returns in proportion to their partnership interests. Alternative forms of business ownership include proprietorships and corporations.
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Corporation
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A business entity authorized by a state government to exist and function subject to the laws of the state. Corporations have separate legal status allowing owners of a corporation to benefit from its business activities without exposing their personal assets to claims that may arise against the business. Ownership in a corporation is evidenced through shares of stock providing stockholder's with the right to vote in certain corporate matters, participate in any distributions of profits (dividends) and share in any distributions in the event of dissolution. Corporations are a popular form of business ownership not only because they offer limited liability to owners, but also because they facilitate access to capital through the issuance of stock to potentially large numbers of investors. In addition, the corporate form facilitates changes in ownership through the trading of stock in secondary markets. A disadvantage of the corporate form is the federal and, in some cases, state taxation of corporate profits. Those same profits are taxed a second time if and when they are distributed to stockholders as a dividend. There are ways to avoid this "double" taxation, but it requires planning and compliance with specific provisions of the tax law. LLCs and S corporations are two such options. An alternative form of business ownership is a proprietorship or partnership.
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IRS
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Internal Revenue Service. The IRS is a federal agency responsible for the collection of federal taxes in the United States.
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S corporation
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An electable status under the Internal Revenue Code that allows for a corporation to avoid federal income taxation and requires instead that all taxable income or losses of the business be attributed directly to the stockholders of the corporation for inclusion in their taxable income. As a result, S corporations avoid the typical double taxation that may occur on corporate profits when they are taxed at the corporate level and then taxed again to stockholders to the extent dividends are paid. In effect, S corporation status allows for a corporation to be taxed as if it were a partnership. The S corporation election is only available to companies meeting certain criteria specified in the code. Generally speaking, only corporations with relatively few domestic, non-corporate stockholders may qualify.
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LLC
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Limited Liability Corporation. A corporate form of business ownership that enjoys some partnership characteristics, including the possible avoidance of federal corporate income taxes, while maintaining limited legal liability for its owners. Limited liability refers to the legal shielding of a business owner's personal assets from any claims against the business. LLCs are subject to their authorizing state's law, which in most cases restricts the number of stockholders allowed and limits certain transfers of ownership.
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LLP
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Limited Liability Partnership. Limited liability refers to the legal shielding of a business owner's personal assets from any claims against the business. Partnerships do not generally provide such legal protections unless they are formed and operated as LLPs according to state law. LLPs are treated as partnerships for income tax purposes and are therefore exempt from the separate income taxation faced by most corporations.
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Board of directors
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A group of individuals elected by the stockholders of a corporation to represent their best interests in providing overall direction to the company and in the making of major strategic decisions. The board is also responsible for the hiring and overseeing of senior management personnel and the declaration of dividends to stockholders in the event the company has available retained earnings. Board members need not be stockholders in the corporation and usually receive fees from the company for their efforts. The company may also employ board members such that it is possible for a person to serve on the board of directors and be hired as the company's CEO.
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Management
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Refers collectively to the people involved in managing a business. Management also refers to the process of organizing, controlling and directing a company's activities.
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Managers
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People reponsible for the organization, control and direction of a company's business activities.
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CEO
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Chief Executive Officer. The CEO is a company employee responsible for the overall management of the business. In some cases, the CEO might also be referred to as the "president" of the company. In a corporation, the CEO is hired by the board of directors and may actually be a member of the board.
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CFO
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Chief Financial Officer. The CFO is a company employee typically responsible for the overall financial affairs of the business. The CFO's scope of responsibility may include the management of a company's accounting information systems, cash balances, financing, financial reporting, investor relations, budgets, investment analysis, cost analysis and control, strategic planning and tax compliance and planning.
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Entrepreneur
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An individual who takes the initiative, and in most cases the risk, associated with starting or growing a business.
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General purpose financial statements
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The financial statements, including balance sheet, income statement, and statement of cash flows, required under GAAP. An additional statement that may be optionally included is a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the financial statements that provide supplemental financial statement information.
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Financial statements
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Also referred to as "general purpose financial statements." Financial statements required under GAAP include a company's balance sheet, income statement, and statement of cash flows. An optional statement that is not required under GAAP but is often provided is a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the financial statements that provide supplemental information.
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Notes to the financial statements
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Footnotes to the general purpose financial statements provided to supplement and expand on the basic information presented in those statements. Specific note disclosures are required in many cases under GAAP.
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Balance sheet
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Also referred to as a "statement of financial position." The balance sheet is a general purpose financial statement which lists, as of the end of an accounting period, all of an entity's assets, liabilities and owners' equity. Simply stated, the balance sheet reports a company's assets and the amount of those assets financed by creditors (debt financing) and the amount financed by owners (equity financing) through capital contributions and retained earnings/deficits. The balance sheet mirrors the basic accounting equation which is: Assets = Liabilities + Owners' equity.
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Financial position
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Refers to a company's assets, l liabilities, and owners' equity as of a point in time.
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Basic accounting equation
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The amount of a company's total assets is always equal to the amount of its total liabilities plus the amount of its total owners' equity. This is always true because companies have only two possible sources for the financing of assets: debt and equity financing. The basic accounting equation remains in balance with each and every transaction of a business. A company's balance sheet mirrors its basic accounting equation at the end of any accounting period.
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Capitalize
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To capitalize a business means to acquire capital (assets) for the business through either debt or equity financing. The term capitalize is also used in the context of a "capitalized cost."
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Assets
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Resources (property or rights) that are owned or controlled by an entity and provide probable future economic benefit to the entity. The assets of a company might also be referred to as the company's capital.
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Accounts receivable
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Amounts due from customers as a result of credit sales where the payment for goods or services sold is not received at the time of sale, but is to be collected in the near future, usually within 30 days.
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Inventory
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An asset reflecting the cost of a company's products held for sale to customers. These product costs are deducted from inventory and recorded as expenses (cost of goods sold) when products are sold. For merchandising businesses, a product's cost is its purchase price and any freight or other costs associated with actually obtaining the product from a vendor. In a manufacturing business, product costs include any direct material, direct labor and manufacturing overhead costs incurred in the manufacturing process. Manufacturing businesses have three stages of inventory: raw materials, work in process (WIP) and finished goods inventory. Raw materials inventory includes the costs of acquiring any direct and indirect materials to be used in the manufacturing process and includes any freight or other costs incurred in actually obtaining the materials from vendors. These costs of direct and indirect materials are then transferred to work in process (WIP) inventory when the materials are actually requisitioned and used in the production process. WIP includes the costs of these materials plus any direct labor and other manufacturing overhead costs incurred in the manufacturing process. Upon completion of production, these costs are transferred to finished goods inventory and then expensed as cost of goods sold upon subsequent product sales.
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Supplies
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Goods purchased for use in support of the operations of a business. Supplies differ from inventory in that supplies are not held for sale to customers. When used up, supplies are accounted for as an expense of the business. Supplies used in support of a manufacturing company's production process are accounted for as manufacturing overhead costs and are reflected as an expense through cost of goods sold.
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Liabilities
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Probable future obligations to pay assets (usually cash) or provide services to another entity. Liabilities are also referred to as a company's debts and are the result of a company's debt financing.
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Accounts Payable
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Obligations resulting from the purchase of inventory or supplies in which the cost is not paid at the time of purchase but is expected to be paid in the near future, usually within 30 days. In some cases, the term accounts payable is used to describe almost any obligation arising from a company's operating costs that are payable in the short-term.
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Note Payable
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An obligation supported by a signed legal document that typically provides for the payment of principal and interest at specified future dates.
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Interest
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The price charged by providers of debt financing, or in other words, the cost incurred in the borrowing of assets.
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Owners' equity
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The amount of a company's equity financing, often referred to simply as "equity" or "stockholders' equity" in the case of a company operating as a corporation. Owners' equity is the amount of assets that owners have contributed to a company, plus or minus the amount of any net assets created or lost as a result of the company's operations less dividends. As a result, owners' equity is simply the amount of total capital contributions plus or minus the amount of retained earnings/deficits. Owners' equity can also be determined by taking the amount of total assets and deducting the amount of total liabilities. This reflects the fact that a company's assets can be financed in only two ways, through either debt or equity. The amount of owners' equity can also be characterized as the amount of residual claims the owners have on the assets of the company following the claims of creditors.
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Capital contributions
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Also referred to as "contributed capital" or "capital stock." Capital contributions are the amount of a company's assets provided by owners in exchange for their ownership rights in the company. Ownership rights include the right to vote or have a say in certain business decisions and the right to share in any company profits or proceeds distributed to owners in the event of company dissolution. In the case of a corporation, capital contributions include all of the proceeds received by the company from the issuance of common stock and preferred stock, if any. This includes amounts contributed at par values and any paid in capital in excess of par.
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Retained earnings/deficits
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An owners' equity account reflecting the amount of net assets that have been created or used up by a company through its profitable or unprofitable operations (net income/ losses) less dividends since inception. Retained earnings/deficits can alternatively be expressed in terms of a company's cumulative revenues less cumulative expenses and dividends since inception. Retained deficits are also sometimes referred to as "accumulated deficits" or "accumulated losses."
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Income
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A loosely used term which may refer to revenues less expenses as in the case of net income. Income is also commonly used to refer to different kinds of revenues as in the case of interest income which refers to interest revenue.
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Net income
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Also referred to as "profit," "net profit," "earnings" or "net earnings." Net income is equal to a company's total revenues less total expenses over a period of time and is reported through a company's income statement. Net income may also be defined as the amount of any increase in a company's net assets during a period of time due to profitable operations.
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Net loss
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Also referred to as a "loss" or sometimes as a "deficit." A net loss results if a company's total expenses are greater than total revenues over a period of time. This would be reported through a company's income statement for the period. Net loss may also be defined as any decrease in the net assets of a compay during a period of time due to unprofitable operations.
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Deficits
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The amount of any negative (debit) balance in the retained earnings/deficits account resulting from a company's losses and dividends in excess of earnings since the inception of the company. Deficits are sometimes referred to as "retained deficits," "accumulated deficits" or "accumulated losses."
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Dividends
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A company's distribution of current or previous profits to its owners. Because profits are defined as increasing net assets of a company from successful operations, dividends are simply distributions of some or all of those assets and are typically paid to owners in the form of cash. Payments of dividends to owners decrease a company's assets and the amount of its retained earnings. In fact, dividends can only be paid to the extent of the balance in retained earnings prior to the dividend. Corporation's pay dividends to stockholders only upon dividend declaration by a corporation's board of directors. Many corporate boards choose not to declare dividends even when there are available retained earnings. There is no legal obligation to declare and pay dividends and increasing retained earnings can be used to finance a company's future growth. Stockholders in companies that do not generally pay dividends hope to earn a return on their investment through the subsequent sale of their stock at higher prices.
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Income statement
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Sometimes referred to as a "statement of operations," "statement of profit and loss," "P & L statement" or "statement of earnings." An income statement is a general purpose financial statement which lists a company's revenues less expenses and the resulting net income or net loss for a period of time. A company's earnings per share must also be disclosed in the income statement.
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Results of operations
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Refers to a company's profits or losses over a period of time. A company's income statements reports its results of operations and is sometimes referred to as the "statement of operations."
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Revenues
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The amount of any assets (usually cash or accounts receivable) received from customers on the sale of goods or services. This amount is also the product's sales price or the service fee charged to a customer. Revenues also include the amount of any interest or dividends earned on any loans or investments and any gains on the sale of non-inventory assets. The revenue recognition principle governs the timing of revenues and provides for revenues to be recorded in the period in which those revenues are earned, not necessarily when cash is collected from customers. The earning of revenues takes place when goods have been delivered to customers or services have been substantially provided. As a result, a company may record revenues in December for services provided in December even though the service fees may not be received until the following January. This is referred to as an "accrued revenue" and is recorded in conjunction with the recording of an account receivable. In some cases, cash or other assets are received from customers in advance of the period in which goods are sold or services are actually rendered. Any such cash advance or deposit received from a customer prior to product delivery or the actual rendering of services should be accounted for as a liability to reflect the future obligation to deliver products or perform services. These liabilities are typically referred to as "unearned revenues." Revenues are not really revenues until they are earned. Unearned revenues are liabilities until goods are delivered or the earnings process is substantially complete. The amount of a company's revenues less expenses during a period of time equals the company's net income or net loss for that period and is the best measure of a company's results from operations.
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Expenses
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The amount of any expenditures, or the amount of any obligations requiring future expenditures as a result of costs incurred in operating a business. Under GAAP, the matching principle governs the timing of expenses and requires that costs incurred in operating a business be recorded as expenses in the period in which those costs provide operating benefits, regardless of the time of payment. For example, a company's December utilities cost should be recorded as a December expense even if the utility bill will not be paid until the following month. This is referred to as an "accrued expense" and is recorded in December with an accompanying liability for utilities payable. The subsequent payment of the utility bill will then be recorded as a payment of the liability. Expenditures are sometimes made in advance of the period of benefit. An example would be insurance premiums paid in advance. Such expenditures should be recorded as assets rather than expenses because they result in rights having future benefits. These assets are commonly referred to as "prepaid expenses" which can be confusing because they are not expenses at all; at least not yet. As time passes, an adjusting entry must be made to reduce the asset (prepaid insurance expense) and record the cost of insurance as an expense in the period of actual coverage. The amount of a company's total revenues less total expenses during a period of time equals net income or loss for the period and measures a company's results of operations.
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Cost of goods sold
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An expense account sometimes referred to simply as "cost of sales." Cost of goods sold reflects the cost of any products sold to customers. A company's product costs are first accounted for as assets (inventory) until the products are actually sold and become an expense of the business (cost of goods sold). In a merchandising business, a product's cost is its purchase price and any freight or other costs associated with actually obtaining the product from a supplier or vendor. In a manufacturing business, a product's cost includes any direct material, direct labor and manufacturing overhead costs incurred in making the product.
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Accounting period
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A period of time, usually a month, quarter or year, in which financial statements are prepared to reflect a company's cash flows and results of operations for the period as well as its financial position at the end of that period.
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Calendar year
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A company operates on a calendar year when the accounting period for the preparation of their annual financial statements is the 12-month period beginning on January 1st and ending on December 31st of each year.
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Fiscal year
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Any 12-month period used for financial reporting of a company's annual operations ending on a date other than December 31st. For example, a company operating on a fiscal year ending August 31st will reflect financial statements that cover the 12-month period beginning September 1st and ending August 31st of the following year. A calendar year is the 12-month period ending December 31st. Companies may elect to operate and provide their annual financial statements on either a calendar or fiscal year basis.
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Statement of cash flows
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One of the three general purpose financial statements required under GAAP. The statement of cash flows is designed to highlight a company's change in cash during an accounting period with a summary of the major factors giving rise to cash increases and decreases during the period. The statement discloses a company's cash flows under each of the three basic activities of a business: operating, investing and financing activities. Because cash is such a critical asset in sustaining a company's operations and growth, most financial analysts utilize the statement of cash flows to understand the causes of past changes in cash for purposes of projecting a company's future operations.
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Current assets
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All assets reported on a company's balance sheet are classified as either current or long-term assets. Current assets include cash and any other asset expected to be used up or converted to cash within the next year. Current assets typically include any short-term investments in securities, accounts receivable, inventory, supplies and prepaid expenses. Even assets like property, plant and equipment may on occasion be included as current assets if management intends to sell the assets for cash in the next year and there is evidence that such a sale will actually take place. The classification of a company's assets as either current or long-term helps financial analysts evaluate a company's liquidity. Cash and other assets that will be converted to cash in the short term represent assets that can be used for the payment of current obligations if necessary. The ratio of total current assets divided by total current liabilities is called the "current ratio" and is used to evaluate a company's liquidity.
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Long-term assets
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A balance sheet classification of assets sometimes referred to as "operating assets" or "capital assets." Long-term assets include any assets which provide future benefits extending beyond the next year of a company's operations. Property, plant and equipment, intangible assets and natural resources are assets that usually fit in this section of a company's balance sheet. Any asset that is not a long-term asset is referred to as a "current asset."
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Current liabilities
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All liabilities reported on a company's balance sheet are classified as either current or long-term liabilities. Current liabilities include all of a company's obligations due within the next year. Common current liabilities include accounts payable, wages payable and any other accrued liabilities, unearned revenues, and any notes, loans or bonds payable to the extent of any principal amounts scheduled to mature within the next year. The comparison of a company's amount of current assets and current liabilities helps financial analysts determine a company's liquidity, which is crucial to a company's successful ongoing operations. The current and acid-test ratios are two commonly used comparisons involving current assets and current liabilities designed to evaluate a company's liquidity.
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Long-term liabilities
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A balance sheet classification of liabilities representing a company's probable future obligations maturing beyond its next year of operations. Common long-term liabilities include bonds payable, notes payable and mortgage notes payable. Any liabilities that are not long-term liabilities are referred to as "current liabilities "and are obligations payable within the next year. Long-term liabilities are also commonly referred to as "non-current liabilities." Some obligations, such as fully amortizing mortgages, mature over extended periods of time. To the extent a portion of an obligation matures within the next year, that amount should be separately classified as the "current portion" of a payable within the current liabilities section of the balance sheet. Any remaining amount of the obligation would be a long-term liability.
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Statement of owners' equity
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Sometimes referred to as a "statement of changes in owners' equity." A statement of owners' equity is not a required general purpose financial statement under GAAP, but is often included in a company's annual report or other financial disclosures. The statement is designed to show the cause of any changes in the amounts of capital contributions and retained earnings reflected in the balance sheet over a period of time.
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Statement of retained earnings/deficits
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Sometimes referred to as a "statement of changes in retained earnings/deficits." A statement of retained earnings/deficits is not a required general purpose financial statement under GAAP, but is often included in a company's annual report or other financial disclosures. The statement is designed to show the cause of any change in the amount of retained earnings/deficits over a period of time. The two primary causes of a change in retained earnings/deficit are net income / losses and any dividends for the period. In many cases, information included in this statement is simply incorporated into a statement of owners' equity and no separate statement is provided.
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Earnings per share
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Also referred to as "EPS," earnings per share is the amount of a company's net income earned during the year for each share of its common stock outstanding. Disclosure of a company's EPS on its income statement is required under GAAP. The amount is calculated by dividing a company's net income by the number of its shares of common stock outstanding. This calculation can become substantially more complicated with the existence of preferred stock, stock options and other factors covered in more advanced accounting courses. A company's earnings per share is usually different from the amount of its dividends per share due to the fact that companies can and often do choose to retain all or a portion of their earnings for use in the business. A company's EPS is a critical in financial statement analysis and stock valuation. In fact, a company's EPS and financial analysts' projections of future EPS are probably the most significant factors impacting a stock's current fair market value.
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Historical cost
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The original cost of acquiring an asset. In an arm's-length transaction, an asset's cost is also its fair market value at the date of acquisition. Under GAAP, the book value of an asset is based on its historical cost even if the asset has appreciated in value subsequent to its acquisition. On the other hand, decreasing asset values below book values may require asset write-downs. This inconsistency in application is due to the attitude of conservatism that prevails in accounting rules and standards.
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Fair market value of an asset
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The price an asset would bring if it were sold in an arm's-length transaction. Given this definition, the current fair market value of most company assets cannot be established with any assurance. The price an asset would bring upon sale cannot be determined unless it is actually offered for sale and then sold. Asset appraisals may may be made, but they are at best a subjective guess of an asset's fair market value. Based on a desire for objective information, GAAP requires that most assets be reported at their historical cost or the price paid upon asset acquisition rather than some current estimated or appraised fair market value. Historical costs can be objectively determined but they lack the relevance that current value information could provide to investors and creditors. This conflict in objectivity and relevance is one of the most significant challenges facing the accounting profession today as it seeks to provide information that is both useful and verifiable.
Although GAAP generally disallows the recording of an asset's value above its historical cost, assets with current fair market values that can be reasonably appraised and are significantly below book values are usually written down as an expense or loss of the period. This contradiction in application when lower values exist is the result of conservatism in accounting. |
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Conservatism
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An attitude in accounting which prefers understatement to possible overstatement in the financial statement presentation of a company's financial position and results of operations. GAAP is formulated and typically applied with an attitude of conservatism because overstatement of financial information can mislead and may result in financial losses to investors and creditors whereas understated information will only result in lost opportunities. Losses due to reliance on overstated financial information that have been certified in a CPA's audit report will usually result in legal action and monetary claims against the CPA firm performing the audit. An example of conservatism is the GAAP requirement that historical costs rather than appreciated fair market values serve as the general basis for asset valuations in a company's financial statements.
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Arms-length transaction
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A transaction between two unrelated entities, both negotiating and acting to make the best deal they can for themselves. Unless there is evidence to the contrary, GAAP assumes all of a company's transactions are made on an arm's-length basis. As a result, the price paid for an asset, or its historical cost, is also the asset's fair market value at the time of acquisition. If an asset is not purchased in an arm's-length transaction, GAAP may require an exception to the asset's valuation at historical cost.
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Monetary measurement principle
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The requirement under GAAP providing for a company's financial statements to reflect only those transactions that can be measured in dollars.
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Entity
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A person, group or organization. GAAP requires that financial statements prepared for a company include only the assets and liabilities of the company as an entity separate from its owners. That means that any personal assets or liabilities of owners should not be included in the company's financial statements.
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Accounting system
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The manual or computerized process whereby a company's financial transactions are identified, recorded, summarized and reported to provide information useful to those who have an interest in the business. The accounting systems used by most companies today follow the steps in the traditional accounting cycle through computer systems which automate the process.
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Accounting cycle
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The periodic process of identifying, recording and summarizing a company's transactions for the purpose of producing financial statements in accordance with GAAP. The traditional accounting cycle typically requires a company to (1) identify its transactions, (2) record transactions in a journal, (3) post journal entries to accounts in the general ledger, (4) prepare a trial balance, (5) make and post adjusting entries, (6) prepare financial statements, and (7) make and post closing entries before the start of the next accounting period. Today, most accounting systems are computerized, and the steps of the accounting cycle are handled electronically. Manual accounting systems, which rely on paper and pencil, are pretty much relics of the past.
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Transaction
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An economic event that effects the status of any asset, liability or owners' equity account of a business. All of a company's transactions must be recorded and summarized by a company's accounting system in order to periodically produce general purpose financial statements. The identification of a company's transactions and the original recording of those transactions through journal entries are the first steps of a company's accounting cycle.
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Account
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A written or electronic record maintained for each of a company's assets, liabilities and categories of owner's equity, including revenues, expenses and dividends. Accounts are used to summarize the affects of a company's transactions on each of its assets, liabilities and categories of owners' equity. A company's transactions are originally recorded through journal entries and then posted to the specific accounts affected. For example, a transaction affecting a company's cash will be recorded and then posted to the cash account to reflect the increase or decrease in cash and update its running balance. All of a company's accounts taken as a whole constitute a file referred to as the company's general ledger.
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Double-entry accounting
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A method of accounting for a company's transactions through journal entries having equal totals of debit and credit entries while maintaining the basic accounting equation.
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Debit entries
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Journal entries recorded on the left-hand side of an account using a T-account format. The rules of double-entry accounting require that debit entries be used to record increases in asset, expense and dividend accounts, and decreases in liability, capital contibution, retained earnings and revenue accounts. As a result, "debiting" an account may refer to an increase or decrease depending on the kind of account that is "debited." Most introductory accounting students inaccurately assume that debit always refers to some decrease. This is clearly not the case in double-entry accounting. For an explanation of why many students are confused in their use of the terms "debit" and "credit," see the explanation under credit entries.
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Credit entries
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Journal entries recorded on the right-hand side of an account using a T-account format. The rules of double-entry accounting require that credit entries be used to record increases in liability, capital contribution, retained earnings and revenue accounts, and decreases in asset, expense and dividend accounts. As a result, "crediting" an account may refer to the increasing or decreasing of an account depending on the kind of account that is "credited." Most introductory accounting students inaccurately assume that the term "credit" always refers to some increase or benefit. This is clearly not the case. As noted above, a credit entry to an asset like cash actually records a decrease in the amount of a company's cash balance. This may seem inconsistent with a student's prior banking experience given that receipts of cash deposited in a bank account are typically "credited" by the bank to the depositor's account. This actually refers to a credit entry the bank makes to a liability account maintained in the bank's books reflecting the amount the bank owes the depositor as a result of the deposit. The bank's credit of a depositor account does not refer to the recording of an increase in the cash account maintained in the depositor's books, it means an increase in the liability on the bank's books. A company's receipt and deposit of cash is recorded in the company's books with a debit entry to cash, regardless of the bank's use of the term "credit."
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Journal
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A record in either written or electronic form used to originally record a company's transactions through appropriate debit and credit entries to the company's accounts. Journals also serve as the original record for a company's adjusting and closing entries. Most companies maintain special journals as well as a general journals to record their transactions.
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General journal
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A company's written or electronic record of all journal entries not otherwise recorded in a special journal. Special journals are often used to record a company's recurring transactions, and as a result, the general journal is often used exclusively for adjusting and closing entries.
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Journal entries
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The original recording of a company's transactions in a general or special journal. Debit and credit entries are used in journal entries to record each transaction's effect on company accounts. Double-entry accounting requires that each journal entry include equal totals of debits and credits while maintaining the integrity of the basic accounting equation. Adjusting and closing entries are also recorded in a company's general journal and referred to as journal entries.
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Sales revenues
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Revenues resulting from a company's product sales to customers. Revenues from the rendering of services to customers may also be referred to as "sales revenues" or "service fee revenues." Sales revenues may also be identified as either cash sales or credit sales based on whether the sales price is paid in cash at the point of sale or the sale is made on account.
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Customer
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The buyer of a company's goods or services offered for sale. Cash customers pay for purchased goods or services in cash at the point of purchase, whereas credit customers agree to pay within some designated period following the point of sale, usually within 30 days. Some customers choose to pay through the use of credit cards. In some industries, customers are known by other names. For example, customers of real estate companies that provide property for rent are called "tenants" and the revenues earned from tenants are typically referred to as "rental income" or "rent revenues." Customers of lending institutions are referred to as "borrowers" and the revenue earned is "interest income" or "interest revenues."
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Cash customer
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A customer that pays in cash (currency or check) at the time a sale is made. A customer that uses a third-party credit card (VISA, MasterCard, etc.) at the point of sale is also considered a cash customer.
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Cash sales
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Sales of goods or services to customers for which the sales price is paid in cash (currency or check) at the time of sale. Cash sales include credit card sales when the credit card used is a third-party credit card such as VISA or MasterCard and not a card issued by the company making the sale.
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Credit customer
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A customer who is allowed to purchase a company's goods or services based on an agreement that they will pay for those goods or services within some designated period following the point of sale, usually 30 days.
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Credit sales
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Sales of goods or services for which payment is not received from customers at the time of sale but is to be received within a short period of time thereafter, usually within 30 days. Credit sales are also referred to as "sales made on account" because they give rise to accounts receivable. Credit customers must typically be approved under a company's established credit policies before they will be allowed to buy a company's products or services on account.
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Credit
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A term which has a number of important meanings depending upon the context. Credit is a term that is often used in conjunction with the providing and incurring of debt financing. A person or organization is said to "have credit" if they can qualify for a loan or purchase on account, also referred to as a "credit purchase." An "extension of credit" implies the making of a loan or a credit sale. The term "credit" is also used in the context of credit entries which refer to journal entries made to the right side of an account. In the case of merchandise returns, the providing of "credit on account" means that the account receivable from a credit customer returning the merchandise is reduced by the sales price of the returned goods through a credit entry.
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Service fee revenues
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May also be referred to as "sales revenues." Service fee revenues are amounts received or receivable from customers as a result of fees earned due to the providing of some service. Service fees are earned when performance of services have been substantially completed.
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Interest revenue
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Also referred to as "interest income." Interest revenue is the amount of interest received plus the amount of any interest receivable as a result of interest earned during the current period on any company loans or other interest bearing investments.
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Cost
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The amount of an any expenditure and/or future expenditures representing the price paid for an asset or the amount of an expense. For example, a company's land cost is the price paid in acquiring the land and is recorded as an asset even though a portion of that price is paid today and a portion may be payable in the future. Under the matching principle, costs of operating a business are accounted for as expenses in the period in which those costs benefit business operations, regardless of when those costs are actually paid.
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Expenditure
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Any payment of cash or other assets to another entity. Expenditures may be made in the purchase of other assets and are referred to as "capitalized expenditures." Expenditures made to pay costs of operating a business in the current period are accounted for as expenses of the period. Any expenditure made in payment of previously recorded obligations reduces a company's liabilities.
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Purchases on account
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The acquisition of some asset, usually inventory or supplies, for which payment is not made at the time of acquisition but is to be made in the near future, usually within 30 days. The term "credit purchase" might also be used to describe a purchase on account.
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Cost of goods sold
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An expense account sometimes referred to simply as "cost of sales." Cost of goods sold reflects the cost of any products sold to customers. A company's product costs are first accounted for as assets (inventory) until the products are actually sold and become an expense of the business (cost of goods sold). In a merchandising business, a product's cost is its purchase price and any freight or other costs associated with actually obtaining the product from a supplier or vendor. In a manufacturing business, a product's cost includes any direct material, direct labor and manufacturing overhead costs incurred in making the product.
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Salaries expense
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The cost incurred in the current period for employees' gross salaries, which includes amounts withheld from those salaries for payment to government or other entities on the employees' behalf. Salaries expense differs from wage expense in that wages are paid to employees who are paid on an hourly rate, as opposed to some fixed monthly amount or salary. In many cases, these two expenses are combined for accounting and/or financial reporting purposes as "salaries and wage expense." This amount does not include an employer's payroll tax expense incurred as a result of having employees. Salaries expense incurred as a product cost would typically be included in indirect labor costs and recorded as an expense through cost of goods sold.
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Interest expense
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The amount of interest paid plus the amount of any interest to be paid in the future (interest payable) as a result of any borrowing of assets for current period use.
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Income tax expense
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The cost of both federal and state income taxes paid and/or payable in the future as a result of a corporation's earnings in the current period. In a multi-step formatted income statement or any other format that may be used, income tax expense is typically broken out as a separate category of expense to highlight a company's income before income taxes and the amount of income taxes incurred by the company. Only corporations incur income taxes that would be reflected on a company's income statement. Companies operating as proprietorships or partnerships do not pay income tax; however, their profits are subject to taxes to be paid for personally by the owners. Corporate owners (stockholders) are also taxed personally on company profits to the extent those profits are distributed as dividends. As a result, corporate profits paid as dividends face "double taxation."
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Ledger
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A file which maintains all of a company's accounts.
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General ledger
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A written or electronic file comprised of all company accounts. The effects of a company's transactions are summarized in its general ledger through the posting of journal entries. Posting refers to the transfer of originally recorded debit and credit entries to the proper general ledger account where an updated running balance is maintained for the specific asset, liability, or owners' equity account affected.
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Books
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The accounting records used to record, summarize and report a company's financial transactions through financial statements. A company's books generally refer to its journals, ledgers and financial statements.
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Posting
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The manual or electronic transfer of an originally recorded debit or credit journal entry to the proper general ledger account. Postings to any general ledger account that has a supporting subsidiary ledger must also be made to the appropriate detailed account within the subsidiary ledger.
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Trial balance
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A listing of all general ledger accounts with their respective end-of-the-period debit or credit balances produced for the purpose of determining that the total of all debit balances equals the total of all credit balances. A trial balance indicates that during the current period, equal debit and credit entries have been made in the accounting journals and posted to the general ledger during the period in compliance with double-entry accounting. A trial balance does not prove that all transactions were properly recorded and posted; it simply verifies that for the transactions that were recorded and posted, debit entries equaled credit entries. Computerized accounting systems are typically programmed to disallow the recording and posting of any transactions with unequal debit and credit entries, and therefore, preparation of a trial balance is often excluded in the accounting cycle of a company using a computerized system.
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Accrual basis accounting
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The method of accounting that must be used to account for the timing of revenues and expenses under GAAP. Accrual basis accounting is comprised of the revenue recognition principle and the matching principle. The revenue recognition principle governs the timing of revenues and provides for revenues to be recorded in the period in which those revenues are earned, not necessarily when cash is collected from customers. The earning of revenues takes place when goods have been delivered or services have been substantially completed. The matching principle governs the timing of expenses and provides for the costs of operating a business to be recorded as expenses in the period in which those costs provide benefits to the company, not necessarily when those costs are actually paid in cash. Cash basis accounting, as opposed to accrual basis accounting, calls for the recording of revenues and expenses only at the time of receipt or payment of cash and is not allowed under GAAP. However, cash basis accounting may be used in certain limited circumstances for federal and state income tax purposes in the United States.
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Cash basis accounting
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A method of accounting for the timing of revenues and expenses. This method generally accounts for revenues when cash is received from sales to customers and not necessarily when goods or services are actually provided. Likewise, expenses are generally recorded when paid in cash without regard to when the costs actually benefit the company's operations. Cash basis accounting is allowed in certain cases for income tax reporting, but it is unacceptable under GAAP because it facilitates management manipulation of income and may not reflect a company's true results of operations for a period of time. The method of accounting for the timing of revenues and expenses that is required under GAAP is accrual basis accounting, which records revenues in the period earned and expenses in the period in which operations are benefited regardless of the timing of cash receipts or payments.
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Adjusting entries
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Journal entries typically made at the end of an accounting period in order to comply with the requirements of accrual basis accounting in the proper timing of revenues and expenses. Adjusting entries might also refer to any journal entries made to modify or correct an account balance. Most adjusting entries involve accrued expenses, accrued revenues, prepaid expenses and unearned revenues.
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Matching principle
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The part of accrual basis accounting that governs the timing of expenses. The matching principle requires the costs of operating a company to be recorded as expenses in the period in which those costs provide benefits to the company, not necessarily when those costs are actually paid in cash. Compliance with the matching principle will often require a company to make adjusting entries to properly account for any accrued or prepaid expenses before preparation of the company's financial statements. The allowance method of accounting for uncollectible accounts receivable, depreciation of property, plant and equipment, depletion of natural recources and amortization of intangibles are all examples of applications of the matching principle.
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Prepaid expense
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An asset arising from the payment of business costs in advance of the actual period in which those costs will benefit company operations. For example, insurance premiums are usually paid in advance of the period of insurance coverage. Under the matching principle, the cost of the insurance should be recorded as an expense in the period of benefit and not before. As a result, an asset rather than an expense is recorded at the time of prepayment, reflecting the right to future insurance coverage. The cost of the prepaid expense must then be adjusted and recorded as an expense as time passes and the benefits of the cost are realized
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Accrued expenses
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Costs that benefit a company's current operations and are recorded as expenses of the period even though no actual expenditure has yet been made. Accrued expenses are payable in the future and are recorded through adjusting entries, with a debit to an expense account and a credit to a liability (payable) account. The recording of employee salaries for the month of December as a December expense, even though the salaries will not be paid until January, is an example of an accrued expense.
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Accrued liabilities
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A term used to describe payables recorded in conjunction with the recording of accrued expenses.
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Revenue recognition principle
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The part of accrual basis accounting that deals with the timing of revenues. The revenue recognition principle provides for revenues to be recorded in the period in which those revenues are earned, not necessarily when cash is collected from customers. The earning of revenues takes place when goods have been delivered to a customer or the performance of services has been substantially completed. Compliance with the revenue recognition principle will often require a company to make adjusting entries to properly account for accrued revenues and any unearned revenues before the preparation of the company's financial statements.
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Accrued revenues
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Revenues earned and recorded in the current period even though no cash or other proceeds have been received from customers for the goods or services provided. Accrued revenues are recorded through adjusting entries with a debit to an asset (receivable) account and a credit to a revenue account. The recording of sales made in December as December revenues, even though the sales price will not be collected from the customer until January, is an example of an accrued revenue.
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Unearned revenues
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Liabilities resulting from customer receipts in advance of the period in which goods are sold or services are actually to be provided. For example, a cash advance or deposit received from a customer prior to product delivery should be accounted for with an increase in cash and a corresponding increase in a liability (unearned revenue) to reflect the future obligation to deliver the product. At the time of product delivery, an adjusting entry is required to reduce the unearned revenue and properly record the revenue earned. Under the revenue recognition principle, revenues are not really revenues until they are earned; therefore, any unearned revenues are accounted for as liabilities and then adjusted to revenue over time as the earnings process is completed.
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Closing entries
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Journal entries made at the end of an accounting period to transfer the account balances of all nominal accounts (revenues, expenses and dividends) to the retained earnings/deficits account. Following closing entries, all nominal accounts will have zero balances from which the next accounting period's accumulations may begin and the retained earnings account will be updated to reflect the company's total retained earnings/deficits from the inception of the business through the end of the current period.
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Real accounts
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Accounts that maintain cumulative running balances and are reflected on a company's balance sheet. These accounts include all asset, contra-asset, liability, capital contribution and retained earnings/deficits accounts. Real accounts are never closed because they are designed specifically to maintain running balances of business activities from a company's inception. The retained earnings/deficit account is a real account and is never closed; however, all revenue, contra-revenue, expense and dividend accounts are closed to retained earnings at the end of each accounting period to update its running balance for the current period's net income / loss and dividends.
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Nominal accounts
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Accounts that accumulate transactional entries for distinct periods of time and are closed to the retained earnings/deficits account at the end of each period. Nominal accounts are sometimes referred to as "temporary accounts" and include all revenue, contra-revenue, expense and dividend accounts.
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Special journals
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Journals used to originally record transactions having certain common characteristics. For example, a cash receipts journal is a special journal used to exclusively record all transactions involving receipts of cash. Other special journals commonly used by companies include a purchases journal to record all purchases of inventory on account, a cash disbursements journal to record all transactions involving payments of cash, and a sales journal to record all transactions involving credit sales. A general journal is used for all journal entries that are not recorded in a special journal. Special journals were originally developed in manual accounting systems to facilitate the posting process and improve internal controls by facilitating the segregation of employee duties. In computerized accounting systems today, special journals may represent software modules designed to facilitate the programming necessary to handle the accounting for various kinds of transactions.
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Subsidiary ledger
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A file which serves as a detailed supplement to a general ledger account. For example, the accounts receivable general ledger account will typically have a supporting subsidiary ledger file referred to as the "accounts receivable subsidiary ledger" which notes the running balance of each credit customer's account. Other general ledger accounts which commonly have supporting subsidiary ledgers include inventory, property, plant and equipment and accounts payable. These accounts maintain detail that is valuable information for a company's management. Managers must know the balance of units on-hand for each of their products as well as the total balance of all inventories. Likewise, the detail of accounts payable for each of a company's vendors is critical in making timely payments on account. General ledger accounts supported by a subsidiary ledger are referred to as the "control account" for the related subsidiary ledger. The total of all of a subsidiary ledger's account balances should equal the balance in its related general ledger control account.
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What is the basic accounting equation?
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Assets=Liabilities+Owner's Equity
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There are only two sources of Owner's Equity, what are they?
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Capital Stock and Retained Earnings
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What are the three basic financial statements required under GAAP?
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Income Statement, Balance Sheet, Statement of Cash flows
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What is accrual based accounting?
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It's dictated by matching principle and revenue principle.
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What is the matching principle?
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Expenses will be recognized when they provided benefit in the provision of goods or services.
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What is the revenue recognition principle?
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Revenues will be recognized at the time when a good or service was provided or performed.
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What is the entity principle?
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An owner's assets in a company’s assets are separate.
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What is the Monetary principle?
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All financial documents will be listed using US dollars.
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The SEC currently requires that all companies that seek capital in the United States comply with international accounting standards established by the IASB.
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False
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Which legal form of business ownership provides limited legal liability to owners?
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Corporations
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Managerial accounting seeks to communicate information to managers primarily through general purpose financial statements.
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False
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An external audit of a company's financial statements by an independent CPA firm is required by the SEC for companies whose stock is publicly traded in the United States and subject to SEC regulations.
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True
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A sporting goods store in the local mall is an example of a merchandising business.
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True
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The three general purpose financial statements required under GAAP are the balance sheet, income statement and the statement of cash flows.
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True
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The basic accounting equation is reflected in the balance sheet.
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True
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Owners' equity on the income statement of a business is made up of the combined amount of capital contributions from owners and the amount of retained earnings of the business.
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False
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A statement of cash flows reflects a company's financial position as of a point in time.
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False
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If an investor wished to find a company's earnings per share (EPS) for the preceding year he or she would have to look to the company's
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Income Statement
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The classification of assets and liabilities as either current or long-term is useful to financial statement users because it helps evaluate a company's
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Liquidity
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The retained earnings of a business would always decrease if
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Expenses > Revenue
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The recording of a cash payment of a utility bill that had been previously recorded as an expense and a liability would require a debit entry to
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Liability Account
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The sale of inventory to a customer at a profit has the following net effect on the balance sheet:
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increases assets and owners' equity with no net effect on liabilities.
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XYZ Company's sale of inventory to a customer on account requires debits to which two accounts on the books of XYZ?
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Cost of Goods Sold, Accounts Receivable
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A debit to the dividends account causes
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an increase in the dividends account and a decrease in owners' equity.
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In a computerized accounting system it is not necessary that the basic accounting equation (A = L + OE) be maintained in balance.
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False
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The transactions of a business are first recorded in
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a journal and then posted to the general ledger.
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A balancing trial balance means that
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the total of all debit account balances equals the total of all credit account balances for the company.
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The general ledger in an accounting system is used to
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summarize the effect of all of a business' transactions on each account of the business.
The general ledger is used to summarize the effect of all of a business' transactions on each account of the business. The general journal is used to initially record a business' transactions. |
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An adjusting entry at year end to reduce Prepaid Property Tax Expense and record Property Tax Expense for the costs of property taxes incurred for the year would be required under
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the matching principle.
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Under accrual basis accounting, December's cost of employee wages for a restaurant should be recorded as an expense of the restaurant in the
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month of December even if the actual payment of wages is not made until the following January.
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At the end of an accounting period, the "Accounts Payable" account will typically have a
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credit balance.
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On 2/1/X3 , XYZ Corp.prepaid $1,200 of insurance premiums for one year's worth of coverage and recorded it as Prepaid Insurance Expense. The 12/31/X3 adjusting entry required to comply with the matching principle would include a debit to
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Insurance Expense for $1,100.
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A restaurant's failure to record an unpaid and unrecorded utility bill for utility usage in the month of December, 20X2 for which payment will be made in January, 20X3 would have the following effect on the restaurant's financial statements prepared as of 12/31/X2:
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net income would overstated.
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If a company's office supplies balance at the beginning and end of a year amounted to $1,000 and $1,200, respectively, determine the amount of Office Supplies Expense for the year if office supply purchases for the year totaled $6,500.
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$6,300
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A failure to record at year end any earned but uncollected and previously unrecorded consulting fee revenues would
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both understate assets and net income.
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All balance sheet accounts are real accounts (as opposed to nominal accounts) the balances of which are not closed to retained earnings at the end of an accounting period.
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True
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Which of the following accounts must be credited in a closing entry at the end of an accounting period?
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Utilities Expense
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What are the 3 basic kinds of businesses?
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The three basic business functions are: (1) manufacturing, (2) merchandising, and (3) service. All businesses perform at least one of these functions and many do two or all three.
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What are the 2 types of merchandising?
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Retail and Wholesale
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What are the 3 keys to a successful business?
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Idea, Capital and Management Skill
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What are the two basic ways owners/investors provide equity capital to a business?
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Debt Financing (borrowing from creditors)
Equity Financing (contributions from investors/owners) |
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Two basic ways owners/investors provide equity capital to a business?
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Capital Contributions and Retained Earnings
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What are the 3 basic legal forms of business ownership?
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Proprietorship, General Partnership and Corporation
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Which type of business ownership has red-tape involved?
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Corporation
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Which type of business ownership has separate legal liability (business/owners)?
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Corporation
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What are the two types of Accounting?
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Financial and Managerial
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Financial Accounting's 3 required statements?
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Balance sheet, income statement and statement of cash flows
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What are the 2 critical conditions for financial statements to be truly useful?
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Comparability and Credibility
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What does the SEC do?
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Regulate Stock & Bond Transactions
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What does the IRS do?
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Collect income taxes
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What does the AICPA do?
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license and certify CPA's
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What does the FASB do?
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Create GAAP (Standards of Accounting)
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Why is accounting the language of business?
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Accounting is the language of business because it seeks to provide information to communication to parties interested in a business
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What is financial accounting as opposed to managerial accounting?
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Financial accounting seeks to provide information to those who are external to the day to day operations of the business. External users are investors, creditors, and government regulatory bodies.
Managerial accounting is the providing of information to management, those who are internal to the business. |
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Why would an investor considering an investment in the stock market find financial accounting information of value?
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Financial accounting provides information to investors that allows them to make comparisons between various investment alternatives.
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What is GAAP?
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GAAP stands for "Generally accepted accounting principles"
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Does GAAP apply to managerial or financial accounting or both?
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GAAP applies only to financial accounting information.
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Why is GAAP important?
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Gaap is important because it helps create comparable information among companies seeking capital and allows investors and creditors to make more informed investment decisions.
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What kind of businesses must have external audits performed on their financial statements and why?
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Businesses which seek to acquire capital from teh public must provide audited financial statements. The SEC requires such companies to provide financial statements prepared in accordance with GAAP and subjected to independent audit by a CPA
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Who has the exclusive authority to perform external audits?
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CPA firms
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What is the auditor's report?
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an independent verification as to the material accuracy of the financial statements. Without it financial statements have no credibility.
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What do CPAs do?
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Exclusive right to perform audits of financial statements. Tax advice and preparation of various kinds of tax returns. Business consulting and advice.
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What is the purpose of the balance sheet?
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reflects a company's financial position (A=L+OE) as of a point in time
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What is the purpose of the Income Statement?
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Reflects a company's results of operations or profits/losses over a period of time
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What is the purpose of the statement of Cash Flows?
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Reflects a company's cash inflows, outflows and changing cash balance over a period of time
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How are a company's profits calculated?
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Revenues-Expenses =Net Income (Profit)
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Liquidity
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ability to meet obligations in teh short term
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How do you find earnings per share
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Net income
# of shares |
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Historical Cost Principle
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Assets will be valued at the price paid upon acquisition
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What are the exceptions to the Historical Cost Principle?
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In the event that an asset purchase was not at arm's length, then the asset will be valued at its Fair Market Value, conservatively determined at the date of purchase
If there is credible evidence that an asset's fair market value is below its historical cost, that cost will usually be reduced to reflect the lower fair market value. |
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Debit
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Increase in assets
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Who is responsible for financial statement accuracy and compliance with GAAP?
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Management
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Entity Concept
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The personal assets of a company's owners are not included in the company's balance sheet...the business is a separate accounting entity
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Monetary measurement principle
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Financial statement amounts are stated in US Dollars, some assets can't be valued
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Cash Basis accounting is used for personal income taxation
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True
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Real Account
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all transactions affecting that account since the inception of the business
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Are nominal accounts closed at the end of an accounting period
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True
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Accounting provides information to:
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Providers of business capital, managers of business and government regulators of business
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an income statement preparein in accordance with GAAP will not report
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dividends
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