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92 Cards in this Set
- Front
- Back
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Accounting |
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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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What are the 3 keys to a successful business?
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Idea, Capital and Management Skill
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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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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 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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Debit
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Increase in assets
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