Accounting I Vocabulary

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Accounting

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Identifying, measuring, communicating Econ. info to inform judgement and decisions

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Asset

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Econ. Resource that is measurable, results from a prior transaction, and provide future Econ. benefit

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Balance Sheet

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Financial Statement that reports a company's assets, liabilities, and equity at a point in time

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Comparability

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Use accounting info to compare and contrast the financial activities of different companies

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Conceptual Framework of Accounting

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Collection of concepts that guide the manner in which accounting is practiced

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Conservatism

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Manner in which accountants deal with uncertainty regarding economic situations

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Consistency

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The ability to use accounting info to compare and contrast the financial activities of the same entity over time

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Contributed Capital

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Resource that investors contribute to a business in exchange for ownership interest

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Cost Principle

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Principle that assets should be recorded and reported at the cost paid to acquire them

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Dividends

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Profits that are distributed to owners

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Economic Entity Assumption

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Accountants assume that the financial activities of a business can be separated from the financial activities of the business's owners

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Equity

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Difference between a company's assets and liabilities, representing the share of assets that is claimed by the company's owners

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Expense

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a decrease in resources resulting from the sale of goods or provision of services

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Going Concern Assump.

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Accountants assume that a company will continue to operate into the foreseeable future

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Income Statement

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A financial statement that reports a company's revenues and expenses over a specific period of time

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Liability

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An obligation of a business that results from a past transaction and will require the sacrifice of economic resources at some future date

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Matching Principle

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The Principle that expenses should be recorded in the period resources are used to generate revenue

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Materiality

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The threshold at which a financial item begins to affect decision making

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Monetary Unit Assump.

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Accountants assume that the dollar is the most effective means to communicate economic activity

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Relevance

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the capacity of a accounting info to make a difference in decisions

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Reliability

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the extent to which accounting information can be depended upon to represent what it purports to represent, both in description and in number

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Retained Earnings

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Profits that are retained in the business

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Revenue Recognition Principle

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The principle that a revenue should be recorded when a resource has been earned

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Statement of Cash Flow

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A financial statement that reports a company's sources ad uses of cash over a specific period of time

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Statement of Retained Earning

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financial statement that reports that change in a company's retained earnings over a specific period of time

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Time Period Assumption

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accountants assume that economic info. can be meaningfully captured and communicated over short periods of time

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Understandability

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ability of accounting info. to be understandable to those who understand/willing to understand business

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Classified Balance Sheet

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a type of balance sheet that groups together accounts of similar nature and reports them in a few major classifications

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Common-Size Financial Statement

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a statement in which all accounts have been standardized by the overall size of the company

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Contributed Capital

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the amount of equity a company generates through the sale of stock to investors

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Corporation

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sperate legal entity that is established by filing articles of incorporations in a state

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Cost of Sales

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the cost of the inventory sold during a period

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Current Asset

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any asset that is reasonably expected to be converted to cash or consumed within one year of the balance sheet date

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Current Liability

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an obligation that is reasonably expected to be satisfied within 1 year

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Fixed Asset

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tangible resources that are used in a company's operations for more than 1 year and are not intended for resale

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Generally Accepted Accounting Principle

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the accounting standards, rules, principles, and procedures that comprise authoritative practice for financial accounting

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Gross Profit

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profit that a company generates when considering only the sales price and the cost of the product sold

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Horizontal Analysis

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method of analyzing a company's account balance over time by calculating absolute and percentage changes in each account

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income before tax

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profit that a company generates when considering all revenues and expenses excerpt for income taxes

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intangible asset

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resource that is used in operations for more than 1 year in not intended for resale, and has no physical substance

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Long term investment

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investments in the common stock or debt of another entity that will not be sold within a year

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Long term liability

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obligation that is not expected to be satisfied within 1 year

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Multi step income statement

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calculates income by grouping certain revenues and expenses together and calculating several subtotals of income

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Net Income

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the final income measure after the provision for income taxes is subtracted from income before taxes

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Notes to the Financial Statement

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the additional textual and numerical info immediately following the financial statement

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operating expense

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recurring expenses that a company incurs during normal operations

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operating profit

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profit that a company generates when considering both the cost of the inventory and the normal expenses incurred to operate the business

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Other revenue and expenses

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revenues and expenses generated outside of normal operations

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partnership

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a business that is formed when 2 or more proprietors join together to own a business

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provision of income taxes

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the amount of income tax expense for a given period

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public corporation

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a separate legal entity in which ownership is available to the public at large

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retained earnings

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the amount of equity a company generates by being profitable and retaining those profits in the business

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sales revenue

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the resources that a company generates during a period from selling its inventory

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single step income statement

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calculates total rev. and total exp. and than determines net income in one step

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sole proprietorship

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a business owned by 1 person

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statement of stockholders equity

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financial statement that shows how and why each equity account in the company's balance sheet changed from one year to the next

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vertical analysis

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method of comparing a company's account balances within 1 year by dividing each account balance by a base amount to yield a percentage

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account

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an accounting record that accumulates the activity of a specific item and yields the item's balance

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accounting info system

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the system that identifies records summarizes and communicates the various transactions of a company

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chart of account

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the list of accounts that a company uses to capture its business activites

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accounting transaction

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any economic event that affects a company's asset, liabilities, or equity at the time of the event

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credit

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ride side of an account

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debit

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left side of the account

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dual nature of accounting

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every accounting transaction affect at least 2 accounts

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journal

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a chronological record of transactions

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ledger

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a collection of accounts and their balances

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trial balance

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a listing of accounts and their balances at a specific point in time

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accounting cycle

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the sequence of steps in which an accounting info system captures processes and reports a company's accounting transactions during a period

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accrual basis of accounting

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records revenues when they are earned and records expenses when they are incurred

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adjusting journal entries

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entries made in the general journal to record revenues that have been earned but not recorded and expenses that have been incurred but not yet recorded

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cash basis of accounting

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records revenues when cash is received and records expenses when cash is paid

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closing entries

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entires made in the journal and posted in the ledger that eliminate the balances in all temporary accounts and transfer those balances to the Retained Earnings Acct.

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closing process

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the process of transferring all revenue expense and dividend acct. balances to the Retained Earning Acct.

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Temporary Acct.

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accounts that accumulate balances only for the current period

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bank reconciliation

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process of reconciling the differences between the cash balance on a bank statement and the cash balance in a company's records

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cash

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medium of exchange

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cash equivalent

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any investment that is readily convertible into cash and has an original maturity of 3 months or less

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control activities

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the policies and procedures established the address the risks that threaten the achievement of organizational objective

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control environment

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atmosphere in which the members of an organization conduct their activities and carry out their respon.

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credit memorandum

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an addition to the cash balance on the bank statement for items such as the collection of interest

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debit memorandum

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a subtraction from the cash balance on the bank statement for items such as service charge

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deposit in transit

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a deposit that has been made by the company but has not cleared the bank as of the statement date

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free cash flow

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excess cash a company generates beyond what it needs to invest in productive capacity and pay dividends to stockholders

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info and communication

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required for the open flow of relevant info. throughout an organization

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internal control

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system of policies and procedures used in a company to promote efficient and effective operations reliable financial reporting and compliance with laws and regulations

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internal control report

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annual report in which management states its responsibility for internal control and provides an assessment of its internal control

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monitoring

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the assessment of the quality of an organizations internal control

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outstanding check

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a check that has been distributed by the company but has not cleared the bank as of the statement date

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petty cash fund

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an amount of cash kept on hand to pay for minor expenditures

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restricted cash

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cash a company has restricted for a specific purpose

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risk assessment

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the identification and analysis of the risks that threaten the achievement of organizational objectives

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accts. receivable

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an amount owed by a costumer who has purchased the company's product or service

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aging schedule

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a listing of accounts receivable by their ages

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allowance for bad debts

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the dollar amount of receivables that a company believes will ultimately be uncollectible

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allowance method

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method in which companies use 2 entries to account for bad debt expense 1 to estimate the expense and a second to write of receivables

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allowance ratio

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a comparison of the allowance account to receivables that measures the percentage of receivables that are expected to be uncollectible in the future

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bad debt expense

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the expense resulting from the inability to collect accts. receivable

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days-in receivable ratio

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a conversion of the receivables turnover ratio that expresses a company's ability to generate and collect receivables in days

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direct write-off method

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method in which bad debt expense is recorded when a company determines that a receivable is uncollectible and removes it from its records

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net realizable method

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the amount of cash that a company expects to collect from its total accts. receivable

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notes receivable

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as asset created when a company accepts a promissory note

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percentages of receivables approach

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method that estimates bad debt expense as a percentage of receivables

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percentage of sales approach

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method that estimates bad debt expense as a percentage of sales

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promissory note

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a written promise to pay a specific sum of money on demand or at some specific date in the future

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receivables turnover ratio

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a comparison of credit sales to receivables that measures a company's ability to generate and collect receivables

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days in inventory ratio

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converts the inventory ratio into a measure of days by dividing the turnover ration into 365 days

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first in first out method (FIFO)

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calculates the cost of goods sold based on the assumption that the first unit of inventory available for sale is the first unit sold

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Gross profit method

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a method of estimating inventory using a companys gross profit percentage to estimate the cost of goods sold and then ending inventory

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inventory

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a tangible resource that is held for resale in the normal course of operations

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inventory turnover ratio

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compares the cost of goods sold during a period to the average inventory balance during that period and measures the ability to sell inventory

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Last in last out (LIFO)

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calculates the cost of goods sold based on the assumption that the last unit of inventory available for sale is the first unit sold

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LIFO reserve

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the difference between the LIFO inventory reported on the balance sheet and what inventory would be if reported on a FIFO basis

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Lower of cost market rule

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requires inventory to be reported on the balance sheet at its market value if the market value is lower than the inventory's cost

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moving average method

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calculates the cost of goods sold based on the average unit cost of all inventory available for sale

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net purchases

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gross purchases plus transportations in less purchase returns and allowances and purchase discounts

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periodic invent. system

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updates the inventory account only at the end of an accounting period

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perpetual invent. system

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updates the inventory account each time inventory is bought or sold

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purchases

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an account used to accumulate the cost of all purchases

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purchase discount

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an account that accumulates the cost reductions generated from vendor discounts granted for prompt payments

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purchase returns and allowances

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an account that accumulates the cost of all inventory returned to vendors as well as the cost reductions from vendor allowances

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specific identification method

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determines the cost of goods sold based on the actual cost of each inventory item sold

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tax deferral

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a temporary delay in the payment of income tax

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transportation in

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an account that accumulates the transportation costs of obtaining the inventory

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accumulated depreciation

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the cumulative amount of depreciation expense recognized to date on a fixed asset

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amortization

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the process of spreading out the cost of an intangible asset over its useful life

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average age of fixed assets

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a comparison of accumulated depreciation to depreciation expense that estimates the number of years on average that the company has used its fixed assets

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average useful life of fixed assets

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a comparison of the cost of fixed assets to depreciation expense that estimates the number of years on average that a company excepts to use its fixed assets

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capital expenditure

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an expenditure that increase the expected useful life or productivity of a fixed asset

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copyright

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the right to reproduce or sell an artistic or published work

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cost

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the historical cost of a fixed asset being depreciated

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depreciable cost

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the difference between an asset's cost and its salvage value

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depreciation

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the process of systematically and rationally allocating the cost of a fixed asset over its useful life

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depreciation expense

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the portion of a fixed asset's cost that is recognized as an expense in the current period

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depreciation method

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the method used to calculate depreciation expense, such as the straight line method, the double declining method and the units of activity method

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double declining method

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a depreciation method that accelerates depreciation expense into the early years of an asset's life

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fixed asset turnover ratio

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a comparison of total revenues to the average net book value of fixed assets that measures the productivity of fixed assets

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franchise

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the right to operate a business under the trade name of the franchise

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goodwill

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an intangible asset eaqual to the excess that one company pays to acquire the net assets of another company

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intangible asset

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a resource that used in operations for more than 1 year but that has no physical substance

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net book value

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the unexpired cost of a fixed asset calculated by subtracting depreciation expense to date from the cost of the fixed asset

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patent

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the right to manufacture sell or use a particular product or process exclusively for a limited period of time

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revenue expenditure

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an expenditure that maintains the expected useful life or the productivity of a fixed asset

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salvage value

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an estimate of the value of a fixed asset at the end of its useful life

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straight line method

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a depreciation method that results in the same amount of depreiation expense each year of the assets useful life

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trademark

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the right to use exclusively a name a symbol or phrase to identify a company

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units of activity method

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a depreciation method in which depreciation expense is a function of the actual usage of the asset

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useful life

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the length of time a fixed asset is expected to be used in operations