Principals Of Accounting

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absorption costing

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Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements.

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accelerated depreciation

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The allocation of the cost of a plant asset to expense in an accelerated manner. This means that the amount of depreciation in the earlier years of an asset's life is greater than the straight-line amount, but will be less in the later years. In total the amount of depreciation over the life of the asset will be the same as straight-line depreciation. The difference between accelerated and straight-line is the timing of the depreciation. For profitable companies, the use of accelerated depreciation on the income tax return will mean smaller cash payments for income taxes in the earlier years and higher cash payments for income taxes in later years.

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account

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A record in the general ledger that is used to collect and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded. A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account.

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accounting equation

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Assets = Liabilities + Owner's Equity. For a corporation the equation is Assets = Liabilities + Stockholders' Equity. Because of double entry accounting this equation should be in balance at all times. The accounting equation is expressed in the financial statement known as the balance sheet.

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accounting net income flows

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The amounts reported on the income statement. Because of accrual accounting the net income flows will be different from the cash flow.

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accounting principles

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The standards, rules, guidelines, and industry-specific requirements for financial reporting.

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accounting principles board (APB)

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This group preceded the current Financial Accounting Standards Board (FASB). The APB members served in a part-time capacity to determine the accounting standards from 1962 to 1973. The accounting rules established by the APB were titled Opinions and remain as part of the generally accepted accounting principles (unless superseded by standards issued by the FASB).

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accounting rate of return

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An indicator of profitability that is measured by dividing the accounting net income by the amount invested.

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accounting research bulletin (ARB)

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These pronouncements were issued by the Committee on Accounting Procedures of the American Institute of Certified Public Accountants during the years 1953 to 1959. They were and are part of the generally accepted accounting principles unless superseded by pronouncements of the APB or FASB.

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accounts payable

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This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

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accounts receivable

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A current asset resulting from selling goods or services on credit (on account). Invoice terms such as (a) net 30 days or (b) 2/10, n/30 signify that a sale was made on account and was not a cash sale.

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accounts receivable - net

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The combined amount of the debit balance in the current asset account Accounts Receivable and the credit balance in the contra asset account Allowance for Doubtful Accounts. The difference between the balances in these two accounts is an approximation of the amount of the accounts receivable that is likely to turn to cash (be collected).

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accounts receivable turnover ratio

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The financial ratio which indicates the speed at which a company collects its accounts receivable. If a company's turnover is 10, this means the company's accounts receivable are turning over 10 times per year. It indicates that the company, on average, is collecting its receivables in 36.5 days (365 days per year divided by 10).

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accrual basis of accounting

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The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).

Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid for when it incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance).

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accrual-type adjusting entry

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An adjusting entry made at the end of the accounting period in order to report (1) revenues that have been earned but not yet entered into the accounting records, (2) expenses that have been incurred but have not yet been entered into the accounting records, (3) revenues already recorded that involve more than the current accounting period, or (4) expenses already recorded that involve more than the current accounting period.

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accrue

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To report a revenue or expense that has occurred, but has not yet been entered in the accounting records as of the end of the accounting period.

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accrued expense

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An expense that has occurred but the transaction has not been entered in the accounting records. Accordingly an adjusting entry is made to debit the appropriate expense account and to credit a liability account such as Accrued Expenses Payable or Accounts Payable.

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accrued expenses payable

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A liability account that reflects the estimated amount a company owes for expenses that occurred, but have not yet been paid nor recorded through a routine transaction.

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accrued liability

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The amount a company owes for expenses or losses incurred that have not yet been paid nor recorded through a routine transaction.

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accrued revenue

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Revenue that has been earned but yet invoiced to the customer.

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accumulated deficit

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The term used in place of retained earnings when a corporation has a negative (debit) balance in its account Retained Earnings.

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accumulated depletion

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The cumulative amount of depletion expense pertaining to the natural resources shown on the balance sheet. The account has a credit balance and will be reported on balance sheet as a contra asset.

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accumulated depreciation

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The amount of a long term asset's cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment.

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accumulated depreciation - buildings

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This is a contra long-term asset account which is credited for the depreciation associated with Buildings. Since it is a balance sheet account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost of the buildings.

When the credit balance in Accumulated Depreciation - Buildings is netted with the cost in the Buildings account, the result is the book value or carrying value of the buildings.

Depreciation Expense - Buildings is the income statement account that is debited when Accumulated Depreciation - Buildings is credited.

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accumulated depreciation - equipment

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The contra asset account which accumulates the amount of Depreciation Expense taken on Equipment since the equipment was acquired. As a contra asset account it will have a credit balance.

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accumulated depreciation - land improvements

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This account is a contra long-term asset account which is credited for the depreciation associated with land improvements. As an asset account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost shown in the Land Improvements account.

When the credit balance in Accumulated Depreciation - Land Improvements is netted with the cost of land improvements, the result is the book value or carrying value of the land improvements.

Depreciation Expense - Land Improvements is the income statement account that is debited when Accumulated Depreciation - Land Improvements is credited.

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accumulated other comprehensive income

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A separate line within stockholders' equity that reports the corporation's cumulative income that has not been reported as part of net income on the corporation's income statement. The items that would be included in this line involve the income or loss involving foreign currency transactions, hedges, pension liabilities, and the unrealized gains and losses on certain investments. To learn more about this go to www.FASB.org, select Accounting Pronouncements form the left panel, and then select Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income.

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activity-based costing (ABC)

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A technique for allocating costs to a product, service, customer, etc. The premise is that activities cause an organization to incur costs. Once the cost of the activities have been identified and each activity's cost has been determined, the cost of the activities is then allocated to the product, service, customer, etc. that required the activity. This technique is more logical for allocating overhead than simply allocating costs based on machine hours or direct labor hours.

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activity-based management

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Using the information generated in activity-based costing to plan and control activities and processes.

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adjusted trial balance

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A listing of the general ledger accounts and their account balances at a point in time after the adjusting entries have been posted. The grand total of the accounts with debit balances should equal the grand total of the accounts with credit balances.

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adjusting entries

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Journal entries usually dated the last day of the accounting period to bring the balance sheet and income statement up to date on an accrual basis (as required by the matching principle and the revenue recognition principle).

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admininstrative expenses

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Administrative expenses are part of the operating expenses (along with selling expenses). Administrative expenses include expenses associated with the general administration of the business. Examples include the salaries and fringe benefits of the company president, human resource personnel, accounting, information technology, the depreciation expense for equipment and space used in administration, as well as supplies, utilities, etc.

Under the accrual basis of accounting, administrative expenses appear on the income statement for the period in which they occurred (not the period in which they were paid).

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advertising expense

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Advertising Expense is the income statement account which reports the dollar amount of ads run during the period shown in the income statement. Advertising Expense will be reported under selling expenses on the income statement.

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after-tax

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The result after subtracting the income tax associated with a given amount. For example, if a corporation has a gain of $100,000 before tax, and its income tax rate is 30%, its after-tax gain is $70,000. If a corporation has a loss of $30,000 before tax, and its income tax rate is 30%, its after-tax loss is $21,000.

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aging of accounts payable

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A sorting of a company's accounts payable by due date.

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aging of accounts receivable

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A sorting of a company's accounts receivables by the age of the receivables.

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AICPA

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American Institute of Certified Public Accountants.

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allocate

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To assign costs to a product, department, customer, etc. on an arbitrary basis. For example, the heating cost might be allocated to the five departments located in the area that is heated. The allocation is often based on each department's square footage.

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allocated

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Costs that have been divided up and assigned to periods, departments, products, etc. In depreciation it is the asset's cost that is assigned to each of the years that the asset is in use. In cost accounting it is the assigning of common production costs to various production departments, product lines, individual products, activities.

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allocation

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The assigning or dividing up of amounts. For example, depreciation is an allocation process because it assigns an asset's cost to expense in each of the years the asset is expected to be used. There is also an allocation process when the cost of goods available for sale is divided up between ending inventory and cost of goods sold. Manufacturers allocate (or assign) fixed overhead such as factory rent to the units of products produced in the factory.