Reviewer in Principles of Accounting (POA)

Comprehensive vocabulary flashcards covering the fundamentals of accounting, the recording process, and adjusting the accounts.

Accounting

The information system that consists of three basic activities: identifying, recording, and communicating the economic events of an organization to interested users.

Internal Users

Managers and personnel inside an organization who plan, organize, and run the business, including Finance, Marketing, Management, and Human Resources.

External Users

Individuals and groups outside an organization who need financial information about the company, primarily investors and creditors.

Ethics

The standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, and fair or not fair.

Generally Accepted Accounting Principles (GAAP)

A common set of standards developed by the accounting profession that are generally accepted and universally practiced, indicating how to report economic events.

Historical Cost Principle

An accounting principle (also called the cost principle) that dictates companies must record assets at their original cost.

Fair Value Principle

An accounting principle stating that assets and liabilities should be reported at the price that would be received to sell an asset or paid to settle a liability.

Monetary Unit Assumption

An assumption requiring that companies include in the accounting records only transaction data that can be expressed in terms of money.

Economic Entity Assumption

An assumption requiring that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.

Going Concern Assumption

The assumption that a business will remain in operation for the foreseeable future.

Proprietorship

A business owned by one person who is often the manager/operator, receives all profits, suffers all losses, and is personally liable for all debts.

Partnership

A business owned by two or more persons associated as partners under a partnership agreement, typically with unlimited personal liability.

Corporation

A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock and providing limited liability to owners.

Basic Accounting Equation

The foundational formula $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$, which provides the underlying framework for recording and summarizing economic events.

Assets

Resources a business owns that provide future services or economic benefits, such as Cash, Supplies, and Equipment.

Liabilities

Claims against assets representing existing debts and obligations owed to creditors, such as Accounts Payable and Notes Payable.

Owner's Equity

The ownership claim on total assets, also referred to as residual equity, equal to total assets minus total liabilities.

Revenues

Gross increases in owner's equity resulting from business activities entered into for the purpose of earning income, such as sales, fees, and commissions.

Expenses

Decreases in owner's equity that result from the cost of assets consumed or services used in the process of earning revenue.

Owner's Drawings

An owner's withdrawal of cash or other assets from the business for personal use, resulting in a decrease in owner's equity.

Transactions

Economic events of an enterprise recorded by accountants that have a dual effect on the basic accounting equation.

Income Statement

A financial statement that reports the revenues and expenses and the resulting net income or net loss of a business for a specific period of time.

Owner's Equity Statement

A financial statement that summarizes the changes in owner's equity for a specific period of time, covering the same duration as the income statement.

Balance Sheet

A financial statement that reports the assets, liabilities, and owner's equity of a business at a specific date, offering a snapshot of its financial condition.

Statement of Cash Flows

A financial statement that provides information about the cash receipts, cash payments, and net change in cash for a specific period of time.

Forensic Accounting

An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft, fraud, and legal disputes.

International Financial Reporting Standards (IFRS)

A set of international, principles-based accounting standards developed by the International Accounting Standards Board (IASB).

Sarbanes-Oxley Act (SOX)

U.S. regulations establishing internal control standards applicable to large public companies listed on U.S. exchanges to prevent and detect fraud.

Account

An individual accounting record of increases and decreases in a specific asset, liability, owner's equity, revenue, or expense item.

Debit

The left side of an accounting account, abbreviated as Dr.

Credit

The right side of an accounting account, abbreviated as Cr.

Double-Entry System

A system of recording transactions where each transaction affects two or more accounts such that total debits always equal total credits.

Journal

The book of original entry in which business transactions are initially recorded in chronological order.

Journalizing

The process of entering transaction data into the journal.

General Ledger

The entire group of accounts maintained by an entity, containing all asset, liability, and owner's equity accounts.

Posting

The procedure of transferring journal entries to the individual ledger accounts.

Trial Balance

A list of accounts and their balances at a given time, used primarily to prove the mathematical equality of debit and credit balances in the ledger.

Time Period Assumption

An accounting assumption (also called the periodicity assumption) stating that the economic life of a business can be divided into artificial time periods.

Fiscal Year

An accounting time period that is one year in length, which may or may not coincide with the calendar year.

Accrual-Basis Accounting

Accounting method in which transactions are recorded in the periods in which events occur: revenues are recognized when services are performed, and expenses are recognized when incurred.

Cash-Basis Accounting

Accounting method in which revenues are recognized only when cash is received and expenses are recognized only when cash is paid (not in accordance with GAAP).

Revenue Recognition Principle

The principle requiring companies to recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense Recognition Principle

The principle dictating that company efforts (expenses) be matched with results (revenues) in the period when efforts are made to generate those revenues; commonly stated as 'let expenses follow revenues.'

Adjusting Entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed, typically involving one income statement account and one balance sheet account.

Deferrals

Adjusting entries for expenses or revenues that are recognized at a date later than the point when cash was originally exchanged, including prepaid expenses and unearned revenues.

Prepaid Expenses

Expenses paid in cash and recorded as assets before they are used or consumed, requiring an adjusting debit to an expense account and credit to an asset account upon use.

Depreciation

The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner (an allocation concept, not a valuation concept).

Accumulated Depreciation

A contra asset account with a credit balance that offsets its related asset account on the balance sheet.

Book Value

The difference between the historical cost of a depreciable asset and its related accumulated depreciation.

Unearned Revenues

Cash received and recorded as a liability before the related service has been performed or revenue has been earned.

Accruals

Adjusting entries made to record revenues for services performed or expenses incurred that have not yet been received, paid, or recorded at the statement date.

Accrued Revenues

Revenues for services performed but not yet received in cash or recorded at the statement date, adjusted by debiting an asset account and crediting a revenue account.

Accrued Expenses

Expenses incurred but not yet paid in cash or recorded at the statement date, adjusted by debiting an expense account and crediting a liability account.

Adjusted Trial Balance

A trial balance prepared after all adjusting entries have been journalized and posted, serving as the primary basis for preparing financial statements.

Relevance

A fundamental qualitative characteristic of useful financial information meaning that the information is capable of making a difference in a business decision by possessing predictive value and confirmatory value.

Materiality

A company-specific aspect of relevance determined by whether the size of an item makes it likely to influence the decision of an investor or creditor.

Faithful Representation

A fundamental qualitative characteristic meaning financial information accurately depicts what really happened, being complete, neutral, and free from error.

Cost Constraint

A financial reporting constraint where standard-setters weigh the cost companies will incur to provide information against the benefit users gain from having that information.