Accounting Definitions and Principles

Flashcards for key accounting definitions and principles to assist in exam preparation.

Cash Basis Accounting

An accounting method that records transactions only when cash changes hands.

Accrual Basis Accounting

An accounting method that records transactions when they actually happen, regardless of cash movement.

The Matching Principle

A rule stating that expenses must be recorded in the same period as the revenues they helped to generate.

Depreciation

The process of spreading out the cost of a large asset over its useful life.

Accumulated Depreciation

The total amount of depreciation that has been recorded for an asset since it was purchased.

Contra Account

An account that reduces the balance of another account, having a contrary normal balance.

Book Value

The net value of an asset calculated as Cost of Asset minus Accumulated Depreciation.

Property, Plant, and Equipment (PP&E)

Long-term, physical assets used in business for more than one year.

Classified Balance Sheet

A balance sheet that organizes assets and liabilities into specific categories.

Liquidity

How quickly an asset can be turned into cash without losing its value.

Current Assets

Assets expected to be turned into cash or used up within one year.

Long-term Assets

Assets expected to be held for more than one year.

Long-term Investment

Assets that a company intends to hold for many years.

Intangible Assets

Assets that have value but no physical substance.

Current Liabilities

Debts or obligations that must be paid within one year.

Long-term Liabilities

Debts or obligations that are not due for more than one year.

Owner's Equity

The owner’s remaining claim to the business assets after all liabilities are paid.

Closing Process

The steps taken at the end of an accounting period to reset temporary accounts back to zero.

Closing Entries

Specific journal entries made at the end of the period to move balances of temporary accounts to the permanent Equity account.

Income Summary

A temporary holding account used during the closing process to calculate Net Income.

Accrual (Expense)

An expense incurred but not yet paid.

Accrual (Revenue)

Revenue earned but cash has not yet been received.

Deferral (Expense)

A payment made in advance for a service or good that will be used later.

Deferral (Revenue)

Cash received before work is performed, deferred until the work is done.