Accounting ALL chaps

Accounting

Accounting

The process of identifying, recording, summarizing & analyzing a company’s financial transactions, processing this into information and communicating this information to decision makers.

Internal Users

Individuals within a company who use accounting information for day-to-day management decisions and to monitor the company's financial health.

External Users

Individuals or entities outside of the company who use accounting information to make decisions, such as investors, shareholders, banks, creditors, and public authorities.

Relevance

Information that influences decisions by predicting future outcomes or confirming past ones.

Faithful Representation

Data that is complete, unbiased, and free from errors, accurately reflecting economic reality.

Comparability

Data that is consistent over time and with other entities to support effective comparisons.

Verifiability

Independent parties agree that information accurately represents an economic event.

Timeliness

Information that is available early enough to help users make decisions when it matters most.

Monetary Unit Assumption

Only financial transactions that can be expressed in terms of money are recorded in accounting.

Economic Entity Assumption

Requires a clear separation between the financial activities of a business entity and those of its owners and other entities.

Proprietorship

A business owned by one person.

Partnership

A business owned by two or more persons associated as partners.

Corporation

A business owned by shareholders.

Accounting Equation

Assets = Liabilities + Equity. It represents the relationship between what a business owns (assets) and what it owes (liabilities and equity).

Assets

What a company owns, such as cash, accounts receivable, inventory, and property.

Liabilities

Debts and obligations of a company, such as accounts payable and notes payable.

Equity

Represents the owners' claim on the company's assets, including share capital and retained earnings.

Expenses

The costs a company incurs to run its business, such as rent, wages, and supplies.

Debit

Represents every positive item in an account, indicating an increase in cash or assets.

Credit

Represents every negative amount in an account, indicating a payment of cash or a decrease in assets.

Double Entry

Every financial transaction has two equal and opposite effects, recorded as a debit and a credit.

Journalizing

Entering transaction data in the journal, including the date, accounts and amounts to be debited and credited, and a brief explanation of the transaction.

Debit

The first entry made in a journal, followed by a credit entry.

Account Titles

Specific and correct titles used in journalizing to describe the content of an account.

Simple Entry

A transaction involving two accounts, one debit and one credit.

Compound Entry

A transaction involving more than two accounts.

Ledger

A collection of T-accounts used to record and track financial transactions.

General Ledger

A ledger that contains all asset, liability, and equity accounts.

Standard Form of Account

A three-column form of account with debit, credit, and balance columns.

Journal

Where transactions are initially recorded in detail.

Posting

The process of transferring journal entries to the ledger accounts.

Trial Balance

A list of accounts and their balances at a given time to ensure the equality of debits and credits.

Accrual-basis Accounting

Recognizing revenue when a sale is made or a service is provided, and recording expenses when goods or services are received.

Cash-basis Accounting

Recording income and expenses only when cash is exchanged.

Performance Obligation

A promise made by a company to provide a product or service to a customer.

Revenue Recognition Principle

Recognizing revenue in the accounting period when the performance obligation is satisfied.

Expense Recognition Principle

Recognizing expenses in the period when efforts are made to generate revenue.

Adjusting Entries

Entries made to ensure that revenue and expense recognition principles are followed.

Deferrals

Expenses or revenues recognized at a later date than when cash was exchanged.

Prepaid Expenses

Costs paid in advance for something to be received or used in the future.

Unearned Revenues

Payments received in advance for products or services not yet delivered.

Accruals

Expenses or revenues recognized at an earlier date than when cash will be exchanged.

Accrued Revenues

Revenue earned but not yet received or recorded.

Accrued Expenses

Costs incurred but not yet paid or recorded.

Adjusted Trial Balance

A list of accounts and their balances after adjusting entries have been made.

Financial Statements

Reports that summarize a company's financial performance and position.

Adjusted Trial Balance

An important step in the accounting process to ensure accuracy and form the basis for financial statements.

Adjusted Trial Balance

A trial balance that reflects updated account balances after making adjusting entries, used to ensure the books are in balance and as a basis for preparing financial statements.

Prepaid Insurance

An additional account included in the adjusted trial balance, representing insurance expenses paid in advance.

Notes Payable

An additional account included in the adjusted trial balance, representing amounts owed by the company for borrowed funds.

Interest Payable

An additional account included in the adjusted trial balance, representing interest expenses owed by the company.

Unearned Service Revenue

An additional account included in the adjusted trial balance, representing revenue received in advance for services not yet provided.

Salaries and Wages Payable

An additional account included in the adjusted trial balance, representing salaries and wages owed by the company.

Income Statement

A financial statement that shows the revenues and expenses of a company, with the net income or net loss calculated by subtracting total expenses from total revenues.

Retained Earnings Statement

A financial statement that shows the beginning balance of retained earnings, adds net income, and subtracts dividends to calculate the ending balance of retained earnings.

Statement of Financial Position (Balance Sheet)

A financial statement that shows the assets, liabilities, and equity of a company at a specific point in time.

Prepaid Expenses (Alternative Treatment)

An alternative approach where prepaid expenses are recorded as expenses immediately, rather than as assets.

Unearned Revenues (Alternative Treatment)

An alternative approach where unearned revenues are recorded as revenue immediately, even if the services or products are not yet delivered.

Monetary Unit Assumption

The assumption that financial transactions are recorded in terms of money.

Economic Entity Assumption

The assumption that a clear separation exists between the financial activities of a business entity and those of its owners and other entities.

Time Period Assumption

The belief that financial information should be divided into specific time periods for easier analysis and reporting.

Going Concern Assumption

The assumption that a business will continue its operations indefinitely.

Historical Cost Principle

The principle that assets are recorded at their original cost and are not adjusted for changes in market value over time.

Fair Value Principle

The principle that assets and liabilities are reported at their current market value when that value is readily available and provides more relevant information.

Revenue Recognition Principle

The principle that revenue is recognized when a company satisfies its performance obligations, typically when goods are transferred or services are performed.

Expense Recognition Principle

The principle that expenses are recognized in the same period as the related revenues to accurately match costs with the revenue they help generate.

Full Disclosure Principle

The principle that requires companies to disclose all important information that could impact financial statement users in accompanying notes when it cannot be reported directly on the financial statements.

Intangible Assets

Long-lived assets that are not physical, such as goodwill, patents, copyrights, trademarks, and property.

Depreciation

The practice of allocating the cost of assets over a number of years by systematically expensing a portion of the asset's cost each year.

Less

Accumulated Depreciation Account:Shows the total amount of depreciation that the company has expensed so far in the asset's life.

Long-Term Investments

Investments in shares and bonds of other companies that are normally held for many years.

Current Assets

Assets that a company expects to convert into cash or use within one year of its operating cycle, including cash, investments, receivables, inventories, and prepaid expenses.

Equity

The ownership interest in a company, which can vary depending on the form of business organization.

Non-Current Liabilities

Obligations that a company expects to pay after one year, such as bonds payable, mortgages payable, and long-term notes payable.

Current Liabilities

Obligations that the company is to pay within the coming year of its operating cycle, including accounts payable, salaries and wages payable, and notes payable.

Operating Cycle

The average time it takes for a company to purchase inventory, sell it on account, and collect cash from customers.

Merchandising Operations

Companies that buy and sell merchandise as their primary source of revenue.

Cost of Goods Sold

The total cost of merchandise sold during a period, directly related to the revenue recognized from the sale of goods.

Operating Expenses

All expenses incurred in the purpose of selling inventory.

Perpetual Inventory System

A system where companies keep detailed records of the cost of each inventory purchase and sale, determining the cost of goods sold each time a sale occurs.

Periodic Inventory System

A system where companies do not keep detailed inventory records throughout the period, determining the cost of goods sold only at the end of the accounting period.

Just-in-Time (JIT) Inventory Methods

Inventory methods where companies manufacture or purchase goods only when needed, lowering inventory levels and costs.

Raw Materials

Basic goods that will be used in production but have not yet been placed into production.

Work in Process

Goods that have been placed into the production process but are not yet complete.

Finished Goods

Goods that are ready to be sold.

Physical Inventory

The process of counting, weighing, or measuring each kind of inventory on hand.

Goods in Transit

Goods that are in the process of being shipped or delivered but have not yet reached the buyer or seller.

Consigned Goods

Goods that are held by one party (the consignor) but are owned by another party (the consignee) who will sell the goods on behalf of the consignor.

Consigned goods

When a business keeps and sells goods on behalf of another business for a fee, without having ownership of the goods.

Inventory cost

The cost associated with acquiring and preparing goods for sale, including modifications made to the goods.

Specific identification method

A method of inventory costing where companies keep records of the original cost of each individual inventory item.

First-in, first-out (FIFO)

An assumed cost flow method where the earliest goods purchased are assumed to be the first ones sold.

Average-cost method

An assumed cost flow method where the cost of goods sold and the value of the inventory are determined based on the average price of all units in inventory.

Last-in, first-out (LIFO)

An assumed cost flow method where the newest inventory items are assumed to be the first ones sold, used for financial reporting in the United States.

Income statement effects

The impact of different cost flow assumptions on the income statement, which can affect net income.

Statement of financial position effects

The impact of different cost flow assumptions on the value of ending inventory, which can affect the accuracy of financial statements.

Tax effects

The impact of different cost flow assumptions on tax calculations, which can result in significant tax savings in a period of rising prices.

Average-Cost

The average-cost method is an inventory costing method that calculates the cost of goods sold and ending inventory by taking the average cost of all units available for sale during the period.

Consistency Concept

The consistency concept in accounting states that a company should use the same accounting principles and methods from year to year to ensure comparability of financial statements over time.

Inventory Errors

Inventory errors occur when there are mistakes in counting, pricing, or recognizing the transfer of legal title to goods in transit. These errors can affect both the income statement and the statement of financial position.