Financial Accounting Core Concepts & The Accounting Cycle

Comprehensive vocabulary flashcards covering financial accounting framework, business transaction measurement, adjusting entries, financial statements, closing entries, and GAAP standards.

Financial Accounting

Accounting information provided to external users to measure business activities of a company and communicate those measurements to decision makers outside the organization.

The Accounting Cycle

The full sequence of accounting procedures performed during and at the end of an accounting period, including measuring external transactions, posting adjusting entries, preparing financial statements, and posting closing entries.

Cash-Basis Accounting

An accounting method under which transactions are recorded only at the time cash is received or paid.

Accrual-Basis Accounting

An accounting method required by GAAP in which economic events affecting assets, liabilities, revenues, and expenses are recorded as they occur, regardless of when cash is exchanged.

Revenue Recognition Principle

Under accrual-basis accounting, the requirement to record revenues at the time goods and services are provided to customers.

Expense Recognition Principle

Under accrual-basis accounting, the requirement to record expenses at the time costs are used in business operations to help generate revenues.

Adjusting Entries

Entries made at the end of an accounting period to update balances of assets and liabilities (and their related revenues and expenses) for timing differences between cash flows and economic activities.

Prepaid Expenses

Assets created when a company pays cash in advance to acquire a resource that is used in a later period.

Deferred Revenues

Liabilities created when a company receives cash in advance from customers before products or services are provided.

Accrued Expenses

Costs incurred in the current period that have not yet been paid in cash, creating a liability and an expense.

Accrued Revenues

Revenues earned for products or services provided in the current period that have not yet been billed or collected in cash, creating an asset and a revenue.

Book Value

The original cost of an asset minus its accumulated depreciation (also known as carrying value).

Adjusted Trial Balance

A list of all general ledger accounts and their updated balances prepared after adjusting entries have been recorded and posted at the end of the period.

Closing Entries

Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account, resetting the temporary accounts to zero for the next period.

Temporary Accounts

Accounts whose balances are closed to zero at the end of each accounting period, including revenues, expenses, and dividends.

Permanent Accounts

Accounts that carry their cumulative balances forward into future periods, including assets, liabilities, and stockholders' equity accounts.

Post-Closing Trial Balance

A list of all permanent accounts and their balances prepared after closing entries have been posted to verify that total debits equal total credits for the next period.

External Transactions

Transactions conducted between the company and a separate economic entity or individual.

Internal Transactions

Events occurring within the company that do not involve an exchange with a separate economic entity but still affect the company's financial position.

Basic Accounting Equation

The core balance showing that total company resources equal total claims to resources: $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$.

Assets

Total resources owned or controlled by a company that provide future economic benefits.

Liabilities

Amounts owed by a company to creditors for past transactions or events.

Stockholders' Equity

The owners' claims to the company's total resources, consisting of common stock and retained earnings.

Chart of Accounts

A list of all account names used to record transactions of a company.

Expanded Accounting Equation

An expansion of the basic accounting equation showing how revenues, expenses, and dividends impact retained earnings: $\text{Assets} = \text{Liabilities} + \text{Common Stock} + \text{Revenues} - \text{Expenses} - \text{Dividends}$.

Debit

The left side of an account or T-account; used to increase assets, expenses, and dividends, or decrease liabilities, equity, and revenues.

Credit

The right side of an account or T-account; used to increase liabilities, equity, and revenues, or decrease assets, expenses, and dividends.

DEALOR

A memory aid where Dividends, Expenses, and Assets increase with a Debit (left), while Liabilities, Owners' Equity, and Revenue increase with a Credit (right).

General Ledger

A collection containing each individual account with its specific transactions and resulting account balance.

Posting

The process of transferring debit and credit transaction information from the journal to individual general ledger accounts.

T-Account

A simplified version of a general ledger account shaped like a 'T', featuring the account title at the top, a left side for debits, and a right side for credits.

Trial Balance

An internal document listing all accounts and their debit or credit balances at a particular date to check that total debits equal total credits.

Operating Activities

Transactions related to the primary operations of the company, such as providing goods/services and incurring operational costs like rent, salaries, utilities, taxes, and advertising.

Investing Activities

Cash transactions involving the purchase and sale of investments and long-term assets.

Financing Activities

Cash transactions with lenders and stockholders, such as borrowing money, issuing common stock, or paying dividends.

Corporation

A business organization legally separate from its owners, offering stockholders limited liability.

Sole Proprietorship

A business owned by one person that does not offer limited liability.

Partnership

A business owned by two or more persons that does not offer limited liability.

Income Statement

A primary financial statement that reports a company's revenues and expenses over an interval of time to determine net income or net loss.

Net Income

The positive difference when total revenues exceed total expenses ($\text{Revenues} - \text{Expenses} = \text{Net Income}$).

Statement of Stockholders' Equity

A financial statement summarizing the changes in common stock and retained earnings over an interval of time.

Dividends

Cash payments distributed to stockholders representing a distribution of net income, which are not considered expenses.

Balance Sheet

A financial statement presenting the financial position of a company on a particular date by showing that assets equal liabilities plus stockholders' equity.

Statement of Cash Flows

A financial statement measuring cash receipts and cash payments over an interval of time across operating, investing, and financing activities.

Generally Accepted Accounting Principles (GAAP)

The standard rules and principles of financial accounting required for reporting financial information to external users in the United States.

Financial Accounting Standards Board (FASB)

An independent, private body with primary responsibility for establishing GAAP in the United States.

Securities and Exchange Commission (SEC)

The U.S. government agency that governs FASB and requires public companies to submit annual reports (Form 10-K) and quarterly reports (Form 10-Q).

Auditors

Trained independent professionals hired to express an opinion on whether financial statements are prepared in compliance with GAAP and free of material misstatement.

Qualitative Characteristics of Useful Financial Information

The conceptual framework hierarchy that includes fundamental characteristics (relevance and faithful representation) and enhancing characteristics (comparability, verifiability, timeliness, and understandability) constrained by cost-effectiveness.

Periodicity Assumption

An underlying GAAP assumption stating that the economic life of an enterprise can be divided into artificial time periods for periodic financial reporting.