Financial Accounting and the Accounting Cycle Flashcards

Vocabulary flashcards covering core accounting definitions, GAAP principles, double-entry rules, adjusting entries, financial statements, and closing entries based on Chapters 1, 2, and 3.

Financial Accounting

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

Corporation

A company that is legally separate from its owners, providing stockholders with limited liability.

Sole Proprietorship

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

Partnership

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

Accounting Equation

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

Assets

Total resources of a company that will benefit future operations, such as cash, supplies, equipment, land, and accounts receivable.

Liabilities

Amounts owed to creditors, representing creditors' claims to company resources.

Stockholders' Equity

Owners' claims to resources, composed of common stock (external source) and retained earnings (internal source).

Revenues

Amounts recognized when a company sells products or provides services to customers.

Expenses

Costs of providing products and services and running business operations during the current period.

Net Income

The difference calculated as $\text{Revenues} - \text{Expenses} = \text{Net Income}$; also called earnings or profit.

Dividends

Cash distributions made by a company to its stockholders that reduce retained earnings but are not classified as expenses.

Operating Activities

Transactions related to the primary operational activities of a company, including providing products and services and paying necessary operational costs like rent, salaries, and utilities.

Income Statement

A primary financial statement that reports a company's revenues and expenses over an interval of time to assess profitability.

Statement of Stockholders' Equity

A primary financial statement that summarizes the changes in stockholders' equity (common stock and retained earnings) over an interval of time.

Balance Sheet

A primary financial statement that presents the financial position of a company on a particular date by confirming that resources equal claims to resources ($\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$).

Statement of Cash Flows

A primary financial statement that measures cash receipts and cash payments over an interval of time, categorized into operating, investing, and financing activities.

Generally Accepted Accounting Principles (GAAP)

The official rules and financial accounting standards that companies must follow when preparing financial statements in the United States.

Financial Accounting Standards Board (FASB)

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

International Accounting Standards Board (IASB)

An independent body that sets global accounting standards used internationally.

Securities and Exchange Commission (SEC)

The U.S. government agency that governs public financial reporting and oversees FASB.

Form 10-K

The annual report that all public companies in the U.S. are required by the SEC to file at the end of each fiscal year.

Auditors

Trained independent third parties hired by a company to verify whether financial statements comply with GAAP and are free of material misstatements.

Qualitative Characteristics of Useful Information

The framework of attributes required for financial accounting to be useful, split into fundamental characteristics (relevance and faithful representation) and enhancing characteristics (comparability, verifiability, timeliness, and understandability).

Relevance

A fundamental qualitative characteristic of accounting information indicating that the information has predictive value, confirmatory value, and materiality.

Faithful Representation

A fundamental qualitative characteristic of accounting information indicating that it is complete, neutral, and free from error.

Underlying Assumptions of GAAP

The four foundational concepts that underpin GAAP: economic entity, monetary unit, periodicity, and going concern.

Economic Entity Assumption

The GAAP assumption stating that all economic events can be identified with a particular economic entity that is separate from its owners.

Monetary Unit Assumption

The GAAP assumption stating that a unit of scale measurement (such as the U.S. dollar) is used to record financial statement items.

Periodicity Assumption

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

Going Concern Assumption

The GAAP assumption stating that a business entity will remain in operation indefinitely into the foreseeable future.

External Transactions

Economic events and exchanges conducted between a company and a separate external entity or individual.

Internal Transactions

Events occurring within a company that do not involve an exchange with an outside economic entity.

Account

A detailed record of all transaction activities related to a specific item over a period of time.

Chart of Accounts

A complete index or listing of all account titles used by a company to record its business transactions.

Expanded Accounting Equation

The detailed breakdown of the accounting equation incorporating retained earnings components: $\text{Assets} = \text{Liabilities} + \text{Common Stock} + \text{Revenues} - \text{Expenses} - \text{Dividends}$.

Deferred Revenue

A liability account created when a company receives cash in advance from customers before goods or services are provided.

Debit

The left side of a ledger account or T-account, used to increase asset, expense, and dividend accounts.

Credit

The right side of a ledger account or T-account, used to increase liability, stockholders' equity, and revenue accounts.

DEALOR

A mnemonic device representing debit and credit rules: Dividends, Expenses, and Assets (DEA) increase with a Debit; Liabilities, Owners' Equity, and Revenue (LOR) increase with a Credit.

Journal

A chronological record detailing all economic transactions affecting a firm before they are posted to general ledger accounts.

Journal Entry

The formal recording of a business transaction in a journal, ensuring that total debits equal total credits.

General Ledger

A collection containing all individual accounts of a company, along with their detailed transaction entries and balances.

Posting

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

T-Account

A simplified visual layout of a general ledger account formatted with an account title across the top, debits on the left side, and credits on the right side.

Trial Balance

An internal document listing all company accounts and their balances at a given date, constructed to verify that total debits equal total credits.

Accounting Cycle

The step-by-step procedure performed during and at the end of each period to record external transactions, post adjusting entries, prepare financial statements, and execute closing entries.

Accrual-Basis Accounting

An accounting framework required by GAAP where revenues are recorded when goods or services are provided and expenses are recorded when costs are used, regardless of cash flow timing.

Cash-Basis Accounting

An accounting method where revenues are recorded only when cash is received and expenses are recorded only when cash is paid (not permitted under GAAP).

Adjusting Entries

Entries recorded at the end of an accounting period to update asset and liability balances and recognize unrecorded revenues and expenses.

Prepaid Expenses

Asset accounts created when a company pays cash in advance for goods or services to be consumed in a future period.

Accumulated Depreciation

A contra asset account that accumulates the total depreciation expense recorded against a long-term asset over its useful life.

Book Value

The original cost of an asset minus its accumulated depreciation; also called carrying value.

Accrued Expenses

Costs incurred in the current period that have not yet been paid in cash, requiring an adjusting entry to debit an expense and credit a liability.

Accrued Revenues

Revenues earned for goods or services provided in the current period that have not yet been billed or collected in cash, requiring an adjusting entry to debit an asset and credit a revenue.

Adjusted Trial Balance

A comprehensive list of all account balances compiled after updating general ledger accounts with adjusting entries.

Temporary Accounts

Revenue, expense, and dividend accounts whose balances are zeroed out at the end of each period during the closing process.

Permanent Accounts

Asset, liability, and stockholders' equity accounts whose balances carry forward into subsequent accounting periods.

Closing Entries

End-of-period entries that transfer temporary account balances (revenues, expenses, and dividends) into Retained Earnings and reduce temporary account balances to zero.

Post-Closing Trial Balance

A final listing of permanent accounts and their balances generated after posting closing entries to confirm equality of debits and credits before the new period begins.