Financial Accounting 201

Accounting Equation

Asset = Liability + Equity

Common stock

The increase in equity representing an owner’s investment in the company.

Expense recognition(Matching) Principle

Salaries are not recorded when employees are paid, salaries are recorded in the same period the emploee’s work generated revenue

Income statement

The financial statement showsthe overall profitability of a company for a specific period of time, such as month,, quarter, or year.

Net Income

Amount earned after subtracting all the expenses from all the revenues for a period.

Statement of cash flows

This is the final financial statement prepared by the company at the end of a financial period and is segregated into the sections operating, investing, and financing activities.

Assets

Resources that a company owns or control and are expected to yield future benefits for the company.

Corporation

A separate entity with the same rights and responsibilities as a person, pays additional income taxes, issues stock to shareholders, and has an indefinite business life.

Expenses

Decreas in equity from costs of providing products and services to customers.

Internal controls

Procedures to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies and include separation of duties, establishment of responsibilities, and regular independent reviews.

Retained Earnings

This is increased by revenues&gains; decreased by espenses, loses, and dividends; and carried forward from period to period.

Statement of Retained Earnings

Explains changes in equity from net income(loss) and any dicidends over a period of time.

Audit

The examination of whether financial statements are prepared using proper concepts and rules.

Dividends

Distributions, typically cash or additional stock shares, to owners of a company. There are not expense.

Financial Acocunting Stands Board (FASB)

This group is given the task of setting concepts and rules that apply to financial statements in United States.

Liabilities

Creditor’s claims

Revenue recognition principle

Prescribes that revenue is recognized when goods or services are delivered to customers.

Time period assumption

The life of company can be delivered into set periods, such as month, quarters, and year, and reports are prepared for those periods.

Balance Sheet

Describes a company’s financial position at a point in time, typically presented in either the account form or the report form

Equity

The owner’s or share holder’s claims on the asset of the company, also called net assets.

Financial Accounting

Primarily provides information for the needs of external users.

Materiality

Concept that all items that are reasonably likey to impact investor’s decision-making must be recorded or reported in detail in a business’s financial statements using GAAP standards. (not relevance)

Revenues

These increase equity and are generated by providing products and/or services to customers.

Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electoronically. Typically does not include the preparation of financial statements.

Expanded accounting equation

Asset = Liability + Contributed capital + Retained earings + Revenues -Expenses -Dvidends

General Accepted Accounting Principles(GAAP)

The concepts and rules govern financial accounting in the United States.

Measurement/Cost principle

Acocunting infromation is measured on a cash or equal-to-cash basis. If a company receives$1000 for services, those services are valued at $1000.

Securities and Exchange Comission(SEC)

This is a United States agency that oversees proper use of the concepts and rules. by companies that sell stock and debt to the public in the United States.

Classified balance sheet

Groups permanent accounts into categories on a financial statement with current items being reported before noncurrent items.

General ledger

A record of all accounts used by a company and shows the beginning balance, increases, decreases, and ending balance in each of the accounts.

Prepaid Expense

When a company pays for a product or service prior to the product being used or the service being provided to the company.

Credit

The right side of acocunt.When a company fulfills an obligation this will increase a revenue.

Journalizing

Recording tranzacrtions in the records of the company.

Receivable

Represents an amount owed to the company for products or services that company has already provided.

Debit

The left side of an account. When a company obtains an asset this will increas the asset.

Normal balance

The side that increases the balance of an account.

Supplies

Tangible resources owned by a company that will be used by the company within a year.

Acocunt balance

The difference between total debits and total credits for an account, including the beginning balance.

Doubble-entry acocunting

System that requires the accounting equation remain in balance. This means each transaction has at least two accounts, at least one debit and one credit, and ttal debits equal total credits.

Payable

Promises to pay an amount to an entity in the future for products or services that have been provided.

Trial balance

A list of all ledger acocunts and their balances at a point in time. This is NOT a financial statement.

Chart of acocunts

A list of all ledger with an idenfication numbers assigned to each account.

General journal

Used to record any transaction that the company makes to change the balance in at leaset two accounts. This includes the date, accounts, and amounts of all transactions.

Posting

Transferring journal entry information to the ledger.

Unearned revenue

Recorded when customers pay in advance for products or services that the company will provide in the future.

Accounting cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance(or optional reversing entries).

Adjusted trial balance

List of accounts and balances prepared after period-end adjustments are recorded and posted.

Current assets

Cash and other resources of a business expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer.

Permanent accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed.

Temporary accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period.

Acrrual basis accounting

Accounting system that recognizes revenues when goods or srices are provided and expenses when incurred; the basis for GAAP.

Adjusting entry

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue accnout.

Current liabilities

Ovligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer.

Plant assets

Tangible long-lived assets used to produce or sell products and services; also called fixed assets.

Unadjusted trial balance

List of acconuts and balances prepared before accounting adjustments are recorded and posted.

Accrued expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for these transactions involve increasing expenses and increasing liabilities.

Book value

Asset’s acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of account.

Depreciation

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Post-closing trial balance

List of permanet accounts and their balances from the ledger after all closing entries are journalized and posted.

Acrrued revenues

Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for these transactions involve increasing assets and increasing revenue.

Closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawals (dividends for a corporation) accounts to the capital account.(or retained earnings for a corporation)

Intangible assets

Noncurrent resources used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Profit margin

Ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue.

Accumulated depreciation

Cumlative sum of all expense recorded for a plant asset. This is contra asset account.

Contra account

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance.

Long-term liabilities

Obligations NOT due to be paid within one year or the operating cycle, whichever is longer.

Straight-line depreciation

Method that allocates an equal portion of the depreciable cost of plant asset(cost minus salvage) to each accounting period in its useful life.

Merchandise inventory

Goods that a company owns andd expects to sell to customers.

Perpetual inventory system

Method that maintains continuous-records of the cost of inventory avaiable abd the cost of goods sold.

Cash discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.

Purchases discount

Term used by a ourchaser to descreibe a cash discount granted to the purchaser for paying within the discount period.

Cost of goods sold

Value of inventory sold to customers during a period. Not the price the buyer pays for the inventory.

Sales returns and allowances

Refunds or credits given to customers by a seller for unsatisfactory merchandise. Sometimes the product is sent back to the seller and sometimes the customer keps the product.

Gross profit

Net sales minus cost of goods sold.

Cash equivalennts

Short-term investment assets that are readily convertible to a known cash amounut of suffciently close to their maturity date (usually within 90 days) so that market value is not sensitive to interest rate changes.

Fraud triangle

Highlights three factors that push a person to commit illegal acts: opportunity, pressure(incentive), and rationalization(attitude).

Liquidity

Availability of resources to meet short-term cash-requirements.

Bank reconciliation

Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance.

Allowance for doubtful accounts

Contra asset account with a balnace approximating uncollectible accounts receivable.

Allowance method

Procedure that estimates and matches bad debts expense with sales for the period and/or reports accounts receivable at estimated realizable value.

Direct write-off method

Method that records the loss from an uncollectible account receivable at the time it is determined to be uncollectible, no attempt is made to estimate bad debts.

Accounts receivable

Amounts due from customers for credit sales; backed by the customer’s general credit standing.

Notes receivable

Written promise to obtain a specific sum of money on a specified future date; recorded by the holder of the agreement.

Aging of accounts receivable

Process of classifying accounts receivable by how long they are past due for purposes of estimating uncollectible accounts.

Principle of a note

Amount that the signer of a note agrees to pay back when it matures, not including interest.

Amortization

Process of allocating the cost of a intangible asset to expense over its estimated useful life.

Capital expenditures

Additional cosrs of plant assets that provide material benefits extending beyond the current period.

Salvage value

Estimate of amount to be recovered at the end of an asset’s useful life; aslo called residual or scrap.

Useful life

Length of time an asset will be productively used in the operations of a business.

Gross pay

Total compensation earned by an emploee.

Net pay

Total compensation earned by an employee less all deductions; also called take-homepay.

Federal Insurance Contribution Act (FICA) taxes

Taxes assesed on both employers and employees; for Social Security and Medicare programs.

Bond

Written promise to pay the par (or face) value and interest at a stated contract rate; often issued in denominations of $1000.

Mortage

Legal loan agreement that protects a lender by gibing. the lender the right to be paid from the sale of a borrower’s assets identified in the agreement.

Paid-in capital

total amount of cash and other assets received from stockholders in exhange of stock.

Par value of stock

Values assigned a share of stock by the corporate charter when stock is authorized.

Market value per share

Price at which stock is bought or sold at a given poiiint in time.

Finacial activities

Transactions with owners and creditors that include obtaining cash from issuing debt, repaying amounts borrowed, and obtaining cash from or distributing cash to owners.

Investing activities

Transactions that involve purchasing and selling long-term assets; includes making and collecting notes receivable and investments in other than cash equivalents.

Operating acrivities

Activities that involve the production or purchase of merchandise and the sale of goods or services of customers, including expenditures related to adminisering the business.