Introduction to Financial Accounting and Internal Controls

Vocabulary terms and definitions covering basic accounting equations, debits and credits, business forms, internal control principles, bank reconciliations, and journal entries.

Basic Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$$

Assets

Economic resources presently controlled by a company that have measurable value.

Liabilities

Amounts that a company owes to creditors.

Stockholders' Equity

The owners' claim on a corporation's assets after liabilities are deducted.

Contributed Capital

Amounts invested in the corporation by its stockholders.

Retained Earnings

The accumulated earnings of a company that have not been distributed to stockholders.

Balance Sheet

The financial statement that reports assets, liabilities, and stockholders' equity.

Expanded Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Contributed Capital} + \text{Revenue} - \text{Expenses} - \text{Dividends}$$

DEALER

An acronym indicating that Debits increase Dividends, Expenses, Assets; and Credits increase Liabilities, Equity, Revenue.

Net Income

Revenue minus expenses.

Net Loss

Occurs when expenses are greater than revenue.

Revenue

Amounts earned by providing goods or services to customers.

Expenses

Costs incurred to generate revenue.

Dividends

Distributions of a company's earnings to its stockholders; dividends are not expenses.

Sole Proprietorship

A business organization owned by one person who is personally liable for all debts of the business.

Partnership

A business organization owned by two or more people where each partner is personally liable for debts of the business.

Corporation

A separate legal entity owned by stockholders, where stockholders are not personally liable for the corporation's debts.

Stockholder

An owner of a corporation whose ownership is indicated by a legal document.

Cash

An asset representing money available to the company.

Accounts Receivable

Amounts owed to the company by customers.

Supplies

Items owned by a company that are used in operating the business.

Prepaid Expenses

Expenses paid in advance; recorded as assets until they are used.

Property, Plant, and Equipment

Long-term assets used in operating a business.

Land

A noncurrent asset used or owned by a business.

Accounts Payable

Amounts owed to suppliers or other creditors for purchases made on account.

Wages Payable

Wages owed to employees that have not yet been paid.

Notes Payable

Amounts owed under a formal written promise to pay.

Deferred Revenue

Cash received before the company has earned the revenue; it is classified as a liability because the company owes goods or services to the customer.

Current Asset

An asset expected to be used or converted into cash in the near term.

Noncurrent Asset

An asset that is not expected to be used or converted into cash in the near term.

Current Liability

A liability expected to be paid in the near term.

Long-Term Liability

A liability that is not expected to be paid in the near term.

Sarbanes-Oxley Act

A law enacted to help prevent corporate accounting scandals and strengthen corporate controls.

Fraud

Fraudulent activity involving intentional deception for personal or organizational gain.

Fraud Triangle

The three factors associated with fraud: incentive, opportunity, and rationalization.

Incentive

A reason or motivation that encourages someone to commit fraud.

Opportunity

A situation that allows someone to commit fraud.

Rationalization

The ability of a person to justify or explain their fraudulent behavior to themselves.

Establish Responsibility

An internal control principle that involves assigning each task to only one employee.

Segregation of Duties

An internal control principle stipulating that one employee should not initiate, approve, record, and have access to the assets involved in the same transaction.

Restrict Access

An internal control principle of physically and electronically protecting valuable assets and information.

Document Procedures

An internal control principle of creating records of business activities and transactions.

Independently Verify

An internal control principle of checking the work performed by others within the company.

Internal Control

A system of procedures designed to protect assets, improve accuracy, and reduce errors and fraud.

Deposit in Transit

A deposit recorded by the company that has not yet appeared on the bank statement.

Outstanding Check

A check written by the company that has not yet cleared the bank.

Bank Reconciliation

A comparison of the company's cash records with the bank's records to identify differences.

NSF Check

Non-Sufficient Funds check; a customer's check that the bank returns because the customer did not have sufficient funds.

Bank Service Charge

A fee charged by the bank to the company.

EFT

Electronic Funds Transfer; electronic exchange of funds that usually results in a book adjustment when not yet recorded by the company.

Accrual Accounting

An accounting method where revenues are recognized when earned and expenses are recognized when incurred.

Journal Entry

A formal record of a business transaction using debits and credits.

Debit

The left side of a journal entry.

Credit

The right side of a journal entry.

On Account

An exchange where a transaction occurs without immediate cash payment.

Petty Cash

A small amount of cash kept available for minor business expenditures.

Wage Expense

Wages incurred by employees as a cost of operating the business.

Credit Memorandum

A bank-side document used to communicate an increase to the company's bank balance.

Debit Memorandum

A bank-side document used to communicate a decrease to the company's bank balance.