Ch. 1-3 Accounting Descriptions

Cash

The company’s cash in its bank account. Any activity in the cash account should be reported on the Statement of Cash Flows

Accounts Receivable

The amount that the company’s customers owe to the company. When the company makes a sale to a customer “on account” or “on credit”, the company records an accounts receivable to represent the money they have the rights to but have not yet received.

Prepaid Insurance

The insurance that the company has paid for upfront before the insurance coverage period has passed (i.e. paid on Day 1 of a 6 month policy). It is decreased as the insurance period passes.

Office Equipment

The equipment the company owns that it will use over a number of years. The equipment will be depreciated over its useful life (recorded in the Acc. Dep. Account below & depreciation expense).

Accumulated Depreciation

The cumulative depreciation expense that the company has recorded (it is recorded here instead of to equipment). It is a contra asset, as in it goes against the balance of the assets

Land

The land the company owns. It is not depreciated. The land account is increased when the land is purchased and decreased when it is sold.

Accounts Payable

The amount that the company owes to its suppliers/vendors. When the company purchases something “on account” or “on credit”, the company records an accounts payable to represent the money they owe to its supplier.

Wages Payable

Represents the wages the company owes to its employees for the days they have worked but not have been paid for. This will decrease once the company pays the employees.

Unearned Revenue

When a company’s customer pays the company before it has provided the goods or services to the customer. Once it provides them, the unearned revenue account is decreased and revenue is recorded.

Notes Payable

Represents a loan the company owes to the bank or a different financer (e.g. if someone provides financing for the purchase of equipment). Decreases as the company pays back the loan.

Common Stock (aka Capital Stock)

The amount the company’s owners (or shareholders/stockholders) have invested into the company (by buying shares).

Retained Earnings

Represents the company’s cumulative earnings over time minus the dividends it has paid to its owners. (Increased by revenues, Decreased by expenses, Decreases by dividends paid)

Operating

The cash the company receives or pays for its operations (normal revenues and expenses in the day to day business when achieving its goal of providing goods or services to customers).

Investing

The cash the company pays or receives when buying or selling a long term asset (equipment, land, etc.)

Financing

The cash the company receives to finance the business (either a loan from a bank or when the company”s owners/shareholders invest in the company). Also the cash the company pays its owners/shareholders as dividends.

Revenues

The income the company earns from providing goods or services to its customers. It might also earn revenue from other activities such as interest income on a note receivable.

Expenses

The expenses the company earns from various activities such as: insurance expense, wage expense, interest expense, depreciation expense. Also includes Cost of Goods Sold, which is the expense we record when we sell inventory.