Principles Of Accounting 1 (Exam 1)

Accounting

An information system that provides reports to stakeholders about the economic activities and condition of a business.

Business Entity Concept

A concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business.

generally accepted accounting principles (GAAP)

Generally accepted guidelines for the preparation of financial statements. (In the USA)

Financial Accounting Standards Board (FASB)

The authoritative body that has the primary responsibility for developing accounting principles. (Sets the rules for GAAP)

Securities and Exchange Commission (SEC)

An agency of the U.S. government that has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

International Accounting Standards Board (IASB)

An organization that issues International Financial Reporting Standards for many countries outside the United States.

International Financial Reporting Standards (IFRS)

Emerged to reduce cross-country differences in accounting standards, primarily in countries outside of North America.

Matching Concept

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Cost Concept

A concept of accounting that determines the amount initially entered into the accounting records for purchases.

Forms of Business Entities

Proprietorship, Partnership, Corporation, and Limited Liability Company

Revenue Recognition Concept

The accounting concept that supports reporting revenues when the services are provided to customers.

Accounting Equation

Assets= Liabilities + Owner's Equity

Assets

The resources owned by a business.

Liabilities

The rights of creditors that represent debts of the business.

Owner's Equity

The owner's right to the assets of the business.

Expenses

Assets used up or services consumed in the process of generating revenues.

Revenues

Increases in assets and owner's equity as a result of selling services or products to customers

Net Income

The amount by which revenues exceed expenses.

Net Loss

The amount by which expenses exceed revenues.

Income Statement

A summary of the revenue and expenses for a specific period of time, such as a month or a year.

Statement of Owner's Equity

A summary of the changes in owner's equity that have occurred during a specific period of time, such as a month or a year.

Balance Sheet

A list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a month or a year.

Cash Flow Statement

A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

Debit

Amount entered on the left side of an account.

Credit

Amount entered on the right side of an account.

T-Accounts

The simplest form of an account.

Journalizing

The process of recording a transaction in the journal.

Journal Entries

The form of recording a transaction in a journal.

Normal Balances

The normal balance of an account can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

Adjusting Entires

The journal entries that bring the accounts up to date at the end of the accounting period.

Cash Basis Accounting

Under this basis of accounting, revenues and expenses are reported in the income statement in the period in which cash is received or paid.

Accural Basis Accounting

Under this basis of accounting, revenues and expenses are reported in the income statement in the period in which they are earned or incurred.

Charts of Accounts

A list of the accounts in the ledger.

Deferrals

To defer or to delay recognizing certain revenues or expenses on the income statement until a later, more appropriate time.

Accruals

Adjustments for revenues that have been earned but are not yet recorded in the accounts, and expenses that have been incurred but are not yet recorded in the accounts.

Prepaid Expenses

Items such as supplies that will be used in the business in the future.

Unearned Revenue

The liability created by receiving revenue in advance.

Accured Expenses

Expenses that have been incurred but not recorded in the accounts.

Accured Revenue

Income that has been incurred but not received.

Contra Account

An account offset against another account.

Depreciation

The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life.

Accumulated Depreciation

The contra asset account credited when recording the depreciation of a fixed asset.

Net Book Value

The cost of a fixed asset minus accumulated depreciation on the asset.

Adjusted Trail Balance

The trial balance prepared after all the adjusting entries have been posted.

Fixed Assets

Long-term or relatively permanent tangible assets such as equipment, machinery, and buildings that are used in the normal business operations and that depreciate over time.

Current Asset

Cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business.

Current Liabilities

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.

Current Ratio

A financial ratio that is computed by dividing current assets by current liabilities.

Fiscal Year

The annual accounting period adopted by a business.

Income Summary

An account to which the revenue and expense account balances are transferred at the end of a period.

Liquidity

The ability to convert assets into cash.

Long-Term Liabilities

Liabilities that usually will not be due for more than one year.

Natural Business Year

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Real (Permanent) Accounts

Term for balance sheet accounts because they are relatively permanent and carried forward from year to year.

Temporary (Nominal) Accounts

Accounts that report amounts for only one period.

Solvency

The ability of a firm to pay its debts as they come due.

Working Capital

The excess of the current assets of a business over its current liabilities.

4 General Financial Statements

Income Statement, Statement of Owner's Equity, Balance Sheet, and Statement of Cash Flow