Chapter 2: Investing and Financing Decisions and the Accounting System

Account

A standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item.

Accounting Cycle

The process used by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle.

Additional Paid-in Capital (Paid-in Capital, Contributed Capital in Excess of Par)

The amount of contributed capital less the par value of the stock.

Assets

Economic resources owned or controlled by a company; they have measureable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future.

Common Stock

The basic voting stock issued by a corporation

Cost (Historical Cost)

The cash-equivalent value of an asset on the date of the transaction. 

Credit

The right side of an account.

Current Assets

Assets that will be used or turned into cash within one year.

Current Liabilities

Short-term obligations that will be paid or settled within the coming year in cash, goods, other current assets, or services.

Debit

The left side of an account. 

Going Concern Assumption

Businesses are assumed to continue to operate into the foreseeable future (also called the continuity assumption)

Journal Entry

The accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.

Liabilities

Measureable obligations resulting from a past transaction; they are expected to be settled in the future by transferring assets or providing services.

Monetary Unit Assumption

Accounting information should be measured and reported in the national monetary unit without any adjustments for changes in purchasing power. 

Par Value

1) The nominal value per share of stock as specified in the corporate charter

2) Also, another name for bond principal, or the maturity of a bond (in Chapter 10)

Retained Earnings

Cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.

Seperate Entity Assumption

Business transactions are seperate from the transactions of owners.

Stockholders’ Equity (Shareholders’ or Owners’ Equity)

The Financing provided by the owners and the operations of the business.

T- Account

A tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company’s activities.

Transaction

1) An exchange between a business and one or more external parties to a business or

2) A measureable internal event such as the use of assets in operations.

Transaction Analysis

The process of studying a transaction to determine its ecnomic effect on the business in terms of the accounting equation.

Trial Balance

A list of all acounts with their balance to provide a check on the equality of the debits and credits.