FBLA Accounting 2

Accountant

Handles a broad range of responsibilities, makes business decisions, and prepares and interprets financial reports

Accounting Clerk

An entry-level job that can vary from specializing in one part of the system to doing a wide range of tasks

For-profit businesses

Operate to earn money for their owners

Profit

Money that is kept after all expenses of running a business have been deducted from the income

Not-for-profit organizations

Operate for purposes other than making a profit

(nonprofit organizations)

Public accounting firms

Provide clients a variety of accounting services

Audit

The review of a company's accounting systems and financial statements to confirm that they follow generally accepted accounting principles

Certified Public Accountant (CPA)

An accountant who has met certain education and experience requirements and passed a national test

Free enterprise system

People are free to produce goods and services they choose and use their money as they wish

Profit

The amount of money earned over and above the amount spent to keep the business operating

Loss

When a business spends more money than they earn

Entrepreneur

A person who transforms ideas for products or services into real-world businesses

Capital

Money that investors, banks, or business owners supply

Service Business

Provides a needed service for a fee

Merchandising Business

Buys finished products and resells them to individuals or other businesses

Manufacturing Businesses

Buys raw materials, uses labor and machinery to transform them into finished products, and sells the finished products to individuals or other businesses

Sole Proprietorship

A business owned by one person

Partnership

A business is owned by two or more persons who agree to operate the business as co-owners

Corporation

A business recognized by law to have a life of its own; must get permission from the state to operate

Charter

Legal permission from the state that gives a corporation certain rights and privileges

Shareholders

The corporation's legal owners

Accounting system

Designed to collect, document, and report on financial transactions affecting the business

Manual accounting system

The accounting information is processed by hand

Computerized accounting system

The financial information is recorded by entering it into a computer

FASB

Financial Accounting Standards Board; issue accounting rules

GAAP

Generally Accepted Accounting Principles; provide a way to communicate financial information in a form understood by those interested in the operations and financial conditions of a business

Financial Reports

Summarized information about the financial status of a business

Financial accounting

Focusses on reporting information to external users

Management accounting

Focuses on reporting information to management; accounting for internal users of accounting information

Business entity

Exists independently of its owner's personal holdings

Accounting period

A period of time covered by an accounting report

Going concern

The accounting assumption that a business is expected to survive and operate indefinitely

Property

Anything of value that a person or business owns and therefore controls

Financial claim

A legal right to property

Credit

An agreement to pay for a purchase at a later time

Creditor

A business or person to whom money is owed

Assets

Property or items of value owned by a business

Equities

The accounting term for the financial claims to the assets

Owner's equity

Measured by the dollar amount of the owner's claims to the total assets of the business

Liabilities

The creditor's claims to the assets of the business

Accounting Equation

Assets \= Liabilities + Owner's Equity

Business Transaction

An economic event that causes a change, either an increase or a decrease, in assets, liabilities, or owner's equity

Account

A subdivision under assets, liabilities, or owner's equity

Accounts receivable

The total amount of money owed to a business; money to be received later

Accounts payable

The amount owed to the creditors of a business

Investment

Money or other property paid out in order to produce profit

On account

The purchase of an item on credit

Revenue

Income earned from the sale of goods or services

Expense

The cost of products or services used to operate a business

Withdrawal

The removal of cash or another asset rom the business by the owner for personal use

Chart of accounts

A list of all accounts used by a business

Ledger

A group of accounts

Double-entry accounting

A system that recognizes the different sides of business transactions as debits and credits

Debit

An entry on the left side of an account

Credit

An entry on the right side of an account

T account

A visual representation of a ledger account; used to show the dollar increase or decrease in an account caused by a transaction

Normal balance

The increase side of an account

Temporary accounts

Start each new accounting period with zero balances

Permanent accounts

Continuous from one accounting period to the next

Revenue recognition

The GAAP principle that revenue is recorded on the date it is earned even if cash has not been received

Accounting cycle

Accounting period of a business

Source document

A paper prepared as evidence for a transaction

Invoice

Lists specific information about a business transaction involving the buying or selling of an item on account

Receipt

A record of cash received by a business

Memorandum

A brief written message that describes a transaction that takes place within a business

Check stub

Lists the same information that appears on a check: the date written, the person or business to whom the check was written, and the amount of the check

Journal

A record of the transactions of a business

Journalizing

The process of recording business transactions in a journal

Fiscal year

An accounting period of 12 months

Calendar year

When a fiscal year for a business begins on Jan 1 and ends on Dec 31

General Journal

An all-purpose journal in which all of the transactions of a business may be recorded

Posting

The process of transferring information from the journal to individual general ledger accounts

General ledger

A permanent record organized by account number

Ledger account forms

Where information about specific accounts is recorded

Proving a ledger

Adding all the debit balances and credit balances to see whether they are equal

Trial balance

The formal way to prove the ledger; list of all the account names and their current balances

Transposition error

Occurs when two digits within an amount are accidentally reversed

Slide error

Occurs when a decimal point is moved by mistake

Correcting entry

An entry made to correct an error in a journal entry discovered after posting

Work sheet

A working paper used to collect information from the ledger accounts in one place

Matching principle

Requires matching expenses incurred in an accounting period with the revenue earned in the same period

Net income

The amount of revenue that remains after expenses for the period have been subtracted

Net loss

Decreases owner's equity

Financial statements

Summarizes the changes resulting from business transactions that occur during an accounting period

Income statement

Reports the net income or net loss for a specific period of time

Statement of changes in owner's equity

Summarizes changes in the owner's capital account as a result of business transactions that occur during the period

Balance Sheet

A report of the balances in the permanent accounts at the end of the period; reports the assets of a business and the claims against those assets on a specific date

Report form

A balance sheet format that lists classifications one under another

Statement of cash flows

Summarizes the amount of cash the business took in, the sources of cash, the amount of cash the business paid out, the uses of cash

Ratio analysis

The process of evaluating the relationship between various amounts in the financial statements

Profitability ratio

Used to evaluate the earnings performance of the business during the accounting period

Return on sales

Used to examine the portion of each sales dollar that represents profit; net income/sales

Current assets

Those used up or converted to cash during the normal operating cycle of the business

Current liabilities

Debts of the business that must be paid within the next accounting period

Working capital

The amount by which current assets exceed current liabilities

Liquidity ratio

A measure of the ability of a business to pay its current debts as they become due and provide as they become due and to provide for an unexpected need for cash

Current ratio

Reflects the relationship between current assets and current liabilities

Quick ratio

A measure of the relationship between short-term assets and current liabilities

Closing Entries

Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account