Intro to Accounting Exam 1

Ch. 1,2,3

Asset

This account category represents what a corporation owns. It is located on the balance sheet.

Balance Sheet

This financial statement provides a snapshot of a corporation's financial position. It contains assets, liabilities, and equity.

Conservatism

This accounting principle states that assets and revenues should not be overstated and liabilities and expenses should not be understated.

Consistency

This accounting principle states that once an accounting rule is put in place, the corporation shall continue to use the same accounting rule going forward.

Equity

This account category represents the owners' share of assets after all liabilities have been paid. It is located on the balance sheet and primarily contains contributed capital and retained earnings.

Ethics

The knowledge of right versus wrong that is often the guidance of our country's laws and is the foundation to the value of accounting.

External Users of Accounting Information

Individuals who are not employed by a corporation and only have access to financial information via financial statements. Examples include shareholders, lenders, customers, and government agencies.

Financing Activities

The category of cash flows that represents long-term debt (bonds and long-term notes payable) or the issuance of common stock.

Full Disclosure

This accounting principle states that all information that will impact an external users' financial decisions about the corporation need to be reported on financial statements, regardless of whether this information is positive or negative.

Income Statement

This financial statement captures the net income (revenue minus expense) of a corporation over an accounting period.

Internal Users of Accounting Information

Individuals who are employed by a corporation and have access to day-to-day financial information. Examples include managers and executives.

Investing Activity

The category of cash flows that represents the buying and selling of long-term assets.

Liability

This account category represents what a corporation owes. It is located on the balance sheet.

Matching

This accounting principle states that expenses should be recognized in the same period that the revenue they supported is recognized.

Materiality

This accounting principle states that information need only be shared in financial statements if it is large enough to impact the external users' financial decision making.

Operating Activity

The category of cash flows that generate revenues or expenses in the current year. These cash flow items impact short-term assets or liabilities.

Partnership

An entity with more than one owner and the owners and entity are considered one for tax and legal purposes.

Revenue Recognition

This accounting principle states that revenue should be recognized when it is earned, not when cash is received.

Statement of Retained Earnings

This financial statement contains only two accounts - retained earnings and dividends.

Accounts Payable

A liability account that increases when our corporation purchases on credit from suppliers and decreases when we pay off our account. This account has a normal credit balance.

Accounts Receivable

An asset account that increases when customers purchase on credit and decreases when customers pay off their account. This account has a normal debit balance.

Common Stock

An equity account that represents the contribution of assets by a shareholder in exchange for ownership in the corporation. This account has a normal credit balance.

Credit

Represents the comparative increase to the right side of the accounting equation. Results in liabilities, equity and revenues increasing. Results in assets, expenses and dividends decreasing.

Debit

Represents the comparative increase to the left side of the accounting equation. Results in assets, expenses and dividends increasing. Results in liabilities, equity and revenues decreasing.

Dividend

An equity account that represents the payment of a corporation's accumulated earnings to its shareholders. This account has a normal debit balance.

Double-entry Accounting

Procedure where for each transaction at least two accounts are involved and the amount debited equals the amount credited.

Expense

An account class that increases when a corporation incurs a cost (and not necessary when cash is paid for that cost). This account has a normal debit balance.

Journal Entry

Formal accounting notation of a financial transaction.

Normal Balance

Indicates whether an account is debited or credited when its balance increases.

Overstated

A situation caused by an error in accounting where an account has a larger balance on the accounting books than it should have in reality.

Payable

An account name indicating that the corporation owes another party money. Accounts containing this name are liabilities.

Posting

Updating an account balance with the results of a journal entry

Prepaid

An asset account name that indicates the corporation is owed goods or services from another party because the corporation has already paid for these goods or services.

Receivable

An account name that indicates another party owes the corporation money. Accounts containing this name are assets.

Retained Earnings

An equity account that represents the cumulative net income that has been reinvested back into the corporation. This account's balance increases by net income and decreases by dividends. This account has a normal credit balance.

Revenue

An account class that increases when it is earned, and not necessarily when cash is received. This account has a normal credit balance.

Trial Balance

A listing of a corporation's accounts and its balances. Debits will always equal credits. This is used to create the financial statements. If an account does not have a balance, it does not appear in this finalized list.

Understated

A situation caused by an error in accounting where an account has a smaller balance on the accounting books than it should have in reality.

Unearned

A liability account name that indicates the corporation owes goods or services to another party. In this situation, the corporation received cash in advance for these goods or services.

Unearned Revenue

A liability account that increases when we receive cash but have not yet provided the goods or services and decreases when we provide those goods or services. This account has a normal credit balance.

Accrual Basis

Method of accounting that records revenues when earned and expenses when incurred.

Accrued Expenses

Costs that are incurred (used), but unpaid and unrecorded.

Adjusted Trial Balance

A trial balance that incorporates the effects of adjusting journal entries.

Adjusting Entries

The process of reporting journal entries at the end of the accounting period to bring the book balance of an account in line with the actual balance.

Cash Basis

Method of accounting that records revenue when cash is received and expenses when cash is paid.

Classified Balance Sheet

Balance sheet format that separates assets and liabilities into short-term and long-term categories.

Closing Entries

The process of transferring the balances of temporary accounts (revenues, expenses, and dividends) into retained earnings at the end of the accounting period.

Long-term

Any asset or liability that is expected to last greater than one year or the end of the accounting period.

Post-closing Trial Balance

A trial balance that incorporates the impact of both adjusting journal entries and closing entries. The only accounts represented on this trial balance are assets, liabilities, and equity.

Prepayments / Prepaid Expenses

The payment for an asset or expense in advance of receiving the benefit from that asset. Examples include long-term assets, insurance, and rent.

Short-term

Any asset or liability that is expected to be used or paid off within one year or the end of the accounting period.

Unadjusted Trial Balance

A trial balance that captures the impact of all recorded transactions during the accounting period.