ACCT 2301, Chapter 9

Going Concern Assumption

Accounting presumption that a company will continue to operate indefinitely, benefiting from its assets and paying its obligations in full; justifies reporting assets and liabilities in the financial statements.

Note Payable

Liability represented by a legal document called a note that describes pertinent details such as principal amount, interest charges, maturity date, and collateral.

Contingent Liability

Obligations with amounts due that depend on events that will be resolved in the future.

General Uncertainties

Uncertainties such as competition and damage from storms. These uncertainties are distinguished from contingent liabilities because they arise from future rather than past events.

Warranties

Promises to correct deficiencies or dissatisfactions in quality, quantity, or performance of products or services sold.

Employee

An individual whose labor is supervised, directed, and controlled by a business.

Independent Contractor

An individual who is paid by a business but retains individual control and supervisory authority over the work performed.

Wages

A term used to describe amounts due employees who are paid according to the number of hours they actually work.

Salaries

A term used to describe the amount due employees who are paid a set amount per week, month, or other earnings period regardless of how many hours they work during the period.

Gross Earnings

The total amount of employee wages or salaries before any deductions or withholdings. Gross earnings include the total of regular pay plus any bonuses, overtime, or other additions.

Employee's Withholding Allowance Certificate (Form W-4)

A form used by an employee to report the number of withholding allowances claimed by the employee. Each withholding allowance reduces the amount of income tax withheld from the employee's pay.

Wage and Tax Statement (Form W-2)

Form used by employers to notify each employee of the amount of their gross earnings for the year and the amounts withheld by the employer.

Employer's Quarterly Federal Tax Return (Form 941)

The form used to show the amounts due and paid to the government for federal tax withholdings.

Social Security

Insurance provided by the federal government to qualified individuals. Also called old age, survivors, and disability insurance (OASDI).

Medicare

Health insurance provided by the government primarily for retired workers.

Net Pay

Employee's gross pay less all deductions (withholdings).

Federal Unemployment Tax Act (FUTA)

The act that requires employers to pay unemployment tax for the establishment of a fund that is used to provide temporary relief to qualified unemployed persons.

Fringe Benefits

Other withholdings including paid vacations, sick leave, maternity leave, and medical, dental, life, and disability insurance.

Current (Short-Term) Assets

Asset that will be converted to cash or consumed within one year or an operating cycle, whichever is longer.

Current (Short-Term) Liabilities

Obligations due within one year or an operating cycle, whichever is longer.

Classified Balance Sheet

Balance sheet that distinguishes between current and noncurrent items.

Liquidity

Ability to convert assets to cash quickly and meet short-term obligations.

Solvency

Ability of a business to pay liabilities in the long run.

Current Ratio

Measure of liquidity; calculated by dividing current assets by current liabilities.

Interest-Bearing Notes

Notes that require face value plus accrued interest to be paid at maturity.

Discount Notes

Note with interest included in its face value, which is also the maturity value.

Discount (on Notes)

Amount of interest included in the face of a discount note; the discount (interest) is subtracted from the face amount of the note to determine the amount of cash borrowed (principal).

Proceeds

The amount of cash received. An example is the principal amount borrowed on a discount note payable (can also be referred to as the principal).

Contra-Liability Account

Account used to reduce the reported value of the liability to which it relates (e.g., subtracting the contra liability Discount on Notes Payable from Notes Payable reduces the amount of liabilities on the balance sheet).

Discount on Notes Payable

Contra liability account subtracted from the Notes Payable account to determine the carrying value of the liability.