Accounting MIdterm Vocab

Accounts payable

Amounts owed to suppliers for goods or services already received, usually short-term and not formally documented by a note

Accounts receivable

Amounts customers owe the company for goods or services already delivered

Adjusting entries

Entries made at period end to record revenues earned but not yet received and expenses incurred but not yet paid. Never involve cash

Assets

Economic resources the company owns or controls that are expected to produce future benefit

Audit

An independent examination of the financial statements resulting in an opinion on whether they are fairly presented in accordance with the applicable accounting rules

Balance Sheet

The statement reporting assets, liabilities, and stockholders’ equity at a single point in time

Book Value

The amount at which something is carried on the books. For an asset, cost less accumulated depreciation; for the company as a whole, total assets less total liabilities

Cash Flow Statement

The statement reporting all cash inflows and outflows for a period, sorted into operating, investing, and financing

channel stuffing

Shipping more product to distributors than they can actually sell, in order to book revenue now. An earnings manipulation, not an accounting method

closing

The period-end process of zeroing out the temporary accounts — revenues, expenses, dividends — by transferring their balances into retained earnings

common stock

The ownership shares issued to investors; the contributed capital portion of stockholders’ equity

conservatism

When genuinely uncertain, choose the treatment less likely to overstate assets and income

Cost flow assumptions

The rules — specific identification, FIFO, LIFO, average cost — governing which costs move to COGS and which stay in inventory

COGS

The cost the company paid for the inventory it sold during the period. An expense, matched against sales revenue

dividend

A distribution of earnings to owners. Not an expense, never on the income statement; reduces retained earnings and is a financing outflow

Double Entry

The system in which every transaction is recorded in at least two accounts, with total debits always equal to total credits

Earnings

A synonym for net income in ordinary use — what the company made for the period

Expenses

Decreases in equity from consuming resources in the course of earning revenue

Financing Activites

Cash flows from transactions with owners and lenders — issuing stock, borrowing or repaying loan principal, paying dividends

gains

Increases in equity from peripheral transactions outside central operations — selling a used delivery truck at a profit

general journal

The chronological record where transactions are first recorded; the book of original entry

general ledger

The record organizing the same transactions by account, so each account carries a running balance; the book of final entry

income

Generally used as a synonym for net income. Be alert: some sources use it loosely to mean revenue, so read the definition offered rather than assuming

income statement

Temporary statement reporting revenues and expenses over a period of time

inflation

A general rise in the price level over time. The condition that makes the rising-price analysis in Module 7 the usual real-world case

interest

The charge for the use of borrowed money. Interest expense is on the income statement; unpaid interest is interest payable

internal controls

Policies and procedures designed to safeguard assets, prevent and detect fraud and error, and keep the accounting records reliable

inventory

Goods held for sale to customers, carried as an asset at cost until sold

investing activities

Cash flows from buying and selling long-term assets — property, railroads, utilities, equipment

liability

An obligation to transfer assets or provide services to someone outside the company in the future

liquidity

How quickly and cheaply an asset can be converted into cash. Balance sheet assets are listed in order of liquidity, cash first

losses

Decreases in equity from peripheral transactions outside central operations

Lower-of-cost-or-market rule

Inventory is written down below cost when its market value has fallen below cost. Conservatism applied to inventory: you write down, never up

Matching concept

Expenses are recognized in the same period as the revenues they helped produce, rather than when cash is paid. The reason adjusting entries exist

Materiality

An item is material if omitting or misstating it could change the decision of someone using the statements. Immaterial items may be handled expediently

Net income

Revenues plus gains minus expenses and losses for the period. Flows into retained earnings when the books are closed

Operating activities

Cash flows from the day-to-day business of earning revenue and paying expenses. Includes interest paid and income taxes paid

Payables

The general family of liability accounts — accounts payable, interest payable, taxes payable, mortgage payable

Prepaid expense

Cash paid in advance for a benefit not yet consumed; an asset until it is used up, then it becomes an expense

Product costs

Costs of acquiring or producing inventory. They attach to the product and sit in inventory as an asset until the product is sold, at which point they become COGS

Receivables

The general family of asset accounts representing money owed to the company

Retained earnings

Cumulative net income the company has earned and kept rather than distributed as dividends

Revenue

Increases in equity from delivering goods or services as part of the company’s central operations

Selling and administrative costs

Costs of running the business that are not attached to a product — sales salaries, rent, advertising. Period costs, expensed when incurred

Separation of duties

The internal control principle that no single person should control custody of an asset, authorization of transactions in it, and the recording of those transactions

Shrinkage

Inventory lost to theft, damage, spoilage, or clerical error. Detectable under a perpetual system; buried in COGS under a periodic one

Transaction

An economic event that affects the company’s financial position and must be recorded

Unearned revenue

Cash collected before the goods or services are delivered; a liability, because the company still owes the customer