Accounting Principles and Terminology Flashcards

Comprehensive vocabulary flashcards covering basic and advanced accounting terms, principles, and financial statement components based on the study guide.

Generally Accepted Accounting Principles (GAAP)

The rules that govern accounting in the United States.

Transaction

Any event that has a financial impact on the business and can be measured reliably.

Asset

An economic resource that is expected to benefit the business in the future (e.g., Cash, Inventory, Equipment).

Liability

A debt that the business owes to an outside party (e.g., Accounts Payable).

Owner's Equity

The owner's claim to the assets of the business, calculated as $\text{Assets} - ext{Liabilities}$.

Revenue

Amounts earned from delivering goods or services to customers.

Expense

The costs of selling goods or services (e.g., Rent, Wages).

Owner's Capital

Owner contributions to the business.

Owner's Withdrawals

Payments of equity to the owner.

Income Statement

Reports the net income or net loss of the business for a specific period, calculated as $\text{Revenues} - ext{Expenses}$.

Statement of Owner's Equity

Reports the changes in owner's equity for a specific period, calculated as $\text{Capital} + ext{Net Income} - ext{Withdrawals}$.

Balance Sheet

Reports on the assets, liabilities, and owner's equity of the business as of a specific date.

Statement of Cash Flows

Reports on a business's cash receipts and cash payments for a specific period.

Accounts Payable

A short-term liability that will be paid in the future.

Accounts Receivable

The right to receive cash in the future from customers for goods sold or for services performed.

Account

The detailed record of the changes in a particular asset, liability, or owner's equity.

Chart of Accounts

A list of all of a company's accounts with their account numbers.

Debits and Credits

The left side (Debit) and right side (Credit) of an account.

Normal Balance

The balance that appears on the increase side of an account (e.g., Assets have a normal Debit balance).

Journal Entry

A chronological record of transactions.

Journals

Known as the book of original entry.

Ledger

The collection of all accounts and their balances.

Posting

The process of transferring data from the journal to the ledger.

Trial Balance

A list of all ledger accounts with their balances at a point in time.

Accounting Cycle

The process by which companies produce their financial statements for a specific period.

Prepaid Expense

A category of miscellaneous assets that typically expire or get used up in the near future (e.g., Prepaid Rent).

Unearned Revenue

A liability created when a business collects cash from customers in advance of providing services or delivering goods.

Accrual Basis Accounting

Accounting method that records revenues when earned and expenses when incurred.

Revenue Recognition Principle

Requires companies to record revenue when it has been earned and determines the amount of revenue to record.

Matching Principle

Guides accounting for expenses, ensuring that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period.

Adjusting Journal Entry

An entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur.

Accrual

An expense or revenue that has occurred but has not yet been recorded.

Deferral

An adjustment for which the business paid or received cash in advance (Prepaid Expense / Unearned Revenue).

Depreciation

The process of allocating the cost of a plant asset to expense over its useful life.

Contra Account

An account that always has a companion account and whose normal balance is opposite that of the companion account.

Book Value

The asset's cost minus accumulated depreciation: $\text{Asset's Cost} - ext{Accumulated Depreciation}$.

Residual (Salvage) Value

The expected value of a depreciable asset at the end of its useful life.

Adjusted Trial Balance

A list of all the accounts with their adjusted balances.

Classified Balance Sheet

A balance sheet that places each asset and each liability into a specific category (Current vs. Long-Term).

Current Assets

Assets that are expected to be converted to cash, sold, or used up during the next 12 months.

Long-Term Assets

Assets that will not be converted to cash or used up within the business's operating cycle or one year.

Current Liabilities

Debts that must be paid within one year or the entity's operating cycle.

Long-Term Liabilities

Liabilities that are not due for more than one year.

Closing Entries

Entries that transfer the revenue, expense, and owner withdrawal balances to the Capital account to prepare the company's books for the next period.

Temporary Accounts

Accounts that relate to a particular accounting period and are closed at the end of that period (Revenues, Expenses, Withdrawals).

Permanent Accounts

Accounts that are not closed at the end of the period (Assets, Liabilities, Capital).

Post-Closing Trial Balance

A list of the accounts and their balances at the end of the period after closing entries, including only permanent accounts.

Merchandiser

A business that sells merchandise, or goods, to customers.

Retailer

A type of merchandiser that buys merchandise from manufacturers or wholesalers and sells it to consumers.

Sales Discount

A contra-revenue account representing a reduction in the amount of cash received from a customer for early payment (e.g., "2/10, n/30").

Sales Return

Merchandise returned by the customer to the seller for a refund; it is a contra-revenue account.

Sales Allowance

A contra-revenue account representing a price reduction granted to a customer for damaged or defective goods that the customer keeps.

Multi-Step Income Statement

An income statement format that shows several subtotals to highlight significant relationships (e.g., Gross Profit, Operating Income).

Single-Step Income Statement

An income statement format that groups all revenues together and all expenses together without calculating subtotals like Gross Profit.

FOB Shipping Point

Terms indicating that the buyer pays the freight and owns the goods as soon as they leave the seller's shipping dock.

FOB Destination

Terms indicating that the seller pays the freight and owns the goods until they arrive at the buyer's destination.

Perpetual Inventory System

A system that maintains a continuous, real-time record of inventory on hand and updates COGS and Inventory accounts with every sale.

Cost of Goods Sold (COGS)

The direct cost of producing or purchasing the goods that were actually sold during the period.

Inventory Shrinkage

The loss of inventory due to theft, damage, or counting errors, recorded when Physical Count < Book Count.

Lower of Cost or Market (LCM)

A rule requiring inventory to be written down if its current market replacement cost falls below its original historical cost.

Materiality

The concept that strict adherence to rules is not required for items that are not significant enough to affect a user's decision.

Internal Control

Organizational plan and all related measures adopted by an entity to safeguard assets, encourage policy compliance, promote efficiency, and ensure accurate records.

Separation of Duties

An internal control principle dividing responsibilities between two or more people to limit fraud.

Bank Reconciliation

A document explaining the reasons for the difference between a depositor's cash records and the bank's cash records.

Depletion

The process of allocating the cost of a natural resource (like oil, timber, or minerals) to expense over its usage.

Amortization

The process of allocating the cost of an intangible asset to expense over its useful life.

Intangible Asset

An asset with no physical form that is valuable because of the special rights it carries.

Patent

An exclusive right granted by the federal government to manufacture and sell an invention for 20 years.

Goodwill

The excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities).

Land Improvement

A depreciable improvement to land, such as fencing, paving, or lighting, that has a limited useful life.

Sales Tax Payable

A current liability representing sales tax collected from customers that must be remitted to the government.

Wage Base

The maximum amount of gross earnings on which certain payroll taxes, such as Social Security, are calculated.

FICA (Federal Insurance Contributions Act)

The federal act that created the Social Security tax and the Medicare tax.

Income Tax Withholding

Taxes that an employer deducts from employees' gross pay to remit to federal and state governments on their behalf.

Payroll Register

A schedule or summary that lists the gross pay, deductions, and net pay for each employee for a specific payroll period.

Unemployment Taxes (FUTA/SUTA)

Payroll taxes paid only by the employer to fund unemployment compensation programs.

Warranty

An agreement that guarantees a company's product against defects.

Cash Equivalent

Highly liquid, short-term investments that can be converted into known amounts of cash immediately.

Deposit in Transit

A deposit recorded by the company but not yet recorded by the bank.

Outstanding Check

A check issued and recorded by the company but not yet paid (cleared) by the bank.

Nonsufficient Funds (NSF) Check

A check for which the maker's bank account has insufficient money to pay the check.

Petty Cash

A fund containing a small amount of cash that is used to pay for minor expenditures.

Bad Debt Expense

The cost to the seller of extending credit, arising from the failure to collect from some credit customers.

Allowance for Doubtful Accounts

A contra-asset account that records the portion of accounts receivable that are estimated to be uncollectible.

Note Receivable

A written promise to pay a specified amount of money at a particular future date, usually with interest.

Dishonor a Note

Failure of a note's maker to pay a note receivable at maturity.

Property, Plant, and Equipment (PP&E)

Tangible assets used in a company's operations that have a useful life of more than one accounting period.

Capital Expenditure

An expenditure that increases the capacity, efficiency, or useful life of an asset, which is debited to the Asset account.

Revenue Expenditure

An expenditure that maintains an asset in its normal operating condition, which is debited to Repair Expense.

Contingent Liability

A potential liability that depends on a future event arising from a past transaction (e.g., a lawsuit).

Gross Pay

Total salary/wages earned before any taxes or deductions are taken out.

Net Pay

The amount of the employee's paycheck, calculated as Gross Pay minus all deductions.

Operating Activities

Cash flows related to the company's primary day-to-day business (e.g., collecting cash, paying suppliers).

Investing Activities

Cash flows related to buying or selling long-term assets (PP&E, Investments).

Financing Activities

Cash flows related to funding the business (Debt, Equity, Dividends).

Indirect Method

A format of the operating activities section that starts with Net Income and reconciles to Net Cash Provided by Operating Activities.

Liquidity

The ability of a company to pay its short-term debts.

Solvency

The ability of a company to pay its long-term debts.

Profitability

The company's ability to earn income.