Principles of Finance BA 385

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Accounting

Information and measurement system that identifies, records, and communicates relevant information about a company's business activities.

Accounting Equation

Equality involving a company's assets, liabilities, and equity; Assets = Liabilities + Equity

Assets

Resources that a company owns or controls that are expected to provide current and future benefits to the business.

Audit

Analysis and report of an organization's accounting system, its records, and its reports using various tests.

Auditors

Individuals hired to review financial reports and information systems of organizations.

Balance Sheet

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.

Bookkeeping

The part of accounting that involves recording transactions and events either manually or electronically. Also called Recordkeeping.

Business Entity Assumption

Principle that requires a business to be accounted for separately from its owner(s) and from any other entity.

Common Stock

A corporation's basic ownership share.

Conceptual Framework

A written framework to guide the development, preparation, and interpretation of financial accounting information.

Corporation

Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.

Cost-benefit Constraint

The notion that only information with benefits of disclosure greater than the costs of disclosure need to be disclosed.

Cost Principle

Accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions.

Equity

Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities. Also called net assets.

Ethics

Code of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

Events

Happenings that both affect an organization's financial position and can be reliably measured.

Expanded Accounting Equation

Assets = Liabilities + Equity; Equity equals [Owner capital - owner withdrawal + revenue - expenses] for a non-corporation; Equity equals [Contributed capital - retained earnings + revenue - expenses] for a corporation where dividends are subtracted from retained earnings.

Expense Recognition Principle

Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Matching Principle.

Expenses

Outflows or using up of assets as part of operations of business to generate sales.

External Transactions

Exchanges of economic value between one entity and another entity.

External Users

Persons using accounting information who are not directly involved in running the organization.

Financial Accounting

Area of accounting aimed mainly at serving external users.

Financial Accounting Standards Board

Independent group of full-time members responsible for setting accounting rules.

Full Disclosure Principle

Principle that prescribes financial statements (including notes) to report all relevant information about an entity's operations and financial condition.

Generally Accepted Accounting Principles

Rules that specify acceptable accounting practices.

Going-concern Assumptions

Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

Income Statement

Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.

Internal transactions

Activities within an organization that can affect the accounting equation.

Internal users

Persons using accounting information who are directly involved in managing the organization.

International Accounting Standards Board

Group that identifies preferred accounting practices and encourages global acceptance; issues the International Financial Reporting Standards.

International Financial Reporting Standards

Accounting standards set by the IASB which aim to develop a single set of global standards, to promote those standards, and converge national and international standards globally.

Liabilities

Creditors' claims on an organization's assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

Managerial Accounting

Area of accounting aimed mainly at serving the decision-making needs of internal users.

Matching Principle

Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Expense Recognition Principle.

Materiality Constraint

Prescribes that accounting for items that significantly impact a financial statement and any inferences from them adhere strictly to GAAP.

Measurement Principle

Accounting information is based on cost with potential subsequent adjustments to fair value.

Monetary Unit Assumption

Principle that assumes transactions and events can be expressed in money units.

Net Income

Amount earned after subtracting all expenses necessary for and matched with sales for a period.

Net Loss

Excess of expenses over revenues for a period.

Owner, Capital

Account showing the owner's claim on company assets; equals owner investments plus net income (or less net loss) minus owner withdrawals since the company's inception. Also called Equity.

Owner Investment

Assets put into the business by the owner.

Owner Withdrawals

Assets pulled out of the business by the owner.

Partnership

Unincorporated association of two or more persons to pursue a business for profit as co-owners.

Recordkeeping

The part of accounting that involves recording transactions and events either manually or electronically. Also called Bookkeeping.

Return

Monies (or sums of money) received from an investment; often in percent form.

Return on Assets

Ratio reflecting operating efficiency; defined as net income divided by average total assets for that period.

Revenue Recognition Principle

The principle prescribing that revenue is recognized when earned.

Revenues

Gross increase in equity from a company's business activities that earn income.

Risk

Uncertainty about expected return.

Sarbanes-Oxley Act (SOX)

Create the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.

Securities and Exchange Commission

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

Shareholders

Owners of a corporation who usually receive dividends. Also called stockholders.

Shares

Equity of a corporation divided into ownership units that usually give dividends. Also called Stock.

Sole Proprietorship

Business owned by one person that is not organized as a corporation.

Statement of Cash Flows

A financial statement that lists cash inflows and cash outflows during a period; arranged by operating, investing, and financing.

Statement of Owner's Equity

Report of changes in equity over a period; adjusted for increases and for decreases.

Stock

Equity of a corporation divided into ownership units that usually give dividends. Also called Shares.

Stockholders

Owners of a corporation who usually receive dividends. Also called shareholders.

Time Period Assumptions

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Account

Record within an accounting system in which increases and decreases are entered and stored in a specific asset, liability, equity, revenue, or expense.

Account Balance

Difference between total debits and total credits (including the beginning balance) for an account.

Balance Column Account

Account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry.

Chart of Accounts

List of accounts used by a company' includes and identification number for each account.

Compound Journal Entries

Journal entries that affect at least three accounts.

Credit

Recorded on the right side; an entry that decreases asset and expense accounts, and increases liability, revenue and most equity accounts. Abbreviated Cr.

Creditors

Individuals or organizations entitled to receive payments

Debit

Recorded on the left side; an entry that increases asset and expense accounts, and decreases liability, revenue and most equity accounts. Abbreviated Dr.

Debtors

Individuals or organizations that owe money.

Debt Ratio

Ratio of total liabilities to total assets; used to reflect risk associated with a company's debts.

Double Entry Accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

General Journal

All purpose journal for recording the debits and credits of transactions and events.

Journal

Record in which trans actions are entered before they are posted to ledger accounts; also called the book of original entry.

Journalizing

Process of recording transactions in a journal.

Ledger

Record containing all accounts (with amounts) for a business.

Posting

Process of transferring journal entry information to the ledger; computerized systems automate this process.

Posting Reference Column

A column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts.

Source Documents

Sources of information in accounting entries that can be in either paper or electronic form. Also called business papers.

T Account

Tool used to show the effects of transactions and events on individual accounts.

Trial balance

List of accounts and their balances at a point in time; total debit balances must equal total credit balances.

Unearned Revenue

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Accounting Period

Length of time covered by financial statements; also called reporting period.

Accrual Basis Accounting

Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP.

Accrued Expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses and increasing liabilities.

Accrued Revenues

Revenues earned in a period that both unrecorded and not yet received in cash (or other assets; adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.

Adjusted Trial Balance

List of accounts and balances prepared after period-end adjustments are recorded and posted.

Adjusting Entry

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expenses or revenue account.

Annual Financial Statements

Financial statements covering one-year period; often based on a calendar year, but any consecutive 12-month (or 52 week) period is acceptable.

Book Value

Assets acquisition costs less its accumulated depreciation, depletion, or amortization. Also sometimes used synonymously as the carrying value of an account.

Cash Basis Accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Contra Account

Account linked with another account and having an opposite normal balance. Reported as a subtraction from the other account's normal balance.

Depreciation

Expense created by allocating the cost of plant and equipment to periods in which they are used. Represents the expense of using the asset.

Fiscal Year

Consecutive 12-month (or 52 week) period chosen as the organization's annual accounting period.

Interim Financial Statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Matching Principle (or Expense Recognition Principle)

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Natural Business Years

The twelve month period that ends when a company's sales activities are at their lowest point.

Plant Assets

Tangible long lived assets used to produce or sell products and services; also called property, plant, and equipment or fixed assets.

Prepaid Expenses

Items paid for in advance of receiving their benefits. Classified as assets.

Profit Margin

Ratio of a company's net income to its net sales. The percent of income in each dollar of revenue.

Straight-line Depreciation Method

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Time Period Assumptions

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, and years.

Unadjusted Trial Balance

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Unearned Revenues

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Accounting Cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post closing trial balance (or reversing entries).

Classified Balance Sheet

Balance sheet that presents assets and liabilities in relevant subgroups, including current and non-current classifications.

Closing Entries

Entries recorded at the end of each accounting period to transfer end of period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retain earnings for a corporation).

Closing process

Necessary end of period steps to prepare the accounts for recording the transactions of the next period.

Current Assets

Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.

Current Liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

Current Ratio

Ratio used to evaluate a company's ability to pay its short term obligations, calculated by dividing current assets by current liabilities.

Income Summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred. Its balance is transferred to the capital account (or retained earnings for a corporation).

Intangible assets

Long Term assets (resources) used to produce or sell products or services. Usually lack physical form and have uncertain benefits.

Long Term Investments

Long term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

Long Term Liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

Operating Cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

Permanent Accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed. Also called real accounts.

Post Closing Trial Balance

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Pro Forma Financial Statement

Statements that show the effect of proposed transactions and events as if they had occurred.

Reversing Entries

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.

Temporary Accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation). They are closed at the end of each period.

Unclassified Balance Sheets

Balance sheet that broadly groups assets, liabilities, and equity accounts.

Working Papers

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.

Work Sheet

Spreadsheets used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.

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