Financial Accounting Test One
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98 terms
Terms | Definitions |
|---|---|
 Business | All of the activities necessary to provide the members of an economic system with goods and services |
| Business Entity | An organization operated to earn a profit |
| Sole Proprietorship | A form of organization with a single owner |
| Economic Entity Concept | The assumption that a single, identifiable unit must be accounted for in all situations |
| Partnership | A business owned by two or more individuals; the organization form often used by accounting firms and law firms |
| Corporation | A form of entity organized under the laws of a particular state; ownership evidenced by shares of stock |
| Share of Stock | A certificate that acts as evidence of ownership in a corporation |
| Bond | A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future |
| Non-business Entity | An organization operated for some purpose other than to earn a profit |
| Liability | An obligation of a business |
| Capital Stock | Indicates the owners' contributions to a corporation |
| Stockholder | One of the owners of a corporation |
| Creditor | Someone to whom a company or person has a debt |
| Asset | A future economic benefit |
| Revenue | An inflow of assets resulting from the sale of gods and services |
| Expense | An outflow of assets resulting from the sale of goods and services |
| Accounting | The process of identifying measuring, and communicating economic information to various users |
| Management Accounting | The branch of accounting concerned with providing management with information to facilitate planning and control |
| Financial Accounting | The branch of accounting concerned with the preparation of financial statements for outsider use |
| Owners' Equity | The owners' claims on the assets of an entity |
| Stockholders' Equity | The owners' equity in a corporation |
| Retained Earnings | The part of owners' equity that represents the income earned less dividends paid over the life of an entity |
| Balance Sheet | The financial statement that summarizes the assets, liabilities, and owners' equity at a specific point in time |
| Income Statement | A statement that summarizes revenues and expenses |
| Net income | The excess of revenues over expenses |
| Dividends | A distribution of the net income of a business to its owners |
| Statement of Retained Earnings | The statement that summarizes the income earned and dividends paid over the life of a business |
| Statement of Cash Flows | The financial statement that summarizes a company's cash receipts and cash payments during the period from operating, investing, and financing activities |
| Cost Principle | Assets are recorded at the cost to acquire them |
| Going Concern | The assumption that an entity is not in the process of liquidation and that it will continue indefinitely |
| Monetary Unit | The yardstick used to measure amounts in financial statements; the dollar in the United States |
| Time Period | An artificial segment on the calendar used as the basis for preparing financial statements |
| Generally Accepted Accounting Principles (GAAP) | The various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements |
| Securities and Exchange Commission (SEC) | The federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public. |
| Financial Accounting Standards Board (FASB) | The group in the private sector with authority to set accounting standards. |
| American Institute of Certified Public Accountants (AICPA) | The professional organization of certified public accountants. |
| Certified Public Accountant (CPA) | The designation for an individual who has passed a uniform exam administered by the AICPA and has met other requirements as determined by individual states |
| Public Company Accounting Oversight Board (PCAOB) | A five-member body created by an act of Congress in 2002 to set auditing standards |
| International Accounting Standards Board (IASB) | The organization formed to develop worldwide accounting standards |
| Auditing | The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented |
| Understandability | The quality of accounting information that makes it comprehensible to those willing to spend the necessary time |
| Relevance | The capacity of information to make a difference in a decision |
| Reliability | The quality that makes accounting information dependable in representing the events that it purports to represent |
| Comparability | For accounting information, the quality that allows a use to analyze two or more companies and look for similarities and differences |
| Depreciation | The process of allocating the cost of a long-term tangible asset over its useful life |
| Consistency | For accounting information, the quality that allows a user to compare two or more accounting periods for a single company |
| Materiality | The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information |
| Conservatism | The practice of using the least optimistic estimate when two estimates of amounts are about equally likely |
| Operating Cycle | The period of time between the purchase of inventory and the collection of any receivable from sales of the inventory |
| Current Asset | An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year |
| Current Liability | An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year |
| Liquidity | The ability of a company to pay its debts as they come due |
| Working Capital | Current assets minus current liabilities |
| Current Ratio | Current assets divided by current liabilities |
| Single-Step Income Statement | An income statement in which all expenses are added together and subtracted from all revenues |
| Multiple-Step Income Statement | An income statement that shows classifications of revenues and expenses as well as important subtotals |
| Gross Profit | Sales less cost of goods sold |
| Profit Margin | Net income divided by sales (Operating Revenues) |
| Auditors' Report | The opinion rendered by a public accounting firm concerning the fairness of the presentation of the financial statements |
| Event | A happening of consequence to an entity |
| External Event | An event involving interaction between an entity and its environment |
| Internal event | An event occurring entirely within an entity |
| Transaction | Any event that is recognized in a set of financial statements |
| Source Document | A piece of paper that is used as evidence to record a transaction |
| Account | A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholders' equity |
| Chart of Accounts | A numerical list of all accounts used by a company |
| General Ledger | A book, a file, a hard drive, or another device containing all of the accounts |
| Debit | An entry on the left side of an account |
| Credit | An entry on the right side of an account |
| Doubt-Entry System | A system of accounting in which every transaction is recorded with equal debits and credits and the accounting equation is kept in balance |
| Journal | A chronological record of transactions |
| Posting | The process of transferring amounts from a journal to the ledger accounts |
| Journalizing | The act of recording journal entries |
| General Journal | The journal used in place of a specialized journal |
| Trial Balance | A list of each account and its balance; used to prove equality of debits and credits |
| Recognition | The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like. |
| Historical Cost | The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets |
| Current Value | The amount of cash or its equivalent that could be received by selling an asset currently |
| Cash Basis | A system of accounting in which revenues are recognized when cash is received and expenses are recognized when cash is paid |
| Accrual Basis | A system of accounting in which revenues are recognized when earned and expenses are recognized when incurred |
| Revenues | Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities |
| Revenue recognition principle | Revenues are recognized in the income statement when they are realized, or realizable, and earned |
| Matching Principle | The association of revenue of a period with all of the costs necessary to generate that revenue |
| Expenses | Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities |
| Adjusting Entries | Journal entries made at the end of a period by a company using the accrual basis of accounting |
| Straight-Line Method | The assignment of an equal amount of deprecation to each period |
| Contra Account | An account with a balance that is opposite that of a related account |
| Deferral | Cash has been paid or received but expense or revenue has not yet been recognized |
| Deferred Expense | An asset resulting from the payment of cash before the incurrence of expense |
| Deferred Revenue | A liability resulting from the receipt of cash before the recognition of revenue |
| Accrual | Cash has not yet been paid or received but expense has been incurred or revenue earned |
| Accrued Liability | A liability resulting from the recognition of an expense before the payment of cash |
| Accrued Asset | An asset resulting from the recognition of a revenue before the receipt of cash |
| Accounting Cycle | A series of steps preformed each period and culminating with the preparation of a set of financial statements |
| Work Sheet | A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries |
| Real Accounts | The name given to balance sheet accounts because they are permanent and are not closed at the end of the period |
| Nominal accounts | The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period |
| Closing Entries | Journal entries made at the end of the period to return the balance in all nominal accounts to zero and transfer the net income or loss and the dividends to Retained Earnings |
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