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Key Terms

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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