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Chapter 3

Account

A record used to summarize all increases and decreases in a particular asset, such as cash, or any other type of
asset liability, owner's equity, revenue, or expense.

Accountability

The condition of being held responsible for one's own actions by the existence of an independent record of those actions. Establishing this is a major goal of accounting records and of internal control procedures.

Accounting Cycle

The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins and ends with the initial recording of business transactions and concludes with the preparation of formal financial statements.

Accounting Period

The span of time covered by an income statement. One year is the accounting period for much financial reporting, but financial statements are also prepared by companies for each quarter of the year and for each month.

Accural basis of accounting

Calls for recording revenue in the period in which it is earned and recorded expenses in the period in which they are incurred. The effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.

Conservatism

The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower amount of income being recognized in the current accounting period. This concept is designed to avoid overstatement of financial strength and earnings.

Credit

An amount entered on the right side of a ledger account. This is used to record a decrease in an asset or an increase in a liability or in owners' equity.

Debit

An amount entered on the left side of a ledger account. This is used to record an increase in an asset or a decrease in a liability or in owners' equity.

Dividends

A distribution of resources by a corporation to its stockholders. The resource most often distributed is cash.

Double-entry Accounting

A system of recording every business transaction with equal dollar amounts of both debit and credit entries. As a result of this system, the accounting equation always remains in balance; in addition the system makes possible the measurement of net income and also the use of error-detecting devices such as trial balance.

Expenses

The costs of the goods and services used up in the process of obtaining revenue.

Fiscal Year

Any 12 month accounting period adopted by a business.

General Journal

The simplest type of journal, it has only two money columns-one for credits and one for debits. This journal may be used for all types of transactions, which are later posted to the appropriate ledger accounts.

Income Statement

A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for the particular accounting period. Shows the net income or net loss.

Journal

A chronological record of transactions, showing for each transaction the debits and credits to be entered in a specific ledger accounts.

Ledger

An accounting system includes a seperate record for each item that appears in the financial statements. Collectively, these records are referred ti as a company's ledger. Individually these records are often referred to as ledger accounts.

Matching Principle

The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The revenue earned during an accounting period is matched (offset) with the expenses incurred in generating the revenue.

Net Income

An increase in owner's equity resulting from profitable operations. Also the excess of revenue earned over the related expenses for a given period.

Net Loss

A decrease in owners' equity resulting from unprofitable operations.

Objectivity

Accountants' preference for using the dollar amounts that are relatively factual-as opposed to merely matters of personal opinion. These measurements can be verified.

Posting

The process of transferring information from the journal to individual accounts in the ledger.

Realization Principle

The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.

Retained Earnings

That portion of stockholder's equity resulting from profits earned and retained in their business.

Revenue

The price of goods and services charged to customers for goods and services rendered by a business.

Time Period Principle

To provide the users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The period of time covered by an income statement is termed the company's accounting period.

Trial Balance

A two-column schedule listing the names and the debit or credit balances of all accounts in the ledger.

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