# Financial Accounting Chapter 2

## 24 terms · Textbook McGrawHill

### Asset

A probable future economic benefit owned by the entity as a result of past transactions.

### Current Asset

an asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell the inventory.

### Liability

a probable debt or obligation of the entity as a result of a past transaction, which will be paid with assets or services.

### Current Liability

a liability that will be paid in cash (or other current assets) or satisfied by providing service within the coming year.

### Contributed capital

the financing provided to the business by owners; usually owners provide cash and sometimes other assets such as equipment and buildings.

### Retained earnings

the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.

### separate-entity assumption

requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business.

### unit-of-measure assumption

requires information to be reported in the national monetary unit. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia.

### continuity or going-concern assumption

businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate.

### historical cost principle

requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations

### Assets equation =

= Liabilities + Stockholders' Equity

### The equalities in accounting

Assets = Liabilities + Stockholders' Equity
Debits = Credits

### The two steps in transaction analysis

1) identify and classify accounts and the direction and amount of the effects.
2) determine that the accounting equation (A = L + SE) remains in balance.

### The two principles underlying the transaction analysis process are:

1) every transaction affects at least two accounts.
2) the accounting equation must remain in balance after each transaction.

### T-account

a simplified representation of a ledger account with a debit column on the left and a credit column on the right

### Journal entry

method for expressing the effects of a transaction on accounts in a debits-equal-credits format

Left hand side

Right hand side

### Total dollar value of all debits =

= total dollar value of all credits

### Relevant

information that can influence a decision; it is timely and has predictive and/or feedback value

### Reliable

Information is accurate and verifiable

### Materiality

exception suggests that small amounts that are not likely to influence a users decision can be accounted for in the most cost-beneficial manner

### Conservatism

exception suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses

### Account

a standardized format that organizations use to accumulate the \$ effect of transactions on each financial statement item