Financial Accounting Ch 2

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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 incurred; the basis for GAAP

accrued expenses

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

accrued revenues

revenues earned in a period that are both unrecorded and not yet recieved in assets; adjusting entries for accrued revenues involve increasing assets and increasing revenues

adjusted trial balance

lists 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 expense or revenue acct

annual financial statements

financial statements covering a 1 year period; often based on the calendar year but any 12 month period is acceptable

book value

assets's acquisition costs less its accumulated depreciation

cash basis accounting

accounting system that recognizes revenues when cash is recieved and records expenses when cash is paid

classified balance sheet

balance sheet that presents assets and liabilities in relevant subgroups including current and noncurrent classifications

closing entries

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

closing process

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

contra account

account linked with another account and having an opposite normal balance; reported as subtraction from the other accounts balance

current assets

cash and other assets expected to be sold, collected or used within one year or the companys operating cycle, whichever is longer

current liablilites

obligations due to be paid or settled within one year or the companys operating cycle

current ratio

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

depreciation

expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using an asset

fiscal year

consecutive 12 month period chosen as the organization's annual accouting period

income summary

temporary account used only in the closing process to which the balances of revenue and expense accounts are transferred; its balance is transferred to the capital account( or retained earnings for a corporation)

intangible assets

long term assets used to produce or sell products or services; usually lack physical form and have uncertain benefits

interim financial statements

financial statements covering periods less than one year

long term investments

long term assets not used in operating activities such as notes recievable and investments in stocks and bonds

long term liabilites

obligations not due to be paid in a year

matching principle

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

natural business year

12 month period that ends when a company's sales activites are at their lowest point

operating cycle

normal time between paying cash for merchandise or employee services and recieving 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

plant assets

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

post closing trial balance

list of permanet accounts and their balances from the ledger after all closing entries are journalized and posted

prepaid expenses

items paid for in advance of recieving their benefits; classified as assets

profit margin

ratio of a companys net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin

pro forma financial statements

statements that show the effects of proposed transactions and events as if they had occured

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 occured in the period prior

straight line depreciation

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

temporary accounts

accounts used to record revenues expenses and withdrawals; they are closed at the end of each period; also called nominal accounts

time period principle

assumption that an organization's activites can be divided into specific time periods

unadjusted trial balance

list of accounts and balances prepared before accounting adjustments are recorded and posted

unclassified balance sheet

balance sheet that broadly groups assets, liablilities and equity accounts

unearned revenue

liability created when customers pay in advance for products and services; earned when products or services are later delivered

working papers

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

work sheet

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

accounting cycle

recurring steps preformed at each accounting period, starting with analyzing transactions and continuing through the post closing trial balance

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