Like this study set? Create a free account to save it.

Sign up for an account

Already have a Quizlet account? .

Create an account

Text: Fundamental Accounting Principles McGraw Hill Ch 1-10

Accounting is an information measurement system that...

Identifies, records and communicates information about business activities by interpreting info and designing info systems to allow business to make better decisions

The Accounting Equation is...

Assets=Liabilities + Owner's Equity
$100 = $10 + $90


Everything a company owns

Accounts Receivable

Assets created by selling goods/services on credit


Debts created by purchasing goods/services on credit

Accounts Payable

liabilities created by purchasing goods/services on credit

Unearned Revenue

Liabilities created when a customer pays before the revenue is earned

Owner's Equity

Owner's claims against assets

Business Entity(assumption)

Every business accounted for separately from other entities, to include its owners

Cost Principle

Accounting info based on actual cost

Full Disclosure

Report all details of financial statements that could impact user's decisions;often in the footnotes

Going-concern Principle

Info that reflects a presumption a business will continue operating

Matching Principle

Requires expenses to be reported in the same period as the revenues earned

Monetary unit Principle

Transactions to be expressed in monetary(money) units

Objectivity Principle

Statement info must be supported by Unbiased evidence

Revenue Recognition Principle

Revenue is recognized when Earned ie.selling products/providing service for cash/credit

Time Period(assumption)

Life of a company divided into time periods with Useful reports for each ie. monthly, quarterly, fiscal/calendar years

Income Statement

Revenues - Expenses = Net Income
Net Income=excess revenues over expenses(profit)
Net loss=excess expenses over revenues

Statement of Owners Equity

Shows beginning OE(capital), events that increase it(owner investments and Net Income), events that decrease it(withdraws and net loss)

Balance Sheet

Lists types/amounts of Assets, Liabilities and Equity as of a specific date (AKA accounting equation)

The accounting process begins with...

Analysis of transactions and source documents


Record of (+/-) in an asset, liability, equity, revenue or expense

Chart of Accounts

List of all company accounts with corresponding identification #s

General Journal records...

Transaction date,Account names, Amount of each debit/credit, and explanation


Collection of all accounts and their balances


(left side) I (right side)
Debit I Credit

Trial Balance

Vertically lists accounts and balances
Total Dr should = Total Cr

Accrual basis of accounting

Preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues

Accumulated Depreciation

Total amount of depreciation recorded throughout the life of an asset

Adjusting Entries are done at the end of an accounting period in order to...

-Assure the statement reflects Revenues earned and the Expense incurred in the appropriate period
-Update liability and asset accounts to proper balance

Adjusted Trial Balance

Is the trial balance prepared once adjustments have been recorded and contains totals of all general ledger accounts


Allocating costs of plant assets over expected their useful lives

Accounting Cycle is the recurring steps performed each reporting period...

In order...Analyze, Journalize, Post, Trial Balance, Adjust, Adjusted Trial Balance, Financial Statements, Close, Post-Closing Trial Balance, Reverse entries(optional)

Capital calculation

Revenues - Expenses = Net Income - Withdraws = Ending Capital

Classified Balance Sheet

Organizes Assets and Liabilities into subgroups providing more info to decision makers

Classified Balance Sheet order...

Assets- Current(used within a year or ops cycle)
Long-term investments(year+)
Plant assets(tangible long lived revenue producing)
Intangible(long term resources ie. patent,TM)
Liabilities-Current(due within a year or ops cycle)
Long-Term(Due outside a year or ops cycle)
Equity- Owners claim on the assets

Closing Process

Ensures Net Income/Net Loss and owners withdraws are closed into the owner's capital account

Income Summary account

Special account to temp hold the amounts of revenues and expenses before net difference is added/subtracted from owner's capital account. Also used to close temp accounts ie.revenues, expenses, net income and withdraws

Permanent(Real Account)

Assets, Liabilities and Equity

Temporary(Nominal Account)

Revenues, Expenses, and withdrawl accounts that are closed at the end of each accounting period

Post-Closing Trial Balance

Trial balance prepared after closing entries have been journalized and posted. Reports all ledger accounts except temporary accounts


(Optional tool)10 Column spreadsheet used to draft unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements

A Merchandise company

Earns Net Income by buying and selling merch.
can buy from manufacturers and sell to retailers
can buy from manufacturers and sell to customers
can be a wholesaler or a retailer

Merchandise inventory is a...

Current asset

Credit terms (2/10, n/30) is interpreted as...

2% cash discount if the amount is paid within 10 days(from date of invoice), If not then the balance is due within 30 days

Trade Discount

Is a reduction in price below the list price

Cost of Goods Sold(expense)

Is the term used for the cost of buying and preparing merchandise for sale

Sales Returns (contra-revenue)

Merchandise that customers return to the seller after the sale

Sales allowances(contra-revenue)

A credit to the buyer for defective merchandise or goodwill

Credit Memo

Advises the buyer that a return or allowance has been credited to the Account Receivable

Debit Memo

Is the document a buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.

Multiple Step income statements...

contain more detail of revenues and expenses listing than a single-step

Inventory Shrinkage

-Comparing a physical count of inventory with recorded inventory counts
-refers to the loss of inventory
-can be caused by theft or deterioration
-is recognized by debiting Cost of Goods Sold

The amount recorded for merchandis inventory includes..

any purchase discounts, returns and allowances, necessary freight cost, and any trade discounts

Costs included in the Merchandise Inventory account can include...

Invoice price minus any discount, transportation-in, storage and insurance

Goods on Consignment

Goods shipped by the owner to the consignee who sells the goods for the owner

Damaged and Obsolete goods

Included in inventory at their net realizable value

Merchandise inventory

includes all goods owned by a company and held for sale

Physical counts of inventory...

necessary to measure and adjust for inventory shrinkage

Internal Controls for Physical Count

-pre-numbered inventory tickets
-counters of inventory should not be those who are responsible for the inventory
-counters must confirm the validity of inventory existence, amounts and quality
-second counts by a different counter

If a period-end inventory amount is reported in error...

it can cause a misstatement in Cost of Goods Sold, Net Income, Gross Profit, and Current Assets

First In First Out(FIFO)

Inventory valuation method that assigns a value to the inventory on the balance sheet that approximates current cost. Ir also mimics the actual flow of goods for most businesses

Last In First Out(LIFO)

Used during a period of steadily rising costs, this valuation method yields the lowest reported net income

Weighted Average

Inventory valuation method that tends to smooth out erratic changes in costs

Consistency Concept

Requires that the same valuation method stays constant unless another method becomes preferable

Generally Accepted Accounting Principles(GAAP) require that the inventory of a company...

be reported at lower of cost or market

An Overstatement of ending inventory will...

Cause an overstatement of assets and equity on the balance sheet

An Understatement of ending inventory will...

cause an understatement of assets and equity on the balance sheet

Accounting Information Systems

Collect and process data from transactions and events, organize data in useful forms, communicate crucial info to business decision makers

Internal Control Procedures

to ensure reliable financial reports, safeguards to protect assets, policies to direct operations toward common goals and methods to achieve compliance with laws and regulations

Control Principle

requires that internal controls aid managers in controlling and monitoring business activities

Relevance Principle

requires and accounting info system to report Useful, understandable, timely, and pertinent info for effective decision making

Source Documents provide...

The basic info processed by and accounting system

Information Processors

interpret,transform, and summarize info for use in analysis and reporting

Accounts Payable Ledger

subsidiary ledger that contains a separate account for each supplier (creditor) to the company

Accounts Receivable Ledger

is a subsidiary ledger that contains an account for each credit customer

5 Fundamental Principles of Accounting info systems are...

Control, relevance, compatibility, flexibility and cost benefit


Includes currency and coins along with the amounts on deposit in bank accounts, checking accounts, and many savings accounts, cashier's checks, certified checks and money orders

Cash Equivalents

short term, highly liquid investment assets meeting 2 criteria; (1) readily convertible to a known cash amount and (2) sufficiently close to their due date so that their market value is not sensitive to interest rate changes


a company's ability to pay for its near term obligations

Bank Account

a record set up by a bank for a customer

Deposit Ticket

lists items such as currency, coins, and checks deposited along with their corresponding dollar amount


Used to withdraw money from an account, a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient

Bank Statement

sent once a month to each depositor showing the activity in the account

Bank Reconcilliation

a report explaining(reconciling) any differences between the checking account balance according to the depositors records and the balance reported on the bank statement

Outstanding Checks

checks written (or drawn) by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank for payment at the bank statement date

Deposits in Transit

deposits made and recorded by the depositor but not yet recorded on the bank statement

Deductions for Uncollectible items/services(aka non-sufficient funds NSF)

A company sometimes deposits another party's check that is uncollectible(usually meaning the balance in that party's account is not large enough to cover the check)

Additions for Collections and Interest

When a bank collects an item, it is added to the depositor's account, less any service fee. The bank then sends a credit memo to notify the depositor of the transaction

When a company extends credit directly to customers...

it (1) maintains a separate account receivable for each customer and (2) accounts for bad debts from credit sales

Credit Card Sales

Gives customers the ability to make purchases without cash or checks. Customers using these cards can make single monthly payments instead of several payments to different creditors and can defer their payments

Allowance Method of accounting for bad debts...

matches the estimated loss from uncollectible accounts receivable against the sales they helped produce. Advantages (1) it records estimated bad debts expense in the period when the related sales are recorded and (2) it reports accounts receivable on the balance sheet at the estimated amount of cash to be collected

Direct Write-Off Method of accounting for bad debts...

records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is attempted to predict bad debts expense

Percent of Sales Method(aka income statement method)

based on the idea that a given percent of a company's credit sales for the period is uncollectible.

Percent of Receivables Method(aka balance sheet method)

Uses balance sheet relations to estimate bad debts- mainly the relation between accounts receivable and the allowance amount. Assumes that a given percent of a company's receivables is uncollectible.

Aging of Receivables Method

Uses both past and current receivables info to estimate the allowance amount. Assumes that the longer an account is past due, the more likely it is to be uncollectible

Promissory Note

a written promise to pay a specified amount of money, usually with interest, either on demand or at a definite future date. Sellers sometimes ask for a note to replace an account receivable when a customer requests additional time to pay a past due account. (calculate note at maturity)

Plant Assets

tangible assets used in a company's operations that have a useful life of more than one accounting period.


process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Factors include; cost, salvage value and useful life

Straight Line Depreciation

Charges the same amount of expense period of the asset's useful life.
(Cost - Salvage Value) / Useful life in periods

Asset Book Value

Net balance sheet amount is computed as the asset's total cost less its accumulated depreciation

Units of Production

Charges a varying amount to expense for each period of an asset's useful life depending on its usage
(Cost - Salvage Value) / Units of production= Dep/Unit
Dep/Unit X Units produced in period =Dep Expense

Double Declining Depreciation

(1) compute the asset's straight line depreciation rate
(2) double the straight line rate
(3)compute depreciation expense by multiplying this rate by the asset's beginning of period book value

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions and try again


Reload the page to try again!


Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

Voice Recording