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42 terms

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