Accounting Definitions Flashcards
Debt Financing
Borrowed resources/capital. It must be repaid at a specific future date, usually has interest. Debt is temporary financing.
Equity Financing
Investors contribute resources/capital in exchange for ownership interest in a business which grants the following rights: 1. a right to vote or have a say in the affairs of the business 2. a right to share in any profits of the business. 3. a right to share in any remaining resources after the business has been terminated.
What are the “General Purpose Financial Statements”?
- Balance Sheet / Statement of Financial Position
- Income Statement / Statement of Operations
- Statement of Cash Flows
GAAP
Generally Accepted Accounting Principles: Ate the rules and Standards of accounting used to create comparable information between businesses financial statements.
SEC
Securities and Exchange Commission: Government run program that has legal authority to determine GAAP for publicly held companies also they regulate the capital transactions of publicly held companies.
AICPA
American Institute of Certified Public Accountants: Originally had the responsibility of determining GAAP. They also Certify and License CPA’s
FASB
Financial Accounting Standards Board: A private organization that was formed in 1973 to assume the responsibility of determining GAAP.
Proprietorship
One owner, no red tape except if employees are hired, No separation of business and personal legal liability. No separate income taxation.
Partnership
More than one owner, no red tape except if employees are hired, No separation of business and personal legal liability, No separate income taxation, a formal partnership agreement is recommended but not required.
Corporation
A separate legal entity apart form it’s owners, lots of red tape, one or more owner, separation of liabilities, separation of business and personal taxation (double taxation)
Who is responsible for a corporations accounting system and the preparation of the financial statements?
Management
Describe Corporate ownership, governance, and management
Share holders (Invest Capital) Elect Board of directors (Advise for a fee) Who hires top management personnel (Manage for a salary) Who hires other employes (Work for a salary/wage) Which produces profits for owners.
Balance Sheet or Statement of Financial Position
Reflect resources and how they have been provided
Income Statement or Statement of Operations, Statement of Earnings, Statement of Profit and Loss, P&L Statement
Shows whether or not the business made a profit.
Statement of Cash Flows
Shows the major sources and use of cash. An option al Financial statement (not required under GAAP but typically provided)
Assets
(Resources) PROPERTY OR RIGHTS that are owned or controlled by a company and provide PROBABLE FUTURE ECONOMIC BENEFIT.
Liabilities
PROBABLE FUTURE OBLIGATIONS to pay assets (usually cash) or provide services to another entity. LIABILITIES ARE A COMPANY’S DEBTS.
What are the two components of Owners Equity?
Capital Stock and Retained Earnings
Retained earnings
Any increase in assets arising from profitable operations to be retained in the business rather than distributed to owners as a dividend .
Revenues
The amount of INFLOWING assets FROM THE SALE OR PROVIDING OF GOODS OR SERVICES TO CUSTOMERS.
revenues are not the asset received but simply a description of why we received the asset.
Expenses
The amount of outflowing assets representing A COST OF PROVIDING GOODS OR SERVICES FOR SALE.
expense is a term which describes why an asset is given up or will be given up in the future.
What is a General Ledger
A book or software file that that has a separate record of every account (assets, liability, or owner’s equity as well as each kind of revenue, expense, and dividend) so that you can easily understand what the total balance of that account is at any given time.
What is a Trial Balance?
A listing of all assets, Liabilities, and owner’s equity ( capital stock, retained earnings, revenues, expense, and dividends) nothing their ending general ledger balances. It tells you you have an equal debits and credits. It’s really a way to do some self checking.
Retained Deficits
Expenses exceed revenues
If a company incurs losses from operations rather than profits retained earnings is reduced and may actually become a deficit or debit balance.
Real Accounts
All accounts which appear on a balance sheet are referred to as real accounts, meaning that the balance of the account is a cumulative running balance reflecting all transactions affecting that account since the inception of the business.
Nominal Account
All income statement accounts (revenues and expenses and even the dividends) do not maintain a cumulative running balance from inception, but instead accumulates amounts period by period (usual year by year) and as a result are referred goal as nominal rather than real accounts. Nominal accounts are closed at the end of an accounting period and their amounts are transferred to retained earnings.
What are Net Sales Revenue?
Net Sales less any Contra-revenue sales / sales discounts.
Gross Margin
Mark up
What does the Aging method find and why?
The Aging method will give you the ending balance in your Allowance for Bad Debt Expense account This is a
Matching Principle
The matching principle requires the cost of operating a company to be recorded as expresses in the period in which those cost provide benefits to the company, not necessarily when those cost are actually paid in cash. It often requires adjusting entries to be made.
Allowance Method
Uses estimation of uncollectible A/R to reflect bad debt expense in the proper period and is required under GAAP
