Terminology & Formulas Flashcards
Net Income
(Profit) Excess Revenues over Expenses
Bookkeeping
The mechanical part of accounting
Financial Accounting
(Internal) Information Providers of entity’s economic activities to investors, creditors, govt agencies, and public
Managerial Accounting
(External) Information Providers of entity’s economic activities to entity’s managers
Propietorship
Single propietor
Partnership
2+ parties as co-owners/partners
Limited Liability Propietorship (LLP)
1 general partner with unlimited liability and all other partners are only liable up to their initial investment
Limited Liability Company (LLC)
one or more owners/members; business not members are liable but it is not unlimited; business does not pay income tax, members pay income tax on their “flow through”.
Corporation
a business owned by stockholders/shareholders who own stock/shares of ownership
generally accepted accounting principles (GAAP)
professional guidelines for measurement and disclosure of financial information
Financial Accounting Standards Board (FASB)
US entity that formulates the GAAP
International Accounting Standards Board (IASB)
sets International Financial Reporting Standards (IFRS)
Entity
any organization that stands apart as a separate economic unit
continuity (going-concern) assumption
the assumption that the entity will continue to operate long enough to use existing assets—land, buildings,equipment, and supplies—for its intended purposes
historical cost principle
assets should be recorded at their actual cost, measured on the date of purchase as the amount of cash paid plus the dollar value of all non-cash consideration (other assets, privileges, or rights) also given in exchange
Fair value
the amount that the business could sell the asset for, or the amount that the business could pay to settle the liability
stable-monetary-unit assumption
the assumption that the dollar’s purchasing power is stable over time
The Accounting Equation
Assets = Liabilities + Owners’ Equity
long-lived assets
property, plant, and equipment
liquid assets
cash and cash equivalents, the medium of exchange
current portion of long-term debt
amount due in the next year
Owners Equity
Assets - Liabilities;2 subparts: paid-in capital & retained earnings
Paid-in capital
the amount the stockholders have invested in the corporation
Retained Earnings
the amount earned by income-producing activities and kept for use in the business. 3 factors: revenues, expenses, and dividends
Revenues
inflows of resources that increase retained earnings by delivering goods or services to customers
Dividends
distributions to stockholders of assets (usually cash) generated by net income. Dividends are not expenses. Dividends never affect net income. Instead of being subtracted from revenues to compute net income, dividends are recorded as direct reductions of retained earnings.
Profits
Excess of Revenues over expenses
net income
aka net profit or net earnings; when total revenues exceed total expenses >> Income Statement_Bottom Line<<
net loss
when expenses exceed revenues >> Income Statement_Bottom Line<<
Financial Statement Data Flow
Income Statement >> Statement of Retained Earnings >> Balance Sheet >> Statement of Cash Flows
income statement
aka statement of operations; Total Revenues and Gains - Total Expenses and Losses. The bottom line is net income or net loss for the period. 2nd line is “Consolidated Statements of Income”
Expenses
-Cost of products/ goods sold or cost of sales -
Selling, general and administrative expenses
IS - the costs of everyday operations that are not directly related to merchandise purchases and occupancy: sales commissions paid to employees,catalog production, mailing costs, warehousing expenses, depreciation,credit card fees,executive salaries, and other home-office expenses.
Net income expense
IS - “other income and expense”
Income tax expense
IS - federal gov’t expense, often largets
Indicator of a healthy and high quality company
consistently growing net income from operations
account format
A balance-sheet format that lists assets on the left and liabilities and stockholders__ equity on the right.
accrual
An expense or a revenue that occurs before the business pays or receives cash. An accrual is the opposite of a deferral.
accrual accounting
Accounting that records the impact of a business event as it occurs regardless of whether the transaction affected cash.
accrued expense
An expense incurred but not yet paid in cash.
accrued revenue
A revenue that has been earned but not yet received in cash.
accumulated depreciation
The cumulative sum of all depreciation expense from the date of acquiring a plant asset.
adjusted trial balance
A list of all the ledger accounts with their adjusted balances.
book value (of a plant asset)
The asset__s cost minus accumulated depreciation.
cash-basis accounting
Accounting that records only transactions in which cash is received or paid.
classified balance sheet
A balance sheet that shows current assets separate from long-term assets and current liabilities separate from long-term liabilities.
closing the books
The process of preparing the accounts to begin recording the next period__s transactions. Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue expense and dividendsaccounts to zero. Also called closing the accounts.
closing entries
Entries that transfer the revenue- expense- and dividends balances from these respective accounts to the Retained Earnings account.
contra account
An account that always has a companion account and whose normal balance is opposite that of the companion account.
current asset
An asset that is expected to be converted to cash- sold- or consumed during the next 12 months or within the business__s normal operating cycle if longer than a year.
current liability
A debt due to be paid within one year or within the entity__s operating cycle if the cycle is longer than a year.
current ratio
Current assets divided by current liabilities. Measures a company__s ability to pay current liabilities with current assets.
debt ratio
Ratio of total liabilities to total assets. States the proportion of a company__s assets that is financed with debt.
deferral
An adjustment for which the business paid or received cash in advance. Examples include prepaid rent prepaid insurance and supplies
depreciation
Allocation of the cost of a plant asset to expense over its useful life.
expense recognition principle
The basis for recording expenses. Directs accountants to identify all expenses incurred during the period to measure the expenses and to match them against the revenues earned during that same period.
liquidity
Measure of how quickly an item can be converted to cash.
long-term asset
An asset that is not a current asset.
long-term liability
A liability that is not a current liability.
multi-step income statement
An income statement that contains subtotals to highlight important relationships between revenues and expenses.
net working capital
A measure of liquidity; Current assets__current liabilities.
operating cycle
Time span during which cash is paid for goods and services that are sold to customers who pay the business in cash.
permanent accounts
Asset liability and stockholders__ equity accounts that are not closed at the end of the period.
plant assets
Long-lived assets- such as land- buildings- and equipment- used in the operation of the business. Also called fixed assets.
prepaid expense
A category of miscellaneous assets that typically expire or get used up in the near future. Examples include prepaid rent- prepaid insurance- and supplies.
report format
followed by liabilities and stockholders__ equity below.
revenue principle
The basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record.
single-step income statement
An income statement that lists all the revenues together under a heading such as Revenues or Revenues and Gains. Expenses appear in a separate category called Expenses or perhaps Expenses and Losses.
temporary accounts
The revenue and expense accounts that relate to a limited period and are closed at the end of the period are temporary accounts. For a corporation- the Dividends account is also temporary.
time-period concept
Ensures that accounting information is reported at regular intervals.
unearned revenue
A liability created when a business collects cash from customers in advance of earning the revenue. The obligation is to provide a product or a service in the future.
