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Accounting Ch. 1, 2, 3 (Exam 1)

accounting
– information system that measures business activity, processes the data into reports, and communicates the results to decision makers
– “language of business”
FINANCIAL STATEMENTS
set of reports on a business in monetary terms as a tool to evaluate performance & financial position to make future business decisions
-periodic reports of activity
financial accounting
provides information for external decision makers (e.g. lenders and outside investors)
managerial accounting
focuses on information for internal decision makers (e.g. managers)
creditor
any person or business lending money
certified public accountants (CPA)
licensed professional accountants who serve the general public
certified management accountants (CMA)
certified professionals who work for a single company
Financial Accounting Standards Board (FASB)
privately funded organizations, formulates accounting standards
generally accepted accounting principles (GAAP)
-guidelines for public information
-main U.S. accounting rule book
international financial reporting standards (IFRS)
international accounting rule book
international accounting standards board (IASB)
published the international financial reporting standards
audit
an examination of a company’s financial records
SOLE PROPRIETOR(SHIP)
singe owner (proprietor) with accounting perspective distinct from its owner
PARTNERSHIP
two or more individuals as co-owners (partners) with accounting perspective distinct from its partners
mutual agency
each owner is a partner and can commit the partnership in a binding contract, so one partner can make all partners mutually liable
CORPORATION
business owned by stockholders/shareholders with a legal entity distinct from its owners
stockholders/shareholders
people who own shares or stock in the business
stock
certificate representing ownership interest in a corporation
articles of incorporation
the rules approved by the state that govern the management of the corporation
limited-liability partnership/company
each partner/company is liable only for his or her own actions and those under his or her control (i.e. debts)
-common for partnerships & proprietorships
not-for-profit
an organization that has been approved by the Internal Revenue Service to operate for a religious, charitable, or educational purpose
-no owners, usually just volunteers
fiduciary responsibility
an ethical and legal obligation to perform their duties in a trustworthy manner
charter
-aka articles of incorporation
-the document that gives the state’s permission to form a corporation
authorization
state “authorizes” or approves the establishment of the corporate entity
BUSINESS ENTITY
an organization that stands apart as a separate economic unit, referring to one business separate from its owners
-economic unit that can provide a service, sell a product, and merchandise, manufacture, and sell a product
faithful representation principle
data faithfully presents measurement or description of that data, which is complete, neutral, and free from material error
COST PRINCIPLE
acquired assets and services should be recorded at their actual cost (historical cost)
– list at the amount shown on the receipt (actual amount paid)
GOING-CONCERN PRINCIPLE/CONCEPT
the entity will remain in operation for the foreseeable future and won’t close soon
-assumption of continuation indefinitely measuring activity
stable monetary unit concept
accountants assume that the dollar’s purchasing power is stable (no inflation)
-stable currency buying power
ASSETS
economic resources that are expected to benefit the business in the future
-something the business owns that has value
– ex: cash, accounts receivable, inventory, equipment, and furniture
LIABILITIES
debts payable to outsiders who are known as creditors
-claims against business assets by third parties
-ex: accounts payable
OWNERS/STOCKHOLDER’S/ SHAREHOLDER’S EQUITY
represents the owners claims to the assets of the business (net worth: value of business to owners)
=assets-liabilities
-ex: common stock and retained earnings
ACCOUNTING EQUATION
basic tool of accounting measuring the resources of a business and the claims to those resources
-economic resources= claims to economic resources
assets= liabilities + stockholders equity
*both sides need to be balanced
paid-in capital/controlled capital
the amount invested in the corporation by its owners, the stockholders.
common stock
represents the basic ownership or every corporation
retained earnings
the amount earned by income-producing activities and kept for use in the business
revenues
increases in retained earnings from delivering goods or services to customers
-sales, service, interest, dividend
dividend revenue
earned on investments in the stock of other corporations
expenses
the decreases in retained earnings that result from operations
-incurred costs that you will have to pay for, either now or later
NET INCOME
when revenues exceed expenses (profit)
= revenues-expenses
*on statement of RE
NET LOSS
when expenses exceed revenues (debt)
dividends
distributions of retained earnings (usually of cash) to stockholders
*not an expense
TRANSACTIONS
any event that affects the financial position of the business and can be measured reliably
-affects what the company owns, owes, or its net worth
-captures financial impact of events on entity to generate financial statements at end of each period
account receivable
a promise (as an asset) when an agency expects to collect cash in the future for services that were not paid for immediately
ACCOUNTS PAYABLE
a short-term liability that will be paid in the future (credit)
-amount owed to supplier for goods or services
INCOME STATEMENT
summary of all revenues and expenses of an entity during a specific period of time, which reports net income/net loss of the business (profitable?)
– aka “statement of earnings” or “statement of operations”
*shows results of operations, how much business generated in net income/net loss
STATEMENT OF RETAINED EARNINGS/OWNERS EQUITY
reports what business did with any profits earned, how much in assets a business has & how much it already owes (increases/decreases to owners equity)
– increase= investments and profits (net income)
– decrease= dividends for corporation and net losses
*Ending RE = Beginning of RE+Net income-Dividends
*shows what caused change in retained earnings
BALANCE SHEET
reports the businesses assets, liabilities, and owners equity at a certain point in time, judges financial health, well-being, & ability to meet short-term financial agreements (ending stockholder’s equity)
-“statement of financial position”
STATEMENT OF CASH FLOWS
reports CASH RECEIPTS (cash coming in) and CASH PAYMENTS (cash going out), and whether cash increased or decreased from operating, investing, and financing activities
movement in financial statements
Income statement… NET INCOME to… statement of owner’s equity… ENDING EQUITY BALANCE to… balance sheet… ENDING BALANCE OF CASH supported by… statement of cash flows
CHARACTERISTICS OF AN CORPORATION
1) separate legal entities
2) continuous life
3) transferability of ownership
4) limited liability
5) separate owners and managers
6) some disadvantages of corporate taxation & government regulation
7) no mutual agency
NOTE PAYABLE
written promise of future payment and usually requires payment of interest in addition to repayment of debt
ACCOUNT
detailed record of all the changes that have occurred in a particular asset, liability, or owners equity (stockholder’s equity) during a period. The basic summary device of accounting.
ACCRUED LIABILITY
a liability for which the business knows the amount owed but the bill has not been paid
CHART OF ACCOUNTS
a list of all a company’s accounts with their account numbers
COMPOUND JOURNAL ENTRY
same as a journal entry, except this entry is characterized by having multiple debits and/or multiple credits. The total debits still equal the total credits in the compound entry
CREDIT
the right side of an account
DEBIT
the left side of an account
DOUBLE-ENTRY SYSTEM
a system of accounting where every transaction affects at least two accounts
JOURNAL
the chronological accounting record of an entity’s transactions
LEDGER
the record holding all the accounts and amounts
NORMAL BALANCE
the balance that appears on the side of an account- debit or credit- where we record increases
NOTE RECEIVABLE
a written promise for future collection of cash
NOTES PAYABLE
represents debts the business owes because it signed promissory notes to borrow money or to purchase something
POSTING
copying amounts from the journal to the ledger
PREPAID EXPENSES
expenses paid in advance of their use
T-ACCOUNT
summary device that is shaped like a capital “T” with debits posted on the left side of the vertical line and credits on the right side of the vertical line. A “shorthand” version of a ledger.
TRIAL BALANCE
a list of all the ledger accounts with their balances at a point in time
ACCRUAL
the cash payment occurs after an expense is recorded or the cash is received after the revenue is earned
ACCRUAL-BASIS ACCOUNTING
accounting that records revenues when earned and expenses when incurred
ACCRUED REVENUE
a revenue that has been earned but for which the cash has been collected yet
ACCRUED EXPENSES
an expense that the business has incurred but not yet paid
ACCUMULATED DEPRECIATION
the sum of all depreciation expense recorded to data for an asset
ADJUSTED TRIAL BALANCE
a list of all accounts with their adjusted balances
ADJUSTING ENTRIES
entries made at the end of the period to assign revenues to the period in which they are earned and expenses to the period in which they are incurred. Adjusting entries help measure the period’s income and bring the related asset and liability accounts to correct balances for the financial statements
BOOK VALUE (OF A PLANT ASSET)
the asset’s cost minus accumulated depreciation
CASH-BASIS ACCOUNTING
accounting that records transactions only when cash is received or paid
CONTRA ACCOUNT
an account that always has a companion account and whose normal balance is opposite that of the companion account
DEFERRAL/PREPAID
the cash payment occurs before an expense is recorded or the cash is received before the revenue is earned
DEFERRED/UNEARNED REVENUE
a liability created when a business collects cash from customers in advance of doing work
DEPRECIATION
the allocation of a plant asset’s cost over its useful life
LIQUIDATION
the process of going out of business by selling all the assets, paying all the liabilities, and giving any leftover cash to the stockholders
MATCHING PRINCIPLE
guide to accounting for expenses. identify all expenses incurred during the period, measure the expenses, and match them against the revenues earned during that same time period
PLANT ASSETS
long-lived tangible assets- such as land, buildings, and equipment- used in the operation of a business
REVENUE RECOGNITION PRINCIPLE
the basis for recording revenues: tells accountants when to record revenue and the amount of revenue to record
TIME-PERIOD CONCEPT
ensures that information in reported at least annually

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