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Accounting Terms – Chapter 4

Current Assets
Cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less.
Notes receivable
Amounts that customers owe. They are written promises to pay the amount of the note and interest. They are more formal than Accounts receivable.
Fixed or Plant Assets
Assets that include equipment, machinery, buildings, and land.
Current Liabilities
Liabilities that are due within a short time (usually one year or less).
Long-term Liabilities
Liabilities that will not be due for a long time (usually more than a year).
Permanent Accounts (or real accounts)
The balances of the accounts reported on the balance sheet that are carried forward from year to year.
Temporary Accounts (or nominal accounts)
The balances of the accounts reported on the income statement plus the drawing account that are not carried forward from year to year.
Closing Entries
To close the temporary accounts with a zero balance by transferring the account balances to permanent accounts at the end of the accounting period. This process if often referred to as closing the books.
Income Summary
A temporary account that is only used during the closing process. It is sometimes called a clearing account.
Accounting Cycle
The accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance.
Fiscal Year
The annual accounting period adopted by a business. The period used most often is the calendar year.
Natural Business Year
When a corporation adopts a fiscal year that ends when business activities have reached the lowest point in its annual operating cycle.
Liquidity
The ability to convert assets into cash.
Solvency
The ability for a business to pay its debts.
Working Capital
The excess of the current assets of a business over its current liabilities. It is calculated by taking CA-CL.
Current ratio
A way of expressing the relationship between current assets and currents liabilities. It is calculated by taking CA/CL.
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