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College Accounting Chapters 2-3

Accounts payable
Amounts a business must pay in the future
Accounts receivable
Claims for future collection from customers
Property owned by a business
Balance sheet
A formal report of a business’s financial condition on a certain date; reports the assets, liabilities, and owner’s equity of the business
Break even
A point at which revenue equals expenses
Business transaction
A financial event that changes the resources of a firm
Financial investment in a business; equity
An owner’s financial interest in a business
An outflow of cash, use of other assets, or incurring of a liability
Fair market value
The current worth of an asset or the price the asset would bring if sold on the open market
Fundamental accounting equation
The relationship between assets and liabilities plus owner’s equity
Income statement
A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses
Debts or obligations of a business
Net income
The result of an excess of revenue over expenses
Net loss
The result of an excess of expenses over revenue
On account
An arrangement to allow payment at a later date; also called a charge account or open-account credit
Owner’s equity
The financial interest of the owner of a business; also called proprietorship or net worth
An inflow of money or other assets that results from the sales of goods or services or from the use of money or property; also called income
Statement of owner’s equity
A formal report of changes that occurred in the owner’s financial interest during a reporting period
Funds taken from the business by the owner for personal use
Account balance
The difference between the amounts recorded on the two sides of an account
Written records of the assets, liabilities, and owner’s equity of a business
Chart of accounts
A list of the accounts used by a business to record its financial transactions
A means of identifying each account as an asset, liability, or owner’s equity
An entry on the right side of an account
An entry on the left side of an account
Double-entry system
An accounting system that involves recording the effects of each transaction as debits and credits
Drawing account
A special type of owner’s equity account set up to record the owner’s withdrawal of cash from the business
A small pencil figure written at the base of an amount column showing the sum of the entries in the column
Normal balance
The increase side of an account
Permanent account
An account that is kept open from one accounting period to the next
An accounting error involving a misplaced decimal point
T account
A type of account. resembling a T, used to analyze the effects of a business transaction
Temporary account
An account whose balance is transferred to another account at the end of an accounting period
An accounting error involving misplaced digits in a number
Trial balance
A statement to test the accuracy of total debits and credits after transactions have been recorded

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