1. Key Accounting Terms
Account
A record used to summarize all increases and decreases in a particular asset,
such as Cash, or any other type of asset, liability, owner’s equity, revenue, or
expense.
Accounting cycle
The sequence of accounting procedures applied in recording, classifying, and
summarizing accounting information. The cycle begins with the occurrence of
business transact ions and concludes with the preparation of financial
statements.
Accounting Equation
Assets are equal to the sum of liabilities plus owner’s equity (A = L + QE). This
equation is reflected in the format of the balance sheet.
Accounting System
The personnel, procedures, records, forms, and devices used by an
organization in developing and communicating accounting information.
American Institute of Certified Public Accountants (AICPA)
The national professional association of certified public accountants (CPAs).
Carries on extensive research and is influential in improving accounting
standards. Also develops auditing standards and administers the Uniform CPA
Examination.
Annual Report
2. A document issued annually by publicly owned corporations to their
stockholders. Includes audited financial statements for several years, as well as
nonfinancial information about the company and its operations.
Assets
Economic resources owned by an entity.
Auditing Performing
An investigation enabling the auditors to express an independent opinion
(auditors’ report) as to the fairness and completeness of a set of financial
statements.
Balance Sheet
The financial statement showing the financial position of an entity by
summarizing its assets, liabilities, and owner’s equity at one specific date.
Business Entity
An economic unit that controls resources, incurs obligations, and engages in
business activities.
Capital Stock
Transferable units of ownership in a corporation.
Certified Public Accountant (CPA)
3. An independent professional accountant licensed by a state to offer auditing
and other accounting services to clients.
Corporation
A business organized as a separate legal entity and chartered by a state, with
ownership divided into transferable shares of capital stock.
Cost Principle
The widely used principle of accounting for assets at their origin al cost to the
current owner.
Credit
An amount entered on the right-hand side of an account. A credit is used to
record a decrease in an asset and an increase in a liability or in owner’s equity.
Creditor
A lender; an entity to which money is owed.
Data base
A storage center of information within a computer-based accounting system.
The idea behind a data base is that data intended for a variety of uses may be
entered into the computer system only once, at which time the information is
stored in the data base. Then, as the information is needed, the computer can
retrieve it from the data base and arrange it in the desired format.
Debit
An amount entered on the left-hand side of an account. A debit is used to
record an increase in an asset and a decrease in a liability or in owner’s equity.
4. Double-entry accounting
A system of recording every business transaction with equal dollar amounts of
both debit and credit entries. As a result of this system, the accounting
equation always remains in balance; in addition, the system makes possible the
measurement of net income and also the use of error-detecting devices such as
a trial balance.
Disclosure (“adequate”)
The accounting principle of providing with financial statements any financial
facts necessary for the proper interpretation of those statements.
Fair
A term used by accountants to describe a set of financial statements that are
complete, not misleading, and prepared in conformity with generally accepted
accounting principles. Auditors express their opinions as to the “fairness” of
financial statements.
Financial Accounting
The development and use of accounting information describing the financial
position of an entity and the results of its operations.
Financial Accounting Standards Board (FASB)
An independent group that conducts research into accounting problems and
issues authoritative pronouncements as to “generally acceptable” accounting
principles.
5. Financial Position
The financial resources and obligations of an organization, as described in a
balance sheet.
Financial Reporting
The process of periodically providing “general-purpose” financial information
(such as financial statements) to persons outside the business organization.
Financial Statements
Four related accounting reports that concisely summarize the current financial
position of an entity and the results of its operations for the preceding year (or
other time period).
Footing
The total of amounts in a column.
Generally Accepted Accounting Principles (GAAP)
The accounting concepts, measurement techniques, and standards of
presentation used in financial statements. Examples include the cost principle
and objectivity.
Going-Concern Assumption
An assumption by accountants that a business will operate indefinitely unless
specific evidence to the contrary exists, such aa impending bankruptcy
Internal Control
All measures used within an organization to assure management that the
organization is operating in accordance with management’s policies and plans.
6. Journal
A chronological record of transactions, showing for each transaction the debits
and credits to be entered in specific ledger accounts. The simplest type of
journal is called a general journal.
Ledger
A loose-leaf book, file, or other record containing all the separate accounts of a
business.
Liabilities
Debts or obligations of an entity that have arisen from past transact ions, The
claims of creditors against the assets of a business.
Objectivity Principle
Accountants’ tendency to base accounting measurements upon dollar amounts
that are factual and subject to independent verification.
Owner’s Equity
The excess of assets over liabilities. The amount of an owner’s net investment
in a business plus profits from successful operations which have been retained
in the business.
Partnership
An unincorporated business owned by two or more persons voluntarily
associated as partners.
Posting
7. The process of transferring information from the journal to individual accounts
in the ledger.
Profitability
An increase in owner’s equity resulting from successful business operations.
Public Information
Information which by law is available to the general public. The annual financial
statements of large publicly owned businesses are public information.
Publicly Held Corporations
Corporations in which members of the general public may buy or sell shares of
capital stock.
Retained Earnings
The portion of the owners’ e4uity in a corporation that has accumulated as a
result of profitable business operations.
Securities and Exchange Commission (SEC)
The federal agency with the legal power to establish financial reporting
requirements for large, publicly owned corporations. Also enforces federal
securities laws, bringing legal action against possible offenders.
Sole Proprietorship
An unincorporated business owned by an individual.
8. Solvency
Having the financial ability to pay debts as they become due.
Stable-Dollar Assumption
An assumption by accountants that the dollar is a stable unit oc measure, like
the mile or the gallon. A simplifying assumption that permits adding or
subtracting dollar amounts originating in different time periods. Unfortunately,
the assumption technically is incorrect and may seriously distort accounting
information during periods of severe inflation.
Stockholders
Owners of capital stock in a corporation; hence, the owners of the corporation.
Stockholders’ Equity
The owners’ equity in an entity organized as a corporation.
Trial balance
A two-column schedule listing the names and the debit or credit balances of
accounts in the ledger.
Transaction
An event that causes an immediate change in the financial position of an entity
and that can be measured objectively in monetary terms. In current practice.
transactions serve as the basis for recording financial activity.
Window dressing
Legitimate measures taken by management to make a business look as strong
as possible at the balance sheet date.
9. Accounting Cycle
The procedures needed to process transactions through an accounting system;
including journalization, posting, adjusting, and preparing financial statements
Capital stock
A non-specific reference to the ownership interests of shareholders in a
corporation
Closing process
The process by which temporary accounts are "zeroed" out and the effects
transferred to retained earnings
Current assets
Assets that will be converted into cash or consumed within one year or the
operating cycle, whichever is longer
Current liabilities
Obligations that will be liquidated within one year or the operating cycle,
whichever is longer
Current ratio
A measure of liquidity, calculated by dividing current assets by current liabilities
Full disclosure principle
All relevant facts that would influence investors' and creditors' judgments about
the company are disclosed in the financial statements or related notes
Income summary
10. A non-financial statement account used only to facilitate the closing process by
summarizing and zeroing-out the revenue and expense accounts
Intangible asset
Lack physical existence, and include items like purchased patents and
copyrights
Liquidity
The ability of a firm to meet its near-term obligations as they come due
Long-term investments
Investments made for long-term holding purposes; including land for
speculation, securities of other companies, etc.
Long-term liabilities
Any obligation that is not current, and include bank loans, mortgage notes, and
the like
Nominal accounts
Accounts that will be reset to a zero balance with each new accounting period;
revenue, expense, and dividend accounts (also called "temporary" accounts)
Operating cycle
The period of time it takes to convert cash back into cash (i.e., purchase
inventory, sell the inventory on account, and collect the receivable)
Other assets
The category of a classified balance sheet for reporting assets that are not
logically attached to one of the other specific sections
Post-closing trial balance
11. Reveals the balance of accounts after the closing process, and consists of
balance sheet accounts only