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Accounting Cycle
ACCT 231 Chapters 1-4
| Term | Definition |
|---|---|
| Service Business | Provides services rather than products to customers. |
| Retail Business | a business that sells products to the final consumer of the product |
| Manufacturing Company | Makes products that are sold to customers |
| Operating Activities | Activities by which the company produces revenue from customers |
| Investing Activities | Activities by which a company acquires long-term assets for use in the operating activities of the company. |
| Financial Activities | Activities by which a company obtains funds to start and operate the company. |
| Accounting | an information system that provides reports to users about the economic activities and condition of a business |
| Financial Accounting | provides external users with information about the economic activities and condition of a business |
| Ethics | moral principles that guide the conduct of individuals |
| Factors related to ethical failures | Failure of Individual Character Culture of Greed and Ethical Indifference |
| PCAOB | Public Company Accounting Oversight Board |
| Accounting Standards | the rules that determine the accounting for individual business transactions |
| Accounting Principles & Assumptions | provide the framework upon which accounting standards are constructed |
| Characteristics of Financial Information | - Relevant - Faithful Representation - Comparability - Verifiability - Timeliness - Understandability |
| Characteristics of Financial Information - Relevant | Information has the potential to impact decision making |
| Characteristics of Financial Information - Faithful Representation | Information accurately reflects an entity's economic activity or condition |
| Characteristics of Financial Information - Comparability | Allows users to identify similarities and differences among reported items, includes consistent reporting |
| Characteristics of Financial Information - Verifiability | Allows users to agree on the meaning of reported items |
| Characteristics of Financial Information - Timeliness | Financial reports are distributed in time to influence a user's decision |
| Characteristics of Financial Information - Understandability | Financial reports are clear and concise, they facilitate user interpretation and analysis |
| Accounting Assumptions - List | Monetary Unit Time Period Business Entity Going Concern |
| Monetary Unit Assumption | The assumption that requires the items on the financial statements to be expressed in a single monetary unit. |
| Time Period Assumption | A company will report its economic activities on a regular basis for a specific period of time. |
| Business Entity Assumption | limits the economic data in financial reports to that directly related to the activities of the business |
| Going Concern Assumption | The assumption that the company will continue in operation for the foreseeable future. |
| Measurement Principle | determines the amount that will be recorded and reported. Requires that amounts be objective and verifiable. |
| Historical Cost | Recording an item at its initial transaction price |
| Revenue Recognition | Determines when revenue is recorded in the accounting records. Revenue is normally recorded when services have been performed or goods are delivered. |
| Expense Recognition Principle | Requires recognition of expenses in the same period as related revenues. Also called Matching Principle |
| Matching Principle | Requires recognition of expenses in the same period as related revenues. Also called Expense Recognition Principle. |
| Accounting Equation | Assets = Liabilities + Owner's Equity |
| Liabilities | Amounts owed to creditors or outsiders |
| Equity | Rights of the owners to the assets of the business |
| Assets | Resources owned by a business |
| Common Stock | Proof of an investor's ownership rights |
| Accounts payable | Liability created by purchase on account |
| Prepaid expenses | Expenses paid in cash and recorded as assets before they are used or consumed |
| Fees Earned | revenues received from providing services |
| Sales | revenues received from selling products |
| Accounts Receivable | Amounts to be received from customers in the future due to the sale of goods or services |
| Dividends | Distributions to stockholders, typically in the form of cash |
| Retained Earnings | the stockholders' equity created from business operations through revenue and expense transactions |
| Balance Sheet | Reports Assets, Liabilities, and Equity as of a specific date |
| Income Statement | Reports Revenues and Expenses for a specific period of time. Prepared first |
| Statement of Stockholders' Equity | reports the changes in each of the company's stockholders' equity accounts, including the change in the retained earnings balance caused by net income and dividends during the reporting period |
| Net Income | Revenues - Expenses |
| Account | A record that summarizes all the transactions pertaining to a single item in the accounting equation |
| Debit | the left side of an account |
| Credit | the right side of an account |
| Ledger | the group of accounts maintained by a company |
| Chart of Accounts | a list of all accounts used by a business |
| Revenues | Increases in assets and stockholders' equity as a result of selling services or products to customers. |
| Expenses | The cost of assets consumed or services used in the process of generating revenues. |
| Double-Entry Accounting | Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit. |
| Rules of Debit and Credit - Assets | Debit Increases. Credit decreases. NB: Debit. |
| Rules of Debit and Credit - Liabilities | Debit Decreases. Credit Increases. NB: Credit |
| Rules of Debit and Credit - Equity | Debit Decreases. Credit Increases. NB: Credit |
| Rules of Debit and Credit - Revenue | Debit Decreases. Credit Increases. NB: Credit |
| Rules of Debit and Credit - Expenses | Debit Increases. Credit decreases. NB: Debit. |
| Rules of Debit and Credit - Equity Distributions/ Dividends | Debit Increases. Credit decreases. NB: Debit. |
| Journal | an accounting record in which transactions are initially recorded in chronological order |
| Journalizing | the process of recording business transactions in a journal |
| Posting | the process of transferring the debit and credit information from the journal to individual accounts in the general ledger |
| Unearned Revenue | A liability created when a business collects cash from customers in advance of providing services or delivering goods. |
| Trial Balance | a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced |
| Accrual Basis | an accounting method in which revenue is recorded when a sale is made and an expense is recorded when it is incurred Required by GAAP |
| Cash Basis | an accounting method in which revenue is recorded when payment is received and an expense is recorded when cash is paid |
| Adjusting Process | the analysis and updating of accounts at the end of the period before the financial statements are prepared |
| Accrual | An expense or a revenue that occurs before the business pays or receives cash. An accrual is the opposite of a deferral. |
| Deferral | occurs when cash related to a future revenue or expense has been initially recorded as a liability or an asset - Unearned Revenue - Prepaid Expense |
| Depreciation | A decrease in the usefulness of an asset, allows a portion of the cost to be recorded as an expense |
| Accumulated Depreciation | A contra asset account representing the total depreciation taken to date. |
| Book Value | cost less accumulated depreciation |
| Permanent Accounts | balance sheet accounts whose balances are carried forward to the next accounting period |
| Temporary Accounts | Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period. |
| Closing Entries | Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings. |
| When are Financial Statements prepared? | After the Adjusted Trial Balance is prepared. Before the Closing Entries are made. |
Created by:
Raderm
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