Chapter 1 Accounting in Action Assets resources a business owns Accounting the information system that identifies records and communicates the economic events of an organization to interested users Balance sheet a financial statement that reports assets liabilities and owner s equity at a specific date Basic accounting equation assets liabilities owner s equity Bookkeeping a part of accounting that involves only the recording of economic events Common stock term used to describe the total amount paid in by stockholders for the shares they purchase Corporation a business organized as a separate legal entity under state corporation law having ownership divided into transferable shares of stock Cost principle an accounting principle that states that companies should record assets at their cost Dividend a distribution by a corporation to its stockholders on a pro rata equal basis Economic equity assumption an assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities Ethics the standards of conduct by which one s actions are judged as right or wrong honest or dishonest fair or not fair Expenses the cost of assets consumed or services used in the process of earning revenue Fair value principle an accounting principle that states that companies should record assets at their fair value Faithful representation means that the numbers and descriptions of financial information match what really existed or happened it s factual Financial accounting the field of accounting that provides economic and financial information for investors creditors and other external users Financial accounting standards board FASB a private organization that established generally accepted accounting principles GAAP Generally accepted accounting principles GAAP common standards that indicate how to report economic events Income statement a financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time International accounting standards board IASB an accounting standard setting body that issues standards adopted by many countries outside the United States Liabilities creditor claims on total assets Managerial accounting the field of accounting that provides internal reports to help users make decisions about their companies Monetary unit assumption an assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money Net income the amount by which revenues exceed expenses Net loss the amount by which expenses exceed revenues Partnership a business owned by two or more persons associated as partners Proprietorship a business owned by one person Public company accounting oversight board PCAOB it determines auditing standards and reviews auditing firms Relevance it means that financial information is capable of making a difference in a decision Retained earnings statement a financial statement that summarizes the changes in retained earnings for a specific period of time Revenues the gross increase in stockholders equity resulting from business activities entered into for the purpose of earning income Sarbanes oxley act of 20022 SOX law passed by Congress in 2002 intended to reduce unethical corporate behavior Securities exchange commission SEC a governmental agency that requires companies to file reports in accordance with generally accepted accounting principles Statement of cash flows a financial statement that summarizes information about the cash inflows receipts and cash outflows payments for a specific period of time Stockholders equity the ownership claim on a corporation s total assets Transactions the economic events of a business that are recorded by accountants Chapter 2 The Recording Process Account a record of increases or decreases in specific asset liability or stockholder s equity items Chart of accounts a list of accounts and the account numbers that identify their location in the ledger Compound entry a journal entry that involves three or more accounts Credit the right side of an account Debit the left side of an account Double entry system a system that records in appropriate accounts the dual effect of each transaction General journal the most basic form of journal General ledger a ledger that contains all asset liability and stockholder s equity accounts Journal an accounting record in which transactions are initially recorded in chronological order Journalizing the entering of transaction data in the journal Ledger the entire group of accounts maintained by a company Normal balance an account balance on the side where an increase in the account is recorded Posting the transfer of journal entries to the ledger accounts Retained earnings net income that is kept retained in the business Simple entry a journal entry that involves only two accounts T account the basic form of an account Three column form of account a form with columns for debit credit and balance amounts in an account Trial balance a list of accounts and their balances at a given time Chapter 3 Adjusting the Accounts Accrual basis accounting accounting basic in which company s record transactions that change a company s financial statements in the periods in which the events occur Accruals adjusting entries for either accrued revenues or accrued expenses Accrued expenses expenses incurred but not yet paid in cash or recorded Accrued revenues revenues earned but not yet received in cash or recorded Adjusted trial balance a list of accounts and their balances after the company has made all adjustments Adjusting entries entries made at the end of an accounting period to ensure that companies follow the revenue and expense recognition principles Book value the difference between the cost of a depreciable asset and its related accumulated depreciation Calendar year an accounting period that extends from January 1 to December 31 Cash basis accounting accounting basis in which companies record revenue when they receive cash and an expense when they pay cash Contra asset account an account offset against an asset account on the balance sheet Deferrals adjusting entries for either prepaid expenses or unearned revenues Depreciation the allocation of the cost of an asset to expense over its useful life in a rational systematic manner Expense recognition matching principle the principle that companies match
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