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Accounting Terms from Chapter 1 and 2 of Financial Accounting 4e


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What are the 3 steps of Accounting?
Indentify, Record, and Communicate
Who are the origins of accounting attributed to?
Luca Pacioli (an Italian Renaissance Mathematician)
Accounting v Bookkeeping
The accounting process includes the bookkeeping function, but bookkeeping usually only involves the recording of economic events.
the standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair
Generally Accepted Accounting Principles are common standards that indicate how to report economic events
The Financial Accounting Standards Board is a private organization that establishes generally accepted accounting principles (GAAP)
Security and Exchange Commission is a governmental agency that requires companies to file financial reports in accordance with generally accepted accounting principles.
Cost Principle
An accounting principle that states that assets should be recorded at their cost.
Monetary Assumption
An assumption stating that only transaction data that can be expressed in terms of money be included in the accounting records - the unit of measure remains sufficiently constant over time
Economic Entity Assumption
An assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities
A business owned by one person, therefore personally liable
An association of two or more persons to carry on as co-owners of a business for profit; must separate own lives from business
A business organized as a separate legal entity under state corporation law having ownership divided into transferable shares of stock
Resources owned by a business

Consists of:
Cash, Accounts Receivable, Supplies, Insurance, and Equipment

Normal Balance is Debit
Creditorship claims on assets

Consists of:
Notes Payable, Accounts Payable, Unearned Revenue

Normal Balance is Credit
Stockholders' Equity
The ownership claim on total assets of a corporation

Consists of accounts:
Common Stock, Retained Earnings, and Dividends

Normal balance is Credit
Retained Earnings
are determined by revenues, expenses, and dividends
The gross increase in stockholders' equity resulting from business activities entered into for the purpose of earning income

Normal Balance is credit
The cost of assets consumed or services used in the process of earning revenue

Ex: advertising, insurance, salaries, and rent

Normal balance is Debit
Net Income
the amount by which revenues exceed expenses
Net loss
the amount by which expenses exceed revenues
a distribution by a corporation to its stockholders on an equal (pro rata) basis

Normal Balance is Debit
the economic events of the enterprise that are recorded by accountants
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
Retained Earnings Statement
A financial statement that summarizes the changes in retained earnings for a specific period of time
Balance Sheet
A financial statement that reports the assets, liabilities, and stockholders' equity at a specific date
Statement of Cash Flows
A financial statement that provides imformation about he cash inflows (receipts) and cash outflows (payments) of an entity for a specific period of time
the examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation
Management Consulting
An area of public accounting involving financial planning and control and the development of accounting and computer systems
Examples of Public Accounting include:
auditing, taxation, and management consulting
Examples of Private Accounting include:
General accounting, cost accounting, budgeting, accounting information systems, tax accounting, internal auditing
a record of increases and decreases in specific asset, liability, or stockholders' equity items
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3 Steps in the Recording Process:
1. analyze each transaction for its effects on the accounts
2. enter the transaction info in a journal
3. transfer the journal info to the appropriate accounts in the ledger
An accounting record in which transactions are initially recorded in chronological order
the entering of transaction data in the journal
the entire group of accounts maintained by a company
- it keeps in one place all the information about changes in specific account balances
General Ledger
a ledger that contains all asset, liability, and stockholders' equity accounts
the procedure of transferring journal entries to the ledger accounts
Chart of Accounts
a list of accounts and the account numbers that identify their location in the ledger
Trial Balance
a list of accounts and their balances at a given time
- primary purpose is to prove that the debis equal the credits after posting
- uncovers errors in journalizing and posting and is useful in preparing financial statements

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