Accounting Terminology - Bar Charts, Inc PDF

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Aaccelerated depreciation: Any depreciation method that results in more depreciation expenses in the first years after purchase than the straight-line method (e., double- declining balance method, sum-of-the-years’ digits method). In the United States, the two depreciation methods that are currently...

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BarCharts, Inc.®

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BUSINESS A accelerated depreciation: Any depreciation method that results in more depreciation expenses in the first years after purchase than the straight-line method (e.g., doubledeclining balance method, sum-of-the-years’ digits method). In the United States, the two depreciation methods that are currently allowed for tax purposes are both accelerated depreciation methods (i.e., the accelerated cost recovery system [ACRS] and the modified accelerated cost recovery system [MACRS]). account: The basic record used in an accounting system to keep track of the balances of assets, liabilities, equities, revenues, and expenses of an organization. accounting cycle: The steps of processing transactions, including analyzing transactions, journalizing, posting, preparing trial balances, adjusting, and preparing financial statements. accounting equation: The foundation of the accounting system: assets = liabilities + owners’ equity; also called the balance sheet equation. accounting period: The period covered by the income statement. accounting principles: The basic standards, rules, and guidelines for financial reporting; also the basics that students study in an introduction to accounting course. accounting: A system that collects and processes (i.e., analyzes, measures, and records) financial information about an organization and reports that information to decision makers. accounts payable: Obligations that arise from the purchase of stock-in-trade items, supplies, or services on an open account. accounts receivable: Money owed to the company from customers as a result of credit sales. accounts receivable, net: Accounts receivable less the balance in the allowance for doubtful accounts. accrual accounting: The basis for recording transactions under generally accepted accounting principles (GAAP). That is, an expense is recorded when incurred, regardless of when the cash payment for the expense is made. Revenues are recorded when a sale is made, not necessarily when cash flows occur. accrued expense: An expense that has occurred but the transaction has not been entered into the accounting records. EX: An adjusting entry is made to debit the appropriate expense account (e.g., wages expense) and to credit a liability account (e.g., wages payable). accrued expenses payable: A liability account that reflects the estimated amount owed for expenses that have occurred but have not yet been paid or recorded. EX: Wages payable and taxes payable. accrued liabilities: Expenses that increase in value as time goes by. EX: Expenses that accrue (or accumulate) on a daily basis, such as wages, interest on note obligations, property taxes, and rent. accrued revenue: Revenue that has been earned but not yet recorded. accumulated depletion: The amount of depletion that has accumulated since the related natural resource was acquired. accumulated depreciation: The amount of depreciation that has accumulated since the associated fixed asset was acquired. accumulated other comprehensive income: The corporation’s cumulative income that has not been reported as part of net income on the corporation’s income statement. EX: The income or loss involving foreign currency transactions, hedges, pension liabilities, and the unrealized gains and losses on certain investments. acquisition cost: The price paid to obtain property. additional paid-in capital: Capital paid into the corporation from the purchase of capital stock by shareholders for a value in excess of the par value of the capital stock.

adjusted trial balance: A trial balance that is prepared after adjusting entries have been mad adjusting entries: Certain accounts need adjustment at the end of a period so that bo the balance sheet and income statement will be accurate at the end of a period. Adjusti entries fall into five categories: prepaid expenses requiring apportionments, record revenues requiring apportionments, unrecorded accrued revenues, unrecorded accru expenses, and valuation of accounts receivable and investments. advertising expense: A type of selling and marketing expense for such activities running advertisements in various media during the same period as reflected on t income statement. EX: Advertisements in newspapers and magazines, commercials on T and radio, banners on websites, and purchased online advertising campaigns (e.g., Goog AdWords, Facebook ads). aging of accounts receivable: A process that results in a list of outstanding accoun receivables sorted by age. EX: A company has $700,000 of accounts receivable balanc that are 0 to 30 days past due, $200,000 that are 31 to 60 days past due, and $500,000 tha are 61 to 360 days past due. allowance for doubtful accounts: An account that contains the estimate of the value the accounts receivable that will not be collected. The allowance account is a contra asset American Accounting Association (AAA): An organization composed of accountin professors and practicing accountants. The AAA serves as a critic in appraising accoun ing practice and recommends improvements through its quarterly publication, T Accounting Review. American Institute of Certified Public Accountants (AICPA): The national profe sional organization of certified public accountants (CPAs) in the United States that s ethical standards for the profession and auditing standards for audits of private compani nonprofit organizations, and federal, state, and local governments. amortization of bond discount: The allocation of the discount on bonds payable bond interest expense over the life of the bond. Amortization of a bond payable discou increases the carrying value of the bond while recognizing interest expense. annuity due: A series of equal cash flows occurring at the beginning of each period; al called an annuity in advance. EX: Monthly rent on an apartment that is due on the f of each month; a lottery settlement that is paid to the winner on the first day of each ye annuity: A fixed amount of cash flow per period for a specific period of tim EX: A 30-year mortgage where the borrower pays $895 per month for 30 years. appraisal: An estimate of an asset’s market value. articles of incorporation: A document filed with a state upon formation of a corpor tion that list the number of shares of stock that the corporation is authorized to issue. assets: Probable future economic benefits obtained or controlled by a particular entity a result of past transactions or events. EX: Cash, accounts receivable, marketable secu ties, inventory, plant and equipment, patents, and copyrights. audit: A series of procedures carried out by an accountant, including performing exte sive tests of transactions and internal controls. These procedures help the accountant reasonably certain that accounting systems perform as required by GAAP. audited financial statements: Financial statements that have been audited by a CP firm and include the report of those independent auditors attesting to the financial sta ments’ fairness and compliance with GAAP. authorized number of shares of stock: The number of shares of stock that a corpora tion may issue based on its articles of incorporation. available-for-sale securities: All passive investments owned by the company oth than trading securities and debt held to maturity.

B bad debt expense: An operating expense resulting from making sales on credit and estimating how much of the accounts receivable created during a particular period will never be collected. balance sheet equation: Assets = liabilities + owners’ equity. balance sheet: A financial statement that identifies a business’s assets, liabilities, and owners’ equity as of a certain date. bank reconciliation: The process of comparing (reconciling) the balance of the cash account from the general ledger to the balance appearing on the bank statement. The objective is to identify the components of the difference between the company’s cash balance and the checking account balance as per the bank’s statement. A bank reconciliation discloses errors on the company’s part or on the bank’s part, expenses that need to be recorded such as bank service charges, and revenue that needs be recognized such as interest income. bank service charge expense: Fees incurred by a company for the expenses associated with its checking account. board of directors: People elected by the common stockholders of a corporation to

the corporation, and vote on (declare) dividends to be paid to the stockholders of commo and preferred stock. bond discount: The difference between the selling price and the face value of a bo when the selling price is less than the face value. EX: A bond’s face value is $1,000 and selling price is $800, so the discount is $200. bond indenture: A document that discloses the terms of the company’s bond issu including the face value, interest rate, interest payment dates, call price, and collateral. bond premium: The difference between the selling price and the face value of a bo when the selling price is more than the face value. EX: The bond’s face value is $1,000 a its selling price is $1,300, so the bond premium is $300. bond sinking fund: A restricted liquid asset owned by the corporation for the so purpose of retiring a bond. bond: A debt investment in which an investor loans money to an entity (corporate governmental) for a defined period of time, usually at a fixed interest rate. Bonds a issued by corporations, municipalities, states, the US government, and foreign governmen

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bonds payable: Usually a long-term liability account containing the face amount (maturity amount) of the bonds issued by a company that are outstanding as of the balance sheet date. book value: The book value of an asset is the cost of the asset less its accumulated depreciation. The book value of a company is the amount of owners’ equity. The book value of bonds payable is the combination of the bonds payable and discount on bonds payable or the combination of bonds payable and premium on bonds payable.

C capital lease: A lease that meets at least one of the four criteria established by GAAP. A capital lease requires recording the lease as an asset and a liability. capital stock: A broad description for the ownership interest in a corporation. The true ownership interest in a corporation is called common stock, which is a type of capital stock. cash basis of accounting: A type of accounting in which revenue is recorded as earned when received or collected and expenses are recorded as incurred when paid. The cash basis of accounting is not a GAAP method. cash equivalents: Short-term assets that are readily converted to cash and whose value will not change. cash flow: Cash into and out of a company. cash flows from financing activities: Cash flows from the issuance of capital stock, debt securities, dividend payments, repayment of debt, and purchase of treasury stock. cash flows from investing activities: Cash flows from the purchases and sales of productive assets and other companies’ debts (bonds and notes) and equity (common and preferred stocks issued by other companies). cash flows from operating activities: Cash flows from day-to-day, income-producing activities. They include the activities that are not in the categories of investing and financing. cash receipts journal: A special journal where all cash receipts are recorded when received. It takes the place of the general journal as the initial place where cash receipts are recorded in the accounting system. cash receipts: Cash received by a company. cash: Currency or any instrument that banks will accept for deposit and immediate credit to a company’s account. EX: Check, money order, and bank draft. certified public accountant (CPA): A license granted by state governments to individuals who have passed the Uniform CPA Exam and have met the requirements regarding work experience and education. CFO: See chief financial officer. chart of accounts: A listing of the accounts in the general ledger of the accounting system. The chart of accounts is ordered with balance sheet accounts (assets, liabilities, stockholders’ equity), followed by income statement accounts (revenues, expenses, gains, losses). chief executive officer (CEO): The top officer of the corporation who is charged with executing the policies set by the board of directors. chief financial officer (CFO): The top financial executive of a corporation. chief operating officer (COO): A top corporation official usually reporting directly to the CEO and responsible for the operations of the corporation. classified balance sheet: A balance sheet with groupings or categories such as current assets; property, plant, and equipment; current liabilities; and long-term liabilities. closing entries: Entries made at the end of a period to transfer net income or loss to retained earnings and to bring to zero the balances of all the temporary accounts that include all revenues and expenses. collection period: The time (in days) for a company’s accounts receivable to be collected. common stock: An investment that is evidence of ownership in a corporation. Common stockholders elect the corporation’s directors and share in the distribution of earnings of the company through the distribution of dividends. common-size financial statement: A form of balance sheet that shows each item’s amount as a percentage of total assets. comparability: A quality of accounting information that allows the user to make a comparison of financial statements of one entity to the financial statements of another entity. compilation: Financial statements prepared by an accountant without reviewing or auditing the amounts. The accountant relies on the client’s amounts when preparing the income statement and balance sheet format and does not provide any assurances regarding the values. comprehensive income: The total of the net income plus a few items that affect the owner’s equity but are not reported on the income statement. EX: Unrealized gains and losses on some investments and unrealized gains and losses involving foreign currency are elements added to or subtracted from net income to derive comprehensive income. condensed financial statements: Financial statements that are in summary form by reducing the size of the statement to a few major lines of information. conservatism: An underlying assumption of financial statements and a guiding principle of accounting that requires accountants to choose accounting methods that are least likely to overstate assets or inflate income. This leads to the general rule that unfavorable events are recorded immediately. The recording of apparently favorable events must wait until the favorable outcome is assured. consistency: A quality of accounting information that allows users of the financial statements to compare reporting of one accounting period to another. It refers to the firm’s use of the same accounting methods for the same transactions from period to period.

contingent liability: A potential liability that results because of a past event and won’t be realized until some future event occurs. EX: A lawsuit that has not yet been settled. continuity assumption: The assumption that the entity will continue in existence in the foreseeable future. This assumption is part of the reason why asset values are not liquidation values but mostly historical cost (with a few exceptions where lower of cost market value applies); also called the going concern assumption. contra asset: An account that is associated with a particular asset but its balance contra to, or opposite of, the asset’s balance. When preparing a balance sheet, the cont account’s balance is subtracted from its associate asset’s balance to derive the net ass value. EX: If fixed assets are recorded at $100,000 and the accumulated depreciatio account balance is $25,000, the accumulated depreciation account is the contra ass account and the net value to be shown on the balance sheet for the fixed assets is $75,00 contract: An agreement between two or more parties that creates enforceable rights an obligation. contributed capital: Cash and sometimes other assets contributed to the business the owners. contribution margin: On a per-unit basis, the contribution margin is price min variable cost per unit. On a company-wide basis, it is sales minus total variable costs. controller: The top accounting officer of a company. convertible bonds: Bonds that bondholders may convert into capital stock. convertible preferred stock: Preferred stock that can be exchanged for a specifie number of shares of common stock of the same company. copyright: The exclusive right to sell, publish, and use a literary, musical, or artistic wo corporation: A legal entity organized under state laws that is separate and distinct fro its owners and is evidenced by shares of stock. cost of goods sold: An expense of companies that sell products and is composed those expenses incurred to manufacture or purchase merchandise that has been sold. coupon bond: A bond that periodically pays interest. It is called a coupon bond becau years ago, interest was evidenced by a coupon that was attached to the bond and clipped from it upon collection of the interest. CPA exam: Also called the uniform CPA exam, the exam consists of questions, exercises, and cases developed by the American Institute of Certified Public Accountants. The exam application must be made through one of the state boar of accountancy. CPA: See certified public accountant. credit: A credit is an amount entered on the right side of an account ledger (a debit entered on the left side). Depending on the type of account, a credit can be either increase or a decrease. credit memorandum: A document (paper or electronic) that authorizes a cred to an account. EX: A credit memorandum is issued when a customer who bought item on credit returns that item. The credit memorandum authorizes a credit to t customer’s account. credit sales: A sale made to a customer on a credit basis. An account receivable created for that customer while a sale is booked. credit terms: The agreement made between a customer and the seller that specifies t discount for early payment and the length of the credit period. Credit terms of “2/1 net 30” mean that the customer can receive a 2% discount from the invoice amount payment is made within 10 days (discount period); otherwise, the customer has 30 da to pay the bill in full before the account is classified as delinquent. creditor: A person or entity that has granted credit to another person or entity an therefore is owed money. EX: A bank lends money to a company; the bank is a credito A supplier sold merchandise to a company on credit; the supplier is a creditor. cumulative preferred stock: A type of preferred stock that has a feature where dividends that are not paid accumulate and must eventually be paid before any comm stock dividends can be paid. current assets: Assets that will most likely be converted into cash, be sold, or be co sumed within a period of one year or within the normal operating cycle of the busines current liabilities: Debts and other obligations owed by th company that will be satisfied within one year. current portion of long-term debt: The principal portio of a debt that must be paid within one year of the balance sheet date. EX: A company has a bank loan of $150,000 that requires monthly interest and principal payments. The next 12 monthly principal payments are $40,000 and will show on the balance sheet as the current portion the long-term debt. That amount ($40,000) would be reporte as a current liability, and the remaining principal amou ($110,000) would be reported as a long-term liability.

D debenture: An obligation (bond) protected not by collateral or tangible assets but only by the general credit rating of the issuer. debit: An entry on the left side of an account ledger. A debit to assets increases the account, while a debit to liabilities or equities reduces the account. debit memorandum: A document that instructs the accountant to debit an account. debtor: A person who owes money. declaration date: The date that the board of directors officially approves a dividend. declining-balance method of depreciation: A depreciation method that uses a const...