reports and financial statements, and communications results to decision makers.
Accounting cycle: the process by which financial statements are prepared
Accounting equation: the most basic tool of accounting; assets = liabilities + equity
Amortization: allocating the cost of an intangible asset to expense it over its useful life
Asset: an economic resource that is expected to be of benefit in the future
Balance sheet: a list of an entity’s assets, liabilities and equity as a of a specific date. Also called the
statement of financial position
Board of directors: a group elected by company’s stockholders to set the policy of the corporation and
to appoint its officers
Capital: another name for the equity of the business
Common stock: the most basic form of capital stock
Continuity assumption: see the going-concern assumption
Corporation: a business owned by its stockholders. A corporation is a legal entity, an “artificial person”
in the eyes of the law
Current asset: an asset that is expected to be converted to cash, sold, or consumed during the next 12
months, or within the business’s normal operating cycle if the cycle is longer than a year.
Current liability: a debt due to be paid within one year or within the entity’s operating cycle if the cycle
is longer than a year
Deficit: a negative balance in retained earnings caused by net losses over a period of years
Depreciation: the allocation of the cost of a long-term plant asset to expense it over its useful life
Dividends: distributions (usually cash) by a corporation to its stockholders.
Entity: an organization or a section of an organization that, for accounting purposes, stands apart from
other organizations and individuals as a separate economic unit
Equity: the claim of the owners of a business to the assets of the business. Also called capital, owners’
equity, stockholders’ equity, or net assets.
Equity method: method of accounting used to account for investments that are at least 20% but not
more than 50% owned.
Ethics: standards of right and wrong that transcend economic and legal boundaries. Ethical standards
deal with the way we treat others and restrain our own actions because of the desires, expectations, or
rights of others, or because of our obligation to them
Expenses: decreases in retained earnings that result from operations; the cost of doing business; the
opposite of revenues
Fair value: the amount that a business could sell an asset for, or the amount that a business could pay to
settle a liability
Financial accounting: the branch of accounting that provides relevant and accurate info to people
outside the firm
Financial accounting standards board (FASB): the regulatory body in the US that formulates
generally accepted accounting principles (GAAP)
Financial statements: business documents that report financial information about a business entity to
decision makers
Financing activities: activities that obtain from investors and creditors the cash needed to launch and
sustain the business; a section of the statement of cash flows
Generally accepted accounting principles (GAAP): accounting guidelines formulated by the FASB
that govern how accounting is practiced
Going concern assumption: the assumption that an entity will remain in operation for the foreseeable
future
Gross profit: revenue from a particular activity minus the direct costs with earning that revenue
Historical cost principle: a principle that states that assets should be recorded at their actual cost
Income statement: a financial statement listing an entity’s revenues, expenses, and net income or net
loss for a specific period. Also called statement of operations
Chapter 1 Vocab & Terms
Accounting: the information system that measures business activities, processes that return data into
Intangible assets: assets with no tangible form that represent resources that have a value and future
benefit
International Financial reporting standards (IFRS): accounting guidelines formulated by the
international accounting standards board (IASB)
Investing activities: activities that increase or decrease the long-term assets available to the business; a
section of the statement of cash flows
Liability: an economic obligation (a debt) payable to an individual or organization outside the business
Limited liability company: a business organization in which the business (not the owner) is liable for
the company’s debts
Long term assets: assets that are expected to benefit the entity for long periods of time, beyond the end
of the next fiscal year. These usually include investments, property and equipment (plant assets), and
intangible assets
Long term debt: a liability that falls due beyond one year from the date of the financial statements
Managerial accounting: the branch of accounting that that generates information for the internal
decision makers of a business, such as top executives
Net earnings: another name for net income
Net income: the excess of total revenues over total expenses. Also called net earnings or net profit
Net loss: the excess of total expenses over total revenues
Net profit: another name for net income
Operating activities: activities that create revenue or expenses in the statement of cash flows.
Operating activities affect the income statement
Owners’ equity: see equity & stockholders’ equity
Paid in capital: the amount of stockholders’ equity that stockholders have contributed to the
corporation. Also called contributed capital
Partnership: an association of two or more persons who co-own a business for profit
Proprietorship: a business with a single owner
Retained earnings: the amount of the stockholders’ equity a corporation has earned through profitable
operations and has not given back to stockholders.
Revenues: increases in retained earnings from delivering goods or services to customers or clients
Segment: a division or subset of a business’s operations
Shareholder: another name for a stockholder
Stable monetary unit assumption: the assumption that because the purchasing power of the dollar has
been relatively stable, inflation’s effect on accounting records can be ignored
Statement of cash flows: a statement that reports cash receipts and cash payments classified according
to the entity’s major activities; operating, investing … and financing.
Statement of financial position: another name for the balance sheet
Statement of retained earnings: a summary of the changes in the retained earnings of a corporation
during a specific period
Stock: shares into which the owners’ equity of a corporation is divided
Stockholder: a person who owns a stock in a corporation. Also called a shareholder
Stockholders’ equity: the stockholders’ ownership interest in the assets of a corporation.
Chapter 2 Vocab & Terms
Account: the record of the changes that have occurred in a particular asset, liability, or stockholders’
equity during a period. The basic summary device of accounting
Accrued liability: a liability for an expense that has not yet been paid by a business
Cash: money and any medium of exchange that a bank accepts at face value
Chart of accounts: a list of a company’s accounts and their account numbers
Credit: the right side of an account
Debit: the left side of an account
Journal: the chronological accounting record of an entity’s transactions
Ledger: the book of accounts and their balances
Posting: the process of copying amounts from the journal to the ledger
Transaction: any event that has a financial impact on the business and can be measured reliably
Trial Balance: a list of all the ledger accounts with their balances
Chapter 3 Vocab & Terms
Account format: a balance sheet format that lists assets of the left and liabilities and stockholders’
equity on the right
Accrual: an expense or revenue that occurs before the business pays or receives cash. An accrual is the
opposite of a deferral
Accrual accounting: accounting that records the impact of a business event as it occurs, regardless of
whether the transaction affected cash
Accrued expense: an expense incurred but not yet paid in cash
Accrued revenue: a revenue that has been earned but not yet receivable in cash
Accumulated depreciation: the cumulative sum of all depreciation expense from the date of acquiring
a plant asset
Adjusted trial balance: a list of all the ledger accounts with their adjusted balances
Book value (of a plant asset): the asset’s cost minus accumulated depreciation
Cash basis accounting: accounting that records only transactions in which cash is received or paid
Classified balance sheet: a balance sheet that shows current assets separate from long-term assets and
current liabilities separate from long-term liabilities
Closing the books: the process of preparing the accounts to begin recording the next period’s
transactions. Closing the books consists of journalizing and posting the closing entries to set the
balances of the revenues, expense and dividend accounts to zero. Also called closing the accounts
Closing entries: entries that transfer the revenue, expense, and dividends balances from these respective
accounts to the Retained Earnings accounts.
Contra account: an account that always has a companion account and whose normal balance is
opposite that of the companion account.
Current asset: an asset that is expected to be converted to cash, sold, or consumed during the next 12
months or within the business’s normal operating cycle if longer than a year
Current liability: a debt due to be paid within one year or within the entity’s operating cycle if longer
than a year
Current ratio: current assets divided by current liabilities, which measures a company’s ability to pay
its current liabilities with its current assets
Debit ratio: the ratio of a company’s total liabilities to its total assets, which indicates the proportion of
the company’s assets financed with debt
Deferral: an adjustment for which a business paid or received cash in advance. Examples include
prepaid rent, prepaid insurance and supplies.
Depreciation: the allocation of the cost of a long-term plant asset to expense over its useful life
Expense recognition principle: a principle that states that all expenses incurred during a period should
be identified and measured to match them against revenues earned during that same period
Liquidity: a measure of how quickly an item can be converted to cash
Long term asset: an asset that is not a current asset
Long term liability: a liability that is not a current liability
Multistep income statement: an income statement that contains subtotals to highlight important
relationships between revenues and expenses
Net working capital: a measure of liquidity; current assets – current liabilities
Operating cycle: time span during which cash is paid for goods and services that are sold to customers
who pay the business in cash
Permanent accounts: asset, liability, and stockholders’ equity accounts that are not closed at the end of
the period
Plant assets: long-lived assets, such as land, buildings, and equipment used in the operation of the
business. Also called fixed assets
Prepaid expense: a category of miscellaneous assets that typically expire or get used up in the near
future. Examples include prepaid rent, prepaid insurance, and supplies.
Report format: a balance-sheet format that lists assets at the top, followed by liabilities and
stockholders’ equity below
Revenue principle: the basis for recoding revenues; a principle that tells accountants when to record
revenue and the amount of revenue to record
Single step income statement: an income statement that lists all the revenues together under a heading
such as Revenues or Revenues and Gains. Expenses appear in a separate category called Expenses or
perhaps Expenses and Losses.
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