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ACG 2021 Block 1 Definitions

General Definitions

Financial accounting - measure business activities of a company and communication of those measurements to external parties for decision-making purposes.

Auditors trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that companys financial statements.

Accrual-basis accounting record revenue when we earn them and record expenses with related expenses, regardless of when cash is received or paid.

Cash basis accounting record revenues at the time cash received and expenses at the time cash is paid.

Accounting Principles Definitions

Generally accepted accounting principles (GAAP) - the rules of financial accounting

Revenue recognition principal record revenue in the period in which we earn it.

Matching principal recognizing expenses in the same period as the revenues they help generate.

Accounting Equation Definitions

Accounting Equation equation that shows a companys resources (assets) equal creditors and owners claims to those resources (liabilities and stockholders equity).

Assets resources owned by a company.

Liabilities - amounts owed to creditors.

Stockholders Equity - owners claims to resources.

Revenues - the amounts earned from selling products or services to customers.

Expenses - the costs of providing products and services.

Net Income - the difference between revenues and expenses.

Accounting Cycle Definitions

Account - summary of the effects of all transactions related to a particular item over a period of time.

Chart of accounts - a list of all account names used to record transactions of a company.

Operating cycle the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale.

General ledger - all accounts used to record the companys transactions.

Journal a chronological record of all transactions affecting a firm.

Posting the process of transferring the debit and credit information from the journal to individual accounts in the general ledger.

Trial Balance a list of all accounts and their balances at a particular date, showing the total debits and credits.

Adjusting entries to record events that have occurred but that have not been recorded, such recording insurance expense at the end of the month from a prepaid policy.

Adjusted trial balance list of all accounts and their balances after we have updated account balances for adjusting entries.

Financial Statements periodic reports published by the company for the purpose of providing information (communicate) to external users.

Income statement - financial statement that reports the companys revenues and expenses over an interval of time.

Statement of stockholders equity - financial statement that summarizes the changes in stockholders equity over an interval of time

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Balance sheet - financial statement that presents the financial position of the company on a particular date.

Statement of cash flows - financial statement that measures activities involving cash receipts and cash payments over an interval of time.

Closing entries entries that transfer balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account.

Temporary accounts revenues, expenses, and dividends are closed out at the end of each accounting period and transferred to Retained Earnings so that the new period begins with a zero (0) balance for

these accounts.

Permanent accounts the balance sheet accounts where the balances are carried forward from period to period.

Basic Account Definitions need to know definition, normal balance, and financial statement associated with the account

Balance Sheet o Cash liquid assets owned by the company. o Accounts Receivable amounts the company expects to collect from customers based on the

delivery of service or products.

o Prepaid expenses costs of assets acquired in one period that will be expensed in a future period.

o Accumulated depreciation cumulative amount of depreciation expensed against a particular asset, such as a vehicle.

o Book value historical cost of an asset, such as equipment, less the accumulated depreciation. o Accounts Payable Promise to pay cash in the future to creditors when purchasing supplies or

materials.

o Notes payable Total amounts owed to creditors for loaning money to the company. o Unearned Revenue cash in advance from a customer for products or services to be provided in

the future.

o Common Stock Amount shareholders have invested in the business. o Retained earnings - cumulative amount of net income earned over the life of the company that

has not been distributed to stockholders as dividends.

Income Statement o Depreciation the process of allocating the cost of an asset, such as equipment, to expense over

the useful life of the asset.

Statement of Stockholders Equity o Dividend cash payments to stockholders (owners).