Key Terms
- abnormal balance
- account balance that is contrary to the expected normal balance of that account
- account
- record showing increases and decreases to assets, liabilities, and equity found in the accounting equation
- accounting cycle
- step-by-step process to record business activities and events to keep financial records up to date
- book of original entry
- journal is often referred to as this because it is the place the information originally enters into the system
- chart of accounts
- account numbering system that lists all the accounts a business uses in its day-to-day transactions
- compound entry
- more than one account is listed under the debit and/or credit column of a journal entry
- conceptual framework
- interrelated objectives and fundamentals of accounting principles for financial reporting
- conservatism
- concept that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount
- contra account
- account that has a normal balance opposite of normal balance for the broad category to which the account belongs
- contributed capital
- owner’s investment (cash and other assets) in the business which typically comes in the form of common stock
- cost principle
- everything the company owns or controls (assets) must be recorded at its value at the date of acquisition
- credit
- records financial information on the right side of an account
- debit
- records financial information on the left side of each account
- double-entry accounting system
- requires the sum of the debits to equal the sum of the credits for each transaction
- ending account balance
- difference between debits and credits for an account
- expanded accounting equation
- breaks down the equity portion of the accounting equation into more detail to see the impact to equity from changes to revenues and expenses, and to owner investments and payouts
- expense recognition principle
- (also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated
- full disclosure principle
- business must report any business activities that could affect what is reported on the financial statements
- general ledger
- comprehensive listing of all of a company’s accounts with their individual balances
- going concern assumption
- absent any evidence to the contrary, assumption that a business will continue to operate in the indefinite future
- journal
- record of all transactions
- journalizing
- entering information into a journal; second step in the accounting cycle
- monetary measurement
- system of using a monetary unit by which to value the transaction, such as the US dollar
- normal balance
- expected balance each account type maintains, which is the side that increases
- original source
- traceable record of information that contributes to the creation of a business transaction
- period
- one operating cycle of a business, which could be a month, quarter, or year
- posting
- takes all transactions from the journal during a period and moves the information to a general ledger (ledger)
- prepaid expenses
- items paid for in advance of their use
- revenue recognition principle
- principle stating that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided
- separate entity concept
- business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally
- simple entry
- only one debit account and one credit account are listed under the debit and credit columns of a journal entry
- stockholders‛ equity
- owner (stockholders‛) investments in the business and earnings
- T-account
- graphic representation of a general ledger account in which each account is visually split into left and right sides
- time period assumption
- companies can present useful information in shorter time periods such as years, quarters, or months
- transaction
- business activity or event that has an effect on financial information presented on financial statements
- trial balance
- list of all accounts in the general ledger that have nonzero balances
- unadjusted trial balance
- trial balance that includes accounts before they have been adjusted
- unearned revenue
- advance payment for a product or service that has yet to be provided by the company; the transaction is a liability until the product or service is provided