Accounting system – the personnel, procedures, devices and records used by an

organization to develop accounting information and communicate that information

to decision-makers.

Audit – an investigation of financial statements designed to determine their

fairness in relation to generally accepted accounting principles.

Balance sheet – a position statement that shows where the company stands in
financial terms at a specific date

Bookkeeping – the clerical dimension of accounting that includes recording the

daily transactions and record keeping of an enterprise

Cash flow prospects – the likelihood that an enterprise will be able to provide an
investor with both a return on the investor’s investment and return of that
investment

Control activities – policies and procedures that management puts in place to

address the risks identified during the risk assessment process

Control environment - the foundation for all other elements of internal control,
setting the overall tone for the organization

Corporate governance – includes the corporate structures and processes for

overseeing a company’s affairs

External users – individuals and other enterprises that have a financial interest in
the reporting enterprise but that are not involved in the day-to-day operations of
that enterprise

Financial accounting – providing information about the financial resources,

obligations and activities of an economic entity that is intended for use primarily by
external decision makers such as investors and creditors

Financial statement – a monetary declaration of what is believed to be true about

an enterprise

Generally accepted accounting principles – principles that provide the

framework for determining what information is to be included in financial
statements and how that information is to be presented

General-purpose information – information that is intended to meet the needs of

multiple users that have an interest in the financial activities of an enterprise rather
than tailored to the specific information needs of one user

Income statement – an activity statement that shows details and results of the
company’s profit-related activities for a period of time
Information and communication – the organization’s process for capturing
operational, financial and compliance related information necessary to run the
business and communicating that information downstream, upstream and across
the organization.

Integrity – the qualities of being complete, unbroken, unimpaired, sound, honest

and sincere

Internal control – a process designed to provide reasonable assurance that the

organization produces reliable financial reports, complies with applicable laws and
regulations, and conducts its operations in an efficient and effective manner.

Internal users - individuals who use accounting information from within an

organization

Management accounting - providing information that is intended primarily for

use by internal management in decision making required to run the business

Monitoring – the process of evaluation the effectiveness of an organization’s

system of internal control over time, including both ongoing management and
supervisory activities and periodic separate evaluations.

Return of Investment - the repayment to an investor of the amount originally

invested in another enterprise

Return on Investment – the payment of an amount (interest, dividends) for using

another’s money

Risk assessment – a process of identifying, analyzing, and managing those risks

that pose a threat to the achievement of the organization’s objectives

Statement of cash flows – an activity statement that shows the details of the
company’s activities involving cash during a period of time

Statement of financial position – also called the balance sheet

Chapter 2

Assets – Economic resources owned by an entity

Balance Sheet – The financial statement showing the financial position of an

enterprise by summarizing its assets, liabilities and owner’s equity at a point in
time. Also called the statement of financial position

Business Entity – An economic unit that controls resources, incurs obligations and
engages in business activities

Capital stock - Transferable units of ownership in a corporation

Corporation – a business organized as a separate legal entity and charted by
state, with ownership divided into transferable shares of stock

Cost principle – the widely used principle of accounting for assets at their original
cost to the current owner

Creditor – a person or organization to whom debt is owed

Deflation – a decline in the general price level, resulting in an increase in the

purchasing power of the monetary unit

Disclosure – the accounting principle of providing with financial statements any

financial and other facts that are necessary for proper interpretation of those
statements

Expenses – past, present, or future reductions in cash required to generate

revenues

Financial statement – a declaration of information believed to be true and

communicated in monetary terms

Financing activities – a category in the statement of cash flows that reflects the
results of debt and equity financing transactions

Going concern assumption – an assumption by accountants that a business will

operate in the foreseeable future unless specific evidence suggests that this not a
reasonable assumption

Income statement – an activity statement that subtracts from the enterprise’s

revenue those expenses required to generate the revenues, resulting in a net
income or loss

Inflation – an increase in the general price level, resulting in a decline in the

purchasing power of the monetary unit

Investing activities – a category in the statement of cash flows that reflects the
results of purchases and sales of assets such as land, buildings and equipment

Liabilities – debts or obligations of an entity that resulted from past transactions.

They represent the claims of creditors on the enterprise’s assets

Liquidity – having the financial ability to pay debts as they become due

Negative cash flows – a payment of cash that reduces the enterprise’s cash
balance

Operating activities – a category in the statement of cash flows that includes the
cash effects of all revenues and expenses included in the income statement
Owner’s equity – the excess of assets over liabilities. The amount of owner’s
investment in the business, plus profits from successful operations that have been
retained in the business.

Partnership – an unincorporated form of business organization in which two or

more persons voluntarily associate for purpose of carrying out business activities

Positive cash flows – increases in cash that add to the enterprise’s cash balance

Retained earnings – the portion of stockholder’s equity that has accumulated as a

result of profitable operations

Revenues – increases in the enterprise’s assets as a result of profit-oriented

activities

Sole proprietorship – an unincorporated business owned by a single individual

Stable dollar assumption – an assumption by accountants that monetary unit

used in the preparation of financial statements is stable over time or changes at a
sufficiently slow rate that the resulting impact on financial statements does not
distort the information

Statement of Cash Flows – an activity statement that explains the enterprise’s

change in cash in terms of its operating, investing and financing activities

Statement of Financial Position – balance sheet

Stockholders – owners of capital stock in a corporation

Stockholder’s equity – the owner’s equity of an enterprise organized as a

corporation

Window dressing – measures taken by management specifically intended to make

a business look as strong as possible in its balance sheet, income statement and
statement of cash flows.

Chapter 3

Account – a record used to summarize all increases and decreases in a particular

asset such as cash or any other type of asset, liability, owners equity, revenue or
expense

Accountability – the condition of being held responsible for one’s actions by the
existence of an independent record of those actions. Establishing accountability is a
major goal of accounting records and of internal control procedures

Accounting cycle – the sequence of accounting procedures used to record, classify

and summarize accounting information. The cycle begins with the initial recording
of business transactions and concludes with the preparation of formal financial
statements.

Accounting period – the span of time covered by an income statement. 1 year is

the accounting period for much financial reporting, but financial statements are also
prepared by companies for each quarter of the year and for each month.

Accrual basis of accounting – calls for recording revenue in the period in which it
is earned and recording expenses in the period in which they are incurred. The
effect of events on the business is recognized as services are rendered or
consumed rather than when cash is received or paid.

Conservatism – the traditional accounting practice of resolving uncertainty by

choosing the solution that leads to the lower amount of income being recognized in
the current accounting period. This concept is designed to avoid overstatement of
financial strength or earnings.

Credit – an amount entered on the right side of a ledger account. A credit is used to
record a decrease in an asset or an increase in a liability or owner’s equity.

Debit – an amount entered on the left side of a ledger account. A debit is used to
record an increase in asset or a decrease in liability or owner’s equity.

Dividends – a distribution of resources by a corporation to its stockholders. The

resource most often distributed is cash.

Double-entry accounting – a system of recording every business transaction with

equal dollar amounts of both debit and credit entries. As a result of this system, the
accounting equation always remains in balance; in addition, the system makes
possible the measurement of net income and also the use of error-detecting devices
such as trial balance.

Expenses – the cost of goods and services used up in the process of obtaining
revenue

Fiscal year – any 12 month accounting period adopted by a business

General journal – the simplest type of journal, it has only two money columns –
one for debits and one for credits.

Income statement – a financial statement summarizing the results of operations

of a business by matching its revenue and related expenses for a particular
accounting period. Shows the net income or loss.

Journal – a chronological record of transactions, showing for each transaction the

debits and credits to be entered in specific ledger accounts. The simplest type of
journal is called general journal.
Ledger – an accounting system includes a separate record for each item that
appears in the financial statements.

Matching principle – the generally accepted accounting principle that determines

when expenses should be recorded in the accounting records. The revenue earned
during an accounting period is matched with the expenses incurred in generating
that revenue.

Net income – an increase in owners’ equity resulting from profitable operations.

Also, the excess of revenue earned over the related expenses for a given period.

Net loss – a decrease in owner’s equity resulting from profitable operations

Objectivity – accountants’ preference for using dollar amount that are relatively
factual – as opposed to merely matters of personal opinion. Objective
measurements can be verified.

Posting – the process of transferring information from the journal to individual

accounts in the ledger

Realization principle – the generally accepted accounting principle that

determines when revenue should be recorded in the accounting records. Revenue is
realized when services are rendered to customers or when goods sold are delivered
to customers.

Retained Earnings – that portion of stockholders equity resulting from profits

earned and retained in the business.

Revenue – the price of goods and services charged to customers for goods and
services rendered by a business

Time period principle – to provide the users of financial statements with timely
information, net income is measured for relatively short accounting periods of equal
length. The period of time covered by an income statement is termed the
company’s accounting period.

Trial Balance – a two-column schedule listing the names and the debit or credit
balances of all accounts in the ledger.

Chapter 4

Accrue – to grow or accumulate over time

Accumulated depreciation – a contra-asset account shown as a deduction from

the related asset account in the balance sheet. Depreciation taken throughout the
useful life of an asset is accumulated in this account
Adjusted trial balance – a schedule indicating the balances in ledger accounts
after end-of-period adjusting entries have been posted. The amounts shown in the
adjusted trial balance are carried directly into financial statements

Adjusting entries – entries made at the end of the accounting period for the
purpose of recognizing revenue and expenses that are not properly measured as a
result of journalizing transactions as they occur

Book value – the net amount at which an asset appears in financial statements.
For depreciable assets, book value represent COST – ACCUMULATED DEPRECIATION.
Also called “carrying value”.

Contra-asset account – an account with a credit balance that is offset against or

deducted from an asset account to produce the proper balance sheet amount for
the asset

Depreciable assets – physical objects with a limited life. The cost of these assets
gradually recognized as depreciation expense.

Depreciation – the systematic allocation of the cost of an asset to expense during

the periods of its useful life

Immaterial – something of little or no consequence

Matching – the accounting principle of offsetting revenue with the expenses

incurred in producing that revenue

Materiality – the relative importance of an item or amount. Items significant

enough to influence decisions are said to be material.

Prepaid expenses – assets representing advance payment of the expenses of

future accounting periods. As time passes, adjusting entries are made to transfer
the related costs from the asset account to an expense account

Straight Line method – the widely used approach of recognizing equal amount of
depreciation expense in each period of a depreciable asset’s useful life

Unearned Revenue – an obligation to deliver goods or render services in the

future

Useful life – the period of time that a depreciable asset is expected to be useful to
the business.

Chapter 5

Adequate disclosure – the generally accepted accounting principle of providing

with financial statements any information that users need to interpret those
statements properly
After-closing trial balance – a trial balance prepared after all closing entries have
been made. Consists only of accounts for assets, liabilities and owner’s equity.

Closing Entries – journal entries made at the end of the period for the purpose of
closing temporary accounts (revenue, expense and dividend) and transferring
balances to the Retained Earnings account

Current assets – cash and other assets that can be converted into cash or used up
within a relatively short period of time without interfering with normal business
operations

Current liabilities – existing obligations that are expected to be satisfied with a

company’s current assets within a relatively short period of time

Income Summary – the summary account in the ledger to which revenue and
expense accounts are closed at the end of the period. The balance (credit balance
for a net income, debit for a net loss) is transferred to Retained Earnings.

Interim financial statements – financial statements prepared for periods of less

than one year

Notes – supplemental disclosures that accompany financial statements.

Chapter 6

Comparable store sales – a comparison of sales figures at established stores with

existing track records

Contra-revenue account – a debit balance account that is offset against revenue

in the income statement. Examples include Sales Discounts and Sales Returns

Control account – a general ledger account that summarizes the content of a

specific subsidiary ledger

Cost of Goods Sold (COGS) – the cost to a merchandising company of the goods
it has sold to its customers during the period

Gross profit – net sales revenue minus the cost of goods sold

Gross profit margin – gross profit expressed as a percentage of sales

Inventory – merchandise intended for resale to customers

Inventory shrinkage – the loss of merchandise through such causes as

shoplifting, breakage or spoilage

Net sales – gross sales revenue less sales returns and allowances and sales
discounts.
Operating cycle – the repeating sequence of transactions by which business
generates its revenue and cash receipts from customers

Periodic inventory system – eliminates the need for recording cost of goods sold
as sales occur. The amounts of inventory and COGS are not known until a complete
physical inventory is taken at year-end

Perpetual inventory system – a system of accounting for merchandising

transactions in which the inventory and cost of goods sold accounts are perpetually
kept up to date

Point of Sales Terminal – electronic cash registers used for computer-based

processing of sales transactions.

Sales per square foot of selling space – a measure of efficient use of available
space

Special Journal – an accounting record or device designed for recording large

numbers of a particular type of transaction quickly

Subsidiary Ledger – a ledger containing separate accounts for each of the items
making up the balance of a control account for each of the items making up the
balance of a control account in the general ledger

Taking a physical inventory – the procedure of counting all merchandise on hand

and determining its cost

Chapter 7