Chapter 1 Interpreting Deciding the meaning and importance of the

information in various reports.

Accountants Designs the accounting information system
and focuses on analyzing and interpreting manufacturing
A business that makes a product to sell.
information. business

Accounting A system of gathering financial information merchandising

A business that buys products to sell.
about a business and reporting this business
information to users.
Para- A paraprofessional who provides many
accounting Records, sorts, and files accounting accountants accounting, auditing, or tax services under
clerks information. the direct supervision of an accountant.

Accounting A standard issued by the Financial
Standards Accounting Standards Board. These
Update standards must be followed when preparing
financial statements. The updates are
included in the FASB Accounting Standards
Codification.
partnership A type of ownership structure in which more
than one person owns the business.
Recording Entering financial information about events
affecting the company into the accounting
system.

Analyzing Looking at events that have taken place and Reporting Telling the results of the financial
thinking about how they affect the business. information.

Bookkeepers Generally supervises the work of accounting service

A business that provides a service.
clerks, helps with daily accounting work, and business
summarizes accounting information.
sole A type of ownership structure in which one
Certified Fraud A forensic accountant who has passed the proprietorship person owns the business.
Examiner exam offered by the Association of Certified
(CFE) Fraud Examiners. Summarizing Bringing the various items of information
together to determine a result.
Certified An internal auditor who has achieved
Internal professional recognition by passing the
Auditor (CIA) uniform examination offered by the Institute
of Internal Auditors. Chapter 2

Certified account A separate record used to summarize changes

An accountant who has passed an in each asset, liability, and owner's equity of a
Management
examination offered by the Institute of business.
Accountant
Management Accountants.
(CMA)
account An unwritten promise to pay a supplier for
Certified A public accountant who has met certain payable assets purchased or services received.
Public educational and experience requirements
Accountant and has passed an examination prepared by Account Provides a description of the particular type of
(CPA) the American Institute of Certified Public titles asset, liability, owner's equity, revenue, or
Accountants. expense.

Classifying Sorting and grouping similar items together accounting The accounting equation consists of the three
rather than merely keeping a simple, diary- equation basic accounting elements: Assets = Liabilities
like record of numerous events. + Owner's Equity.

controller The accountant who oversees the entire accounting

The concept that income determination can be
accounting process and is the principal period
made on a periodic basis.
accounting officer of a company. concept

corporation A type of ownership structure in which accounts An amount owed to a business by its customers
stockholders own the business. The owners' receivable as a result of the sale of goods or services.
risk is usually limited to their initial Assets An item that is owned by a business and will
investment, and they usually have very little provide future benefits.
influence on the business decisions.
balance Reports assets, liabilities, and owner's equity on
Financial sheet a specific date. It is called a balance sheet
Accounting because it confirms that the accounting
This Codification is an electronic database
Standards equation is in balance.
that provides one authoritative source for the
Board
standards which must be followed by U.S.
Accounting business An individual, association, or organization that
companies.
Standards entity engages in economic activities and controls
Codification specific economic resources.
Forensic A specialized field that combines fraud business The concept that nonbusiness assets and
Accounting detection, fraud prevention, litigation entity liabilities are not included in the business
support, expert witnessing, business concept entity's accounting records.
valuations, and other investigative activities.
business An economic event that has a direct impact on
generally transaction the business.
Procedures and guidelines developed by the
accepted
Financial Accounting Standards Board to be
accounting capital Another term for owner's equity, the amount by
followed in the accounting and reporting
principles which the business assets exceed the business
process.
(GAAP) liabilities.
drawing Withdrawals that reduce owner's equity as a debit To enter an amount on the left side of an account.
result of the owner taking cash or other assets
out of the business for personal use. debit The normal balance of asset, expense, and
balances drawing accounts.
Expenses The decrease in assets (or increase in liabilities)
as a result of efforts to produce revenues. double-
A system in which each transaction has a dual
entry
effect on the accounting elements.
fiscal year Any accounting period of 12 months' duration. accounting

income Reports the profitability of business operations footings The total dollar amounts on the debit and credit
statement for a specific period of time. sides of an account.

Input Business transactions provide the necessary normal

The side of an account that is increased.
input for the accounting information system. balance

Liabilities Something owed to another business entity. trial A list of all accounts, showing the title and
balance balance of each account, used to prove that the
Liquidity A measure of the ease with which an asset will sum of the debits equals the sum of the credits.
be converted to cash.

net income The excess of total revenues over total

expenses for the period. Chapter 4
net loss The excess of total expenses over total book of
revenues for the period. The journal or the first formal accounting record
original
of a transaction.
entry
net worth Another term for owner's equity, the amount by
which the business assets exceed the business chart of
liabilities. A list of all accounts used by a business.
accounts
notes A formal written promise to pay a supplier or compound A general journal entry that affects more than two
payable lender a specified sum of money at a definite entries accounts.
future time.
correcting An entry to correct an incorrect entry that has
operating Another name for the income statement, which entry been journalized and posted to the wrong account.
statement reports the profitability of business operations
for a specific period of time. cross- The information in the Posting Reference
reference columns of the journal and ledger that provides a
Output The financial statements are the output of the link between the journal and ledger.
accounting information system.
general A complete set of all the accounts used by a
Owner's The amount by which the business assets ledger business. The general ledger accumulates a
equity exceed the business liabilities. complete record of the debits and credits made to
each account as a result of entries made in the
Processing Recognizing the effect of transactions on the
journal.
assets, liabilities, owner's equity, revenues, and
expenses of a business. general An account with columns for the debit or credit
ledger transaction and columns for the debit or credit
profit and Another name for the income statement, which
account running balance.
loss reports the profitability of business operations
statement for a specific period of time. journal A day-by-day listing of the transactions of a
business.
Revenues The amount a business charges customers for
products sold or services performed. journalizing Entering the transactions in a journal.
statement of Another name for the balance sheet, which posting Copying the debits and credits from the journal to
financial reports assets, liabilities, and owner's equity on the ledger accounts.
condition a specific date.
ruling A method of correcting an entry in which a line is
statement of Another name for the balance sheet, which method drawn through the error and the correct
financial reports assets, liabilities, and owner's equity on information is placed above it.
position a specific date.
slide error An error that occurs when debit or credit amounts
statement of ?slide? a digit or two to the left or right.
Reports beginning capital plus net income less
owner's
withdrawals to compute ending capital.
equity source Any document that provides information about a
document business transaction.
Withdrawals Reduce owner's equity as a result of the owner
taking cash or other assets out of the business transposition
for personal use. An error that occurs when two digits are reversed.
error

trial balance A list used to prove that the totals of the debit and
Chapter 3 credit balances in the ledger accounts are equal.

balance The difference between the footings of an two-column

A journal with only two amount columns, one for
account. general
debit amounts and one for credit amounts.
journal
credit To enter an amount on the right side of an
account.
Chapter 5
credit The normal balance of liability, owner's equity,
balances and revenue accounts.
accrual basis A method of accounting under which
of accounting revenues are recorded when earned and
expenses are recorded when incurred.
Adjusted Trial The third pair of amount columns on the work
Balance sheet. They are used to prove the equality of
columns the debits and credits in the general ledger
accounts after making all end-of-period
adjustments.
adjusting Journal entries made at the end of an
entries accounting period to reflect changes in
account balances that are not the direct result
of an exchange with an outside party.
Balance Sheet The work sheet columns that show the
columns amounts that will be reported in the balance
sheet and the statement of owner's equity.
book value The difference between the asset account
and its related accumulated depreciation
account. The value reflected by the
accounting records.
cash basis of A method of accounting under which
accounting revenues are recorded when cash is received
and expenses are recorded when cash is
paid.
contra-asset An account with a credit balance that is
deducted from the related asset account on
the balance sheet.
depreciable The cost of an asset that is subject to
cost depreciation.
Depreciation A method of matching an asset's original cost
against the revenues produced over its useful
life.
double-
A depreciation method that recognizes
declining-
depreciation each year by multiplying a rate
balance
(typically double the straight-line rate) by the
depreciation
book value of the asset.
method
expense Expenses should be recognized when
recognition incurred, regardless of when cash is paid.
principle Expenses are generally considered to be
incurred when services are received or assets
consumed.
fiscal year A 12-month period for which financial reports
are prepared.
historical cost A principle that requires assets to be recorded
principle at their actual cost.
Income The work sheet columns that show the
Statement amounts that will be reported in the income
columns statement.
market value The amount an item can be sold for under
normal economic conditions.
matching The proper matching of revenues earned
principle during an accounting period with the
expenses incurred to produce the revenues is
often referred to as the matching principle.
Modified
Accelerated A depreciation method in which rates
Cost determined by the IRS are multiplied by the
Recovery cost of the asset to determine depreciation
System expense for the year.
(MACRS)
modified cash A method of accounting that combines
basis aspects of the cash and accrual methods. It
uses the cash basis for recording revenues
and most expenses. Exceptions are made
when cash is paid for assets with useful lives
greater than one accounting period.
plant assets Assets of a durable nature that will be used
for operations over several years. Examples
include buildings and equipment.
revenue Revenues should be recognized when
recognition earned, regardless of when cash is received
principle from the customer. Revenues are considered
earned when a service is provided or a
product is sold.
Salvage value The expected market value of an asset at the
end of its useful life.
straight-line
A depreciation method that recognizes an
depreciation
equal amount of depreciation each year.
method
straight-line A depreciation method in which the
method depreciable cost is divided by the estimated
useful life.
sum-of-the- A depreciation method that recognizes
years'-digits depreciation each year by multiplying a
fraction by the depreciable cost. The
numerator of the fraction is the remaining life
of the asset, measured from the beginning of
the year. The denominator is the sum-of-the-
years'-digits.
sum-of-the-
If an asset has a five-year life, the sum-of-the-
years'-digits
years'-digits is computed as follows: 5 + 4 + 3
depreciation
+ 2 + 1 = 15.
method
undepreciated The difference between the asset account
cost and its related accumulated depreciation
account. Also known as book value.
useful life The period of time that an asset is expected
to help produce revenues.
work sheet A form used to pull together all of the
information needed to enter adjusting entries
and prepare the financial statements.
Chapter 6
account
A balance sheet in which the assets are on the left
form of
and the liabilities and the owner's equity sections are
balance
on the right.
sheet
accounting The steps involved in accounting for all of the
cycle business activities during an accounting period.
classified A balance sheet with separate categories for current
balance assets; property, plant, and equipment; current
sheet liabilities; and long-term liabilities.
closing The process of giving zero balances to the
process temporary accounts so that they can accumulate
information for the next accounting period.
Current Cash and assets that will be converted into cash or
assets consumed within either one year or the normal
operating cycle of the business, whichever is longer.
Current Liabilities that are due within either one year or the
liabilities normal operating cycle of the business, whichever is
longer, and that are to be paid out of current assets.
Financing Those transactions dealing with the exchange of
activities cash between the business and its owners and
creditors.
Income A temporary account used in the closing process to sales Reductions in the price of merchandise
Summary summarize the effects of all revenue and expense allowances granted by the seller because of defects or
accounts. other problems with the merchandise.

Investing Those transactions involving the purchase and sale sales To the seller, cash discounts are considered
activities of long-term assets, lending money, and collecting discounts sales discounts.
the principal on the related loans.
sales invoice A document that is generated to bill the
long-term customer to whom the sale was made.
See property, plant, and equipment.
assets
sales return Merchandise returned by a customer for a
long-term refund.
See long-term liabilities.
debt
sales ticket A document created as evidence of a sale in
Long-term Obligations that are not expected to be paid within a a retail business.
liabilities year and do not require the use of current assets.
Also called long-term debt. schedule of An alphabetical or numerical listing of
accounts customer accounts and balances, usually
operating Those transactions related to the revenues and receivable prepared at the end of the month.
activities expenses reported on the income statement.
subsidiary A separate ledger made up of individual
operating The period of time required to purchase supplies and ledger accounts that contain the detail for a
cycle services and convert them back into cash. controlling account.

permanent Accounts that accumulate information across

accounts accounting periods; all accounts reported on the Chapter 11
balance sheet.
account, See contra-cost account.
plant
See property, plant, and equipment. accounts
assets A separate ledger containing an individual
payable
post- account payable for each supplier.
Prepared after posting the closing entries to prove ledger
closing
the equality of the debit and credit balances in the contra-cost An account with a credit balance that is
trial
general ledger accounts. deducted from the related cost account.
balance

Property, Assets that are expected to serve the business for contra-
See contra-cost account.
plant, and many years. Also called plant assets or long-term purchases
equipment assets.
Cost of The difference between the goods available for
report goods sold sale and the ending inventory.
A balance sheet in which the liabilities and the
form of
owner's equity sections are shown below the assets cost of
balance
section. merchandise See cost of goods sold.
sheet
sold
temporary Accounts that do not accumulate information across
accounts accounting periods but are closed, such as the FOB Shipping terms indicating that transportation
drawing account and all income statement accounts. destination charges are paid by the seller.

FOB
Shipping terms indicating that transportation
shipping
charges are paid by the buyer.
Chapter 10 point

accounts A separate ledger containing an individual gross

See gross profit.
receivable account receivable for each customer, kept margin
ledger in either alphabetical or numerical order. Gross profit The difference between net sales and cost of
cash Discounts to encourage prompt payment by goods sold.
discounts customers who buy merchandise on gross-price Under this method, purchases are recorded at
account. method the gross amount.
contra- invoice A document prepared by the seller as a bill for
An account with a debit balance that is
revenue the merchandise shipped. To the seller, this is
deducted from the related revenue account.
account a sales invoice. To the buyer, this is a purchase
controlling A summary account maintained in the invoice.
account general ledger with a subsidiary ledger (for net-price Under this method, purchases are recorded at
example, the accounts receivable ledger). method the net amount, assuming all available cash
credit memo A document issued when credit is given for discounts are taken.
merchandise returned or for an allowance. purchase A document prepared by the seller as a bill for
merchandising A business that purchases merchandise invoice the merchandise shipped. To the buyer, this is
business such as clothing, furniture, or computers, and a purchase invoice.
sells that merchandise to its customers. purchase A written order to buy goods from a specific
sale A transfer of merchandise from one business order vendor (supplier).
or individual to another in exchange for cash purchase A form used to request the purchase of
or a promise to pay cash. requisition merchandise or other property.

purchases Merchandise acquired for resale to customers.

receiving inventory A form used for recording inventory items. It
A report indicating what has been received.
report sheet has columns for recording the description of
each item, the quantity on hand, the cost per
schedule of An alphabetical or numerical listing of supplier unit, and the extension.
accounts accounts and balances, usually prepared at the
payable end of the month. last-in, first- A method of allocating merchandise cost
out, or LIFO, which assumes that the sales in the period
trade A reduction from the list or catalog price offered method were made from the most recently purchased
discount to different classes of customers. goods. Therefore, the earliest goods
purchased remain in inventory.
Chapter Loss on This account is debited when the market value
12 Write-Down (replacement cost) of the inventory is below
of Inventory cost when applying the lower-of-cost-or-
cash market method of inventory valuation. It is
A special journal used to record only cash
payments reported on the income statement as an
payments transactions.
journal expense.
cash lower-of-
A special journal used to record only cash receipts An inventory valuation method under which
receipts cost-or-
transactions. inventory is valued at the lower-of-cost-or-
journal market
market value (replacement cost).
method
purchases A special journal used to record only purchases of
journal merchandise on account. Market In applying the lower-of-cost-or-market
method, market means the cost to replace the
sales A special journal used to record only sales of
inventory. It is the prevailing price in the
journal merchandise on account.
market in which goods are purchased not the
special A journal designed for recording only certain kinds prevailing price in the market in which they are
journal of transactions. normally sold.

natural A fiscal year that starts and ends at the time

business the stock of goods is normally at its lowest
year level.
Chapter 13 periodic Under this system, the ending inventory and
inventory cost of goods sold are determined at the end
average cost
See weighted-average method. system of the accounting period, when a physical
method
inventory is taken.
conservatism The accounting practice of conservatism
perpetual Under this system, the merchandise inventory
states that we should never anticipate gains,
inventory and cost of goods sold accounts are updated
but always anticipate and account for losses.
system when merchandise is bought and sold.
As applied to inventory, conservatism means
that if the value of inventory declines while it is perpetual A method of allocating merchandise cost
being held, the loss should be recognized in LIFO which assumes that every time inventory is
the period of the decline. inventory purchased, a new layer is formed. When
method inventory is sold, units are sold out of the most
consignee The company holding the merchandise of
recent layer. As those units are used up,
another business to be sold.
additional sales are taken from the next most
consignment Goods that are held by one business for sale recently purchased layer.
but that are owned by another business.
perpetual A method of allocating merchandise cost
consignor The owner of the merchandise that is held by moving- which assumes that every time inventory is
another business. average purchased, a new average cost per unit is
inventory calculated. When inventory is sold, the most
Consistency The principle that states that a business method recent average cost is used to measure cost
should use the same accounting methods of goods sold and the remaining inventory on
from period to period. This improves the hand.
comparability of the financial statements over
time. physical
A physical count of the goods on hand.
inventory
cost In applying the lower-of-cost-or-market
method, cost means the dollar amount retail method A variation of the gross profit method that is
calculated using one of the four inventory used by many retail businesses, such as
costing methods. department and clothing stores, to estimate
the cost of goods sold and ending inventory.
first-in, first- A method of allocating merchandise cost
out, or FIFO, which assumes that the first goods purchased specific A method of allocating merchandise cost in
method were the first goods sold and, therefore, that identification which each unit of inventory is specifically
the latest goods purchased remain in method identified.
inventory.
weighted- A method of allocating merchandise cost
gross profit A method of estimating inventory in which a average based on the average cost of identical units.
method business's normal gross profit percentage is method The average cost of identical units is
used to estimate the cost of goods sold and determined by dividing the total cost of units
ending inventory. available for sale by the total number of units
available for sale.
in transit Goods that are in the process of being shipped
between the seller and the buyer.