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Accounting:


  • Accelerated depreciation method-  A depreciation method that writes off a relatively large amount of the asset's cost nearer the start of its useful life than the straight-line method does.


  • 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.


  • Account format- A balance-sheet format that lists assets on the left and liabilities and stockholders' eouity on the right.


  • Account payable- A liability backed by the general reputation and credit standing of the debtor.


  • Accounting- The information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers.


  • Accounting equation- The most basic tool of accounting: Assets= Liabilities+ Owners' Equity.


  • Accounts receivable turnover- Measures a company's ability to collect cash from credit customers. To compute accounts receivable turnover, divide net credit sales by average net accounts receivable.


  • Accrual-An expense or a 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 liability- A liability for an expense that has not yet been paid by the company.


  • Accrued revenue- A revenue that has been earned but not yet received in cash.


  • Accumulated depreciation- The cumulative sum of all depreciation expense from the date of acquiring a plant asset.


  • Acid-test ratio- Ratio of the sum of cash plus short-term investments plus net current receivables to total current liabilities if they come due immediately.


  • Adjusted trial balance- A list of all the ledger accounts with their adjusted balances.


  • Adverse opinion- An audit opinion stating that the financial statements are unreliable.


  • Aging-of-accounts receivable- A way to estimate bad debts by analyzing individual accounts receivable according to the length of time they have been receivable from the customer.


  • Allowance for doubtful accounts- A contra account, related to accounts receivable, that holds the estimated amount of collection losses.


  • Allowance method- A method of recording collection losses based on estimates of how much money the business will not collect from its customers.


  • Amortization- The systematic reduction of a lump-sum amount. Expense that applies to intangible assets in the same way depreciation applies to plant assets and depletion applies to natural resources.


  • Asset- An economic resource that is expected to be of benefit in the future.


  • Audit- A periodic examination of a company's financial statements and the accounting systems, controls, and records that produce them.


  • Available-for-sale investments- All investments not classified as held-to-maturity or trading securities.


  • Average cost method- Inventory costing method based on the average cost of inventory during the period. Average cost is determined by dividing the cost of goods available by the number of units available.


  • Balance sheet- List of any entity's assets, liabilities, and owners' equity as of a specific date.


  • Bank collection- Collection of money by the bank on behalf of a depositor.


  • Bank reconciliation- A document explaining the reasons for the difference between a depositor's records and the bank's records about the depositor's.


  • Bank statement- A document showing the beginning and ending balances of a particular bank account listing that month's transactions that affected the account.


  • Benchmarking- The comparison of a company to a standard set by other companies, with a view toward improvement.


  • Board of directors- Group elected by the stockholders to set policy for a corporation and to appoint its officers.


  • Bonds payable- Groups of notes payable (bonds) issued to multiple lenders called bondholders.


  • Book value (of a stock)-  Amount of owners' equity on the company's books for each share of its stock.


  • Book value (of a asset)-   The asset's cost minus accumulated depreciation.


  • Book value per share of common stock- Common stockholders' equity divided by the number of shares of common stock outstanding. The recorded amount for each share of common stock outstanding.


  • Budget- A quantitative expression of a plan that helps managers coordinate the entity's activities.


  • Bylaws- Constitution for governing a corporation.


  • Callable bonds- Bonds that the issuer may call (pay off) at a specified price whenever the issuer wants.


  • Capital- Another name for the owner's equity of a business.


  • Capital charge- The amount that stockholders and lenders charge a company for the use of their money. Calculated as (Notes payable+ Loans payable + Long-term debt + Stockholders' equity) x Cost of capital.


  • Capital expenditure- Expenditure that increases an asset's capacity or efficiency or extends its useful life. Capital expenditures are debited to an asset account.


  • Capital lease- Lease agreement that meets any one of four criteria: (1) The lease transfers title of the leased asset to the leasee. (2) The lease contains a bargain purchase option. (3) The lease term is 75% or more of the estimated useful life of the leased asset. (4) The present value of the lease payments is 90% or more of the market value of the leased asset.


  • Cash- Money and any medium of exchange that a bank accepts at face value.


  • Cash equivalents- Highly liquid short-term investments that can be converted into cash immediately.


  • Cash flows- Cash receipts and cash payments (disbursements).


  • Cash-basis accounting- Accounting that records only transactions in which cash is received or paid.


  • Chairperson- Elected  by a corporation's board of directors, usually the most powerful person in the corporation.


  • Chart of accounts- List of all a company's accounts and their account numbers.


  • Check- Document instructing a bank to pay the designated persons or business the specified amount of money.


  • Classified balance sheet- A balance sheet that shows current assets separate from long-term assets, and current liabilities separate from long-term liabilities.


  • Closing entries- Entries that transfer the revenue, expense, and dividends balances from these respective accounts to the Retained Earnings account.


  • Closing the books- The process of preparing the accounts to begin recording the next period's transactions. Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends accounts to zero.


  • Common stock- The most basic form of capital stock.


  • Common-size statement- A financial statement that reports only percentages (no dollar amounts).


  • Comprehensive income- A company's change in total stockholder's equity from all sources other than from the owners of the business.


  • Conservatism- The accounting concept by which the least favorable figures are presented in the financial statements.


  • Consistency principle- A business must use the same accounting methods and procedures from period to period.


  • Consolidated statements- Financial statements of the parent company plus those of majority-owned subsidiaries as if the combination were a single legal entity.


  • Contra account- An account that always has a companion account and whose normal balance is opposite  that of the companion account.


  • Controller- The chief account officer of a business.


  • Controlling (majority) interest- Ownership of more than 50% of an investors company's voting stock.


  • Convertible bonds (or notes)- Bonds (or notes) that may be converted into the issuing company's common stock at the investor's option.


  • Copyright- Exclusive right to reproduce and sell a book, musical composition, film, other work of art, or computer program. Issued by the federal government, copyrights extend 70 years beyond the author's life.


  • Corporation- A business owned by stockholders. A corporation is a legal entity, an "artificial person" in the eyes of the law.


  • Cost of capital- A weighted average of the returns demanded by the company's stockholders and lenders.


  • Cost of goods sold- Cost of the inventory the business has sold to customers.


  • Cost principle- Principle that states that assets and services should be recorded at their actual cost.


  • Cost-of-goods-sold model- Formula that brings together all the inventory data for the entire accounting period: Beginning inventory+Purchases= Goods available. Then, Goods available-Ending inventory= Cost of goods sold.


  • Credit- The right side of an account.


  • Creditor- The party to whom money is owed.


  • Cumulative preferred stock- Preferred stock whose owners must receive all dividends in arrears before the corporation can pay dividends to the common stockholders.


  • 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 installment of long-term debt- The amount of the principal that is payable within one 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.


  • Current ratio- Current assets divided by current liabilities. Measures a company's ability to pay current liabilities with current assets.


  • Day's sales in receivables- Ratio of average net accounts receivable to one day's sales. Indicates how many days' sales remain in Accounts Receivable awaiting collection. Also called the collection period.


  • Debentures- Unsecured bonds- bonds backed only by the good faith of the borrower.


  • Debit- The left side of an account.


  • Debt instrument- A receivable or a payable, usually some form of note.


  • Debt ratio- Ratio of total liabilities to total assets. States the proportion of a company's assets that is financed with debt.


  • Debtor- The party who owes money.


  • Deferral- An adjustment for which the business paid or received cash in advance . Examples include prepaid rent, prepaid insurance, and supplies.


  • Deficit- Debit balance in the Retained Earnings account.


  • Depletion expense- That portion of a natural resource's cost that is used up in a particular period. Depletion expense is computed in teh same way as units-of-production depreciation.


  • Deposit in transit- A deposit recorded by the company but not by its bank.


  • Depreciable cost- The cost of a plant asset minus its estimated residual value.


  • Depreciation- Expense associated with spreading (allocating) the cost of a plant asset over its useful life.


  • Direct method- Format of the operating activities section of the statement of cash flows; lists the major categories of operating cash receipts (collections from customers and receipts of interest and dividends) and cash disbursements  (payments to suppliers, to employees, for interest and income taxes).


  • Direct write-off method- A method of accounting for bad debts in which the company waits until a custotmer's account receviable proves uncollectable and then debits Uncollectible-Account  Expense and credits the customer's Account Receivable.


  • Disclaimer- An audit opinion stating that the auditor was unable to reach a professional opinion regarding the quality of the financial statements.


  • Disclosure principle- A business's financial statements must report enough infomation for outsiders to make knowledegable decisions about the business. The company should report relevant, reliable, and comparable information about its economic affairs. 


  • Discount (on a bond)- Excess of a bond's face (par value) over its issue price.


  • Dividend- Distribution (usually cash) by a corporation to its stockholders.


  • Dividend yield- Ratio of dividends per share of stock to the stock's market price per sahre. Tells the percentage of a stock's market value thta a company returns  to stockholders as dividends.


  • Double taxation- Corporations pay income taxes on corporate income. Then, the stockholders pay personal income tax on the cash dividends that they receive from corporations.


  • Double-declining-balance (DDB) method- An accelarted depreciation method that computes annual depreciation by multiplying the asset's decreasing book value by a constant percentage, which is 2 times the straight-line rate.


Accounting Formulas

Accounting Notes and Tests