Chapter 2 : Accounting Vocabulary

Topics covered in this snack-sized chapter:



Assets arrow_upward


  • The resources owned by the business.
    • Cash
    • Accounts Receivable – Amounts owed by the customers.
    • Prepaid Expense – Assets to be used in the future (supplies, prepaid insurance).
    • Merchandise Inventory

    Liabilities arrow_upward


  • Rights of creditors or debtors of the business.
    • Accounts payable – the amount owed to creditors.
    • Dividends payable – the amount owed to shareholders.
    • Accrued expenses
    • Mortgage payable
    • Notes payable

    Owner’s Equity arrow_upward


  • Assets minus liabilities.
  • Capital stock:
    • Investment by shareholders
  • Retained earnings:
    • Earnings kept in the business
  • Dividends:
    • Distribution of income to shareholders

    Revenue arrow_upward


  • The total amount of money a business takes in (income) during a given period by selling goods and services.
    • Sales
    • Fees earned
    • Commissions received
    • Increase in retained earnings
    • Results from operations

    Expenses arrow_upward


  • Cost of doing business.
    • Salary expenses
    • Rent expenses
    • Depreciation expenses
    • Miscellaneous expenses
    • Decrease of retained earnings

    GAAP arrow_upward


  • Generally Accepted Accounting Principles
    • Govern financial accounting practices
    • Its purpose is to make information in financial statements relevant, reliable, and comparable.

    The Income Statement arrow_upward


  • One of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow statement).
  • Summarizes the revenues and expenses generated by the company over the entire reporting period.
  • A summary of revenue and expenses for a specific period of time.
  • The income statement reports:
    • Net assets generated through business operations (revenues)
    • Net assets consumed (the expenses)
    • Net income
  • Formula:
  • Revenue - Expenses = Net Income
  •                                       (Net Loss)
    • Net Income is transferred to the statement of retained earnings

    Example of Income Statement arrow_upward


    Income Statement for XYZ Corporation: Jan 2011


    Revenue

    $1,000

    Expenses

    Wage Expenses

    $500

    Depreciating Expenses

    $100

    Net Income (loss)

    $400


  • Transferred to the retained earnings statement.

    • Retained Earnings Statement arrow_upward


  • An amount earned by a corporation and not yet distributed to stockholders.
  • Retained earnings represent stockholders’ equity created from business operations through revenue, expenses, and dividend transactions.
  • A summary of the changes in the earnings retained in the corporation for a specific period of time.
  • Formula:

    • Example of Retained Earnings Statement arrow_upward


    Statement of Retained Earnings for XYZ Corporation (Jan 2011)


    Retained earnings Jan 1, 2011

    $1,000

    Add

    Net income for

    Jan

    $100

    Less

    Dividends

    ($10)

    Retained Earnings Jan 21, 2011

    $1,090


  • Transferred to the balance sheet.

    • Balance Sheet arrow_upward


  • A financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.
  • A list of assets, liabilities, stockholder’s equity for a specific date.
  • Starting at a certain point in time, the Balance Sheet reports:

    • Statement of Cash Flow arrow_upward


  • The statement of cash flow reports, for a specified period of time:
  • A summary of the cash receipts and cash payments for a specific period of time.
  • Cash flow includes the following activities:

    • Dividends arrow_upward


  • Dividends are the distribution of earnings to stockholders.

    • Revenue Recognition arrow_upward


  • Provides guidance on when a company must recognize revenue (recognize means to record).
  • Four concepts of revenue recognition are:

    • Auditors arrow_upward


  • Auditors work independently of a company’s management and internal accountants to examine the financial statements.
  • Auditors issue an auditor’s opinion about the fairness of the statements and their adherence to proper accounting principles.

    • Auditor’s Opinion arrow_upward


  • Unqualified opinion:
  • Qualified Opinion:
  • No Opinion:
  • Adverse:

    • Manufacturing Companies arrow_upward


  • Purchase materials and components and convert them into finished goods.
  • Must also develop, design, market, and distribute its products.

    • Merchandising Companies arrow_upward


  • Provide services or intangible products to their customers.
  • These companies contribute to the sale of products to retail consumers.

    • Partnership arrow_upward


  • A business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
  • Combines the skills and resources of more than one person.

    • Corporation arrow_upward


  • A business owned by stockholders who share in its profits but are not personally responsible for its debts.
  • Organized under state or federal statutes as a separate legal entity.
  • Includes ownership divided into shares of stock.

    • Limited Liability Corporation (LLC) arrow_upward


  • A popular alternative to a partnership.
  • Hybrid of a publicly held corporation and a partnership in which an owner is taxed as partners but enjoys the benefits of limited liability.
  • Gives tax and liability advantages to the owners.


    • Thank You from Kimavi arrow_upward


  • Please email us at admin@kimavi.com and help us improve this tutorial.