Financial Accounting
Glossary
Chapter 1
Accounting The information system that identifies,
records, and communicates the economic events of an
organization to interested users. (p. 4).
Assets Resources a business owns. (p. 12).
Auditing The examination of financial statements by a
certified public accountant in order to express an opinion
as to the fairness of presentation. (p. 25).
Balance sheet A financial statement that reports the assets,
liabilities, and owner’s equity at a specific date. (p. 2).
Basic accounting equation Assets = Liabilities + Owner’s
equity. (p. 21).
Bookkeeping A part of the accounting process that involves
only the recording of economic events. (p. 5).
Convergence The process of reducing the differences
between U.S. GAAP and IFRS. (p. 9).
Corporation A business organized as a separate legal entity
under state corporation law, having ownership divided into
transferable shares of stock. (p. 10).
Drawings Withdrawal of cash or other assets from an
unincorporated business for the personal use of the
owner(s). (p. 13).
Economic entity assumption An assumption that requires
that the activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities. (p. 10).
Ethics The standards of conduct by which actions are
judged as right or wrong, honest or dishonest, fair or not
fair. (p. 7).
Expanded accounting equation Assets = Liabilities +
Owner’s capital - Owner’s drawings + Revenues -
Expenses. (p. 13).
Expenses The cost of assets consumed or services used in
the process of earning revenue. (p. 13).
Fair value principle An accounting principle stating that
assets and liabilities should be reported at fair value (the
price received to sell an asset or settle a liability). (p. 9).
Faithful representation Numbers and descriptions match
what really existed or happened—they are factual. (p. 9).
Financial accounting The field of accounting that provides
economic and financial information for investors, creditors,
and other external users. (p. 6).
Financial Accounting Standards Board (FASB) A private
organization that establishes generally accepted
accounting principles in the United States (GAAP) (p. 9).
Forensic accounting An area of accounting that uses
accounting, auditing, and investigative skills to conduct
investigations into theft and fraud. (p. 26).
Generally accepted accounting principles (GAAP)
Common standards that indicate how to report economic
events. (p. 8).
Historical cost principle An accounting principle that states
that companies should record assets at their cost. (p. 9).
Income statement A financial statement that presents the
revenues and expenses and resulting net income or net loss
of a company for a specific period of time. (p. 21).
International Accounting Standards Board (IASB) An
accounting standard-setting body that issues standards
adopted by many countries outside of the United States. (p.
9).
International Financial Reporting Standards (IFRS)
International accounting standards set by the International
Accounting Standards Board (IASB). (p. 9).
Investments by owner The assets an owner puts into the
business. (p. 13).
Liabilities Creditor claims against total assets. (p. 12).
Management consulting An area of public accounting
ranging from development of accounting and computer
systems to support services for marketing projects and
merger and acquisition activities. (p. 25).
Managerial accounting The field of accounting that
provides internal reports to help users make decisions
about their companies. (p. 5).
Monetary unit assumption An assumption stating that
companies include in the accounting records only
transaction data that can be expressed in terms of money.
(p. 9).
Net income The amount by which revenues exceed
expenses. (p. 21).
Net loss The amount by which expenses exceed revenues.
(p. 21).
Owner’s equity The ownership claim on total assets. (p.
13).
Owner’s equity statement A financial statement that
summarizes the changes in owner’s equity for a specific
period of time. (p. 21).
Partnership A business owned by two or more persons
associated as partners. (p. 10).
Private (or managerial) accounting An area of accounting
within a company that involves such activities as cost
accounting, budgeting, design and support of accounting
information systems, and tax planning and preparation. (p.
26).
Proprietorship A business owned by one person. (p. 10).
Public accounting An area of accounting in which the
accountant offers expert service to the general public. (p.
25).
Relevance Financial information that is capable of making
a difference in a decision. (p. 9).
Revenues The gross increase in owner’s equity resulting
from business activities entered into for the purpose of
earning income. (p. 13).
Sarbanes-Oxley Act (SOX) Law passed by Congress
intended to reduce unethical corporate behavior. (p. 7).
Securities and Exchange Commission (SEC) A
governmental agency that oversees U.S. financial markets
and accounting standard-setting bodies. (p. 9).
Statement of cash flows A financial statement that
summarizes information about the cash inflows (receipts)
and cash outflows (payments) for a specific period of time.
(p. 21).
Taxation An area of public accounting involving tax advice,
tax planning, preparing tax returns, and representing
clients before governmental agencies. (p. 25).
Transactions The economic events of a business that are
recorded by accountants. (p. 14).
Chapter 2
Account A record of increases and decreases in specific
asset, liability, or owner’s equity items. (p. 50).
Chart of accounts A list of accounts and the account
numbers that identify their location in the ledger. (p. 60).
Compound entry A journal entry that involves three or
more accounts. (p. 56).
Credit The right side of an account. (p. 50).
Debit The left side of an account. (p. 50).
Double-entry system A system that records in appropriate
accounts the dual effect of each transaction. (p. 51).
General journal The most basic form of journal. (p. 55).
General ledger A ledger that contains all asset, liability, and
owner’s equity accounts. (p. 57).
Journal An accounting record in which transactions are
initially recorded in chronological order. (p. 55).
Journalizing The entering of transaction data in the journal.
(p. 55).
Ledger The entire group of accounts maintained by a
company. (p. 57).
Normal balance An account balance on the side where an
increase in the account is recorded. (p. 51).
Posting The procedure of transferring journal entries to the
ledger accounts. (p. 59).
Simple entry A journal entry that involves only two
accounts. (p. 56).
T-account The basic form of an account. (p. 50).
Three-column form of account A form with columns for
debit, credit, and balance amounts in an account. (p. 58).
Trial balance A list of accounts and their balances at a given
time. (p. 68).
Chapter 3
Accrual-basis accounting Accounting basis in which
companies record transactions that change a company’s
financial statements in the periods in which the events
occur. (p. 94).
Accruals Adjusting entries for either accrued revenues or
accrued expenses. (p. 96).
Accrued expenses Expenses incurred but not yet paid in
cash or recorded. (p. 106).
Accrued revenues Revenues for services performed but
not yet received in cash or recorded. (p. 104).
Adjusted trial balance A list of accounts and their balances
after the company has made all adjustments. (p. 111).
Adjusting entries Entries made at the end of an accounting
period to ensure that companies follow the revenue
recognition and expense recognition principles. (p. 96).
Book value The difference between the cost of a
depreciable asset and its related accumulated
depreciation. (p. 101).
Calendar year An accounting period that extends from
January 1 to December 31. (p. 94).
Cash-basis accounting Accounting basis in which
companies record revenue when they receive cash and an
expense when they pay out cash. (p. 94).
Comparability Ability to compare the accounting
information of different companies because they use the
same accounting principles. (p. 119).
Consistency Use of the same accounting principles and
methods from year to year within a company. (p. 119).
Contra asset account An account offset against an asset
account on the balance sheet. (p. 100).
Cost constraint Constraint that weighs the cost that
companies will incur to provide the information against the
benefit that financial statement users will gain from having
the information available. (p. 121).
Deferrals Adjusting entries for either prepaid expenses or
unearned revenues. (p. 96).
Depreciation The process of allocating the cost of an asset
to expense over its useful life. (p. 100).
Economic entity assumption An assumption that every
economic entity can be separately identified and
accounted for. (p. 120).
Expense recognition principle (matching principle) The
principle that companies match efforts (expenses) with
accomplishments (revenues). (pp. 95, 121).
Fair value principle Assets and liabilities should be
reported at fair value (the price received to sell an asset or
settle a liability). (p. 120).
Faithful representation Information that accurately
depicts what really happened. (p. 119).
Fiscal year An accounting period that is one year in length.
(p. 94).
Full disclosure principle Accounting principle that dictates
that companies disclose circumstances and events that
make a difference to financial statement users. (p. 121).
Going concern assumption The assumption that the
company will continue in operation for the foreseeable
future. (p. 120).
Historical cost principle An accounting principle that states
that companies should record assets at their cost. (p. 120).
Interim periods Monthly or quarterly accounting time
periods. (p. 94).
Materiality A company-specific aspect of relevance. An
item is material when its size makes it likely to influence the
decision of an investor or creditor. (p. 119).
Monetary unit assumption An assumption that requires
that only those things that can be expressed in money are
included in the accounting records. (p. 120).
Prepaid expenses (prepayments) Expenses paid in cash
before they are used or consumed. (p. 98).
Relevance The quality of information that indicates the
information makes a difference in a decision. (p. 119).
Revenue recognition principle The principle that
companies recognize revenue in the accounting period in
which the performance obligation is satisfied. (pp. 95, 121).
Timely Information that is available to decision-makers
before it loses its capacity to influence decisions. (p. 119).
Time period assumption An assumption that accountants
can divide the economic life of a business into artificial time
periods. (pp. 94, 120).
Understandability Information presented in a clear and
concise fashion so that users can interpret it and
comprehend its meaning. (p. 119).
Unearned revenues A liability recorded for cash received
before services are performed. (p. 101).
Useful life The length of service of a long-lived asset. (p.
100).
Verifiable The quality of information that occurs when
independent observers, using the same methods, obtain
similar results. (p. 119).
Chapter 4
Classified balance sheet A balance sheet that contains
standard classifications or sections. (p. 169).
Closing entries Entries made at the end of an accounting
period to transfer the balances of temporary accounts to a
permanent owner’s equity account, Owner’s Capital. (p.
159).
Correcting entries Entries to correct errors made in
recording transactions. (p. 167).
Current assets Assets that a company expects to convert to
cash or use up within one year. (p. 170).
Current liabilities Obligations that a company expects to
pay within the coming year or its operating cycle,
whichever is longer. (p. 172).
Income Summary A temporary account used in closing
revenue and expense accounts. (p. 159).
Intangible assets Noncurrent assets that do not have
physical substance. (p. 171).
Liquidity The ability of a company to pay obligations
expected to be due within the next year. (p. 173).
Long-term investments Generally, (1) investments in
stocks and bonds of other companies that companies
normally hold for many years, and (2) long-term assets,
such as land and buildings, not currently being used in
operations. (p. 171).
Long-term liabilities Obligations that a company expects to
pay after one year. (p. 173).
Operating cycle The average time that it takes to purchase
inventory, sell it on account, and then collect cash from
customers. (p. 170).
Permanent (real) accounts Accounts that relate to one or
more future accounting periods. Consist of all balance
sheet accounts. Balances are carried forward to the next
accounting period. (p. 159).
Post-closing trial balance A list of permanent accounts and
their balances after a company has journalized and posted
closing entries. (p. 163).
Property, plant, and equipment Assets with relatively long
useful lives and currently being used in operations. (p. 171).
Reversing entry An entry, made at the beginning of the
next accounting period that is the exact opposite of the
adjusting entry made in the previous period. (p. 166).
Stockholders’ equity The ownership claim of shareholders
on total assets. It is to a corporation what owner’s equity is
to a proprietorship. (p. 174).
Temporary (nominal) accounts Accounts that relate only
to a given accounting period. Consist of all income
statement accounts and owner’s drawings account. All
temporary accounts are closed at end of the accounting
period. (p. 158).
Worksheet A multiple-column form that may be used in
making adjusting entries and in preparing financial
statements. (p. 150).
Chapter 5
Contra revenue account An account that is offset against a
revenue account on the income statement. (p. 218).
Cost of goods sold The total cost of merchandise sold
during the period. (p. 208).
FOB destination Freight terms indicating that the seller
places the goods free on board to the buyer’s place of
business, and the seller pays the freight. (p. 213).
FOB shipping point Freight terms indicating that the seller
places goods free on board the carrier, and the buyer pays
the freight costs. (p. 213).
Gross profit The excess of net sales over the cost of goods
sold. (p. 223).
Gross profit rate Gross profit expressed as a percentage, by
dividing the amount of gross profit by net sales. (p. 223).
Income from operations Income from a company’s
principal operating activity; determined by subtracting cost
of goods sold and operating expenses from net sales. (p.
224).
Multiple-step income statement An income statement
that shows several steps in determining net income. (p.
222).
Net sales Sales revenue less sales returns and allowances
and less sales discounts. (p. 223).
Nonoperating activities Various revenues, expenses, gains,
and losses that are unrelated to a company’s main line of
operations. (p. 224).
Operating expenses Expenses incurred in the process of
earning sales revenue. (p. 224).
Other expenses and losses A nonoperating-activities
section of the income statement that shows expenses and
losses unrelated to the company’s main line of operations.
(p. 224).
Other revenues and gains A nonoperating-activities
section of the income statement that shows revenues and
gains unrelated to the company’s main line of operations.
(p. 224).
Periodic inventory system An inventory system under
which the company does not keep detailed inventory
records throughout the accounting period but determines
the cost of goods sold only at the end of an accounting
period. (p. 210).
Perpetual inventory system An inventory system under
which the company keeps detailed records of the cost of
each inventory purchase and sale, and the records
continuously show the inventory that should be on hand.
(p. 209).
Purchase allowance A deduction made to the selling price
of merchandise, granted by the seller so that the buyer will
keep the merchandise. (p. 214).
Purchase discount A cash discount claimed by a buyer for
prompt payment of a balance due. (p. 214).
Purchase invoice A document that supports each credit
purchase. (p. 212).
Purchase return A return of goods from the buyer to the
seller for a cash or credit refund. (p. 214).
Sales discount A reduction given by a seller for prompt
payment of a credit sale. (p. 218).
Sales invoice A document that supports each credit sale. (p.
216).
Sales returns and allowances Purchase returns and
allowances from the seller’s perspective. See Purchase
return and Purchase allowance, above. (p. 217).
Sales revenue (Sales) The primary source of revenue in a
merchandising company. (p. 208).
Single-step income statement An income statement that
shows only one step in determining net income. (p. 226).