account format
a balance-sheet format that lists assets on the left and liabilities and stockholders' equity on the right
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 revenue
a revenue that has been earned but not yet received in cash
accumulated depreciation
the cumulative sum of all depreciation expense form the date of acquiring a plant asset
adjusted trial balance
a list of all the ledger accounts with their adjusted balances
book value (of a plant asset)
the asset's cost minus accumulated depreciation
cash-basis accounting
accounting that records only transactions in which cash is received or paid
classified balance sheet
a balance sheet that shows current assets separate from long-term assets, and current liabilities separate from long-term liabilities
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. also called
closing entries
entries that transfer the revenue, expense, and dividends balances from these respective accounts to the retained earnings account
contra account
an account that always has a companion account and whose normal balance is opposite that of the companion account
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 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
debt ratio
ratio of total liabilities to total assets. states the proportion of a company's assets that is financed with debt
deferral
an adjustment for which the business paid or received cash in advance. examples include prepaid rent, prepaid insurance, and supplies
depreciation
allocation of the cost of a plant asset to expense over its useful life
liquidity
measure of how quickly an item can be converted to cash
long-term asset
an asset that is not a current asset
long-term liability
a liability that is not a current liability
matching principle
the basis for recording expenses. directs accountants to identify all expenses incurred during the period, to measure the expenses, and to match them against the revenues earned during that period
multi-step income statement
an income statement that contains subtotals to highlight important relationships between revenues and expenses
operating cycle
time span during which cash is paid for goods and services that are sold to customers who pay the business in cash
permanent accounts
asset, liability, and stockholders' equity accounts that are not closed at the end of the period
plant assets
long-lived assets, such as land, buildings, and equipment, used in the operation of the business. also called fixed assets
prepaid expense
a category of miscellaneous assets that typically expire or get used up in the near future. examples include prepaid rent, prepaid insurance, and supplies
report format
a balance-sheet format that lists assets at the top, followed by liabilities and stockholders' equity below
revenue principle
the basis for recording revenues; tells accounts when to record revenue and the amount of revenue to record
single-step income statement
an income statement that lists all the revenues together under a heading such as revenues or revenues and gains. expenses appear in a separate category called expenses or perhaps expenses and loses
temporary accounts
the revenue and expense accounts that relate to a limited period and are closed at the end of the period are temporary accounts. for a corporation, the dividends account is also temporary
time-period concept
ensures that accounting information is reported at regular intervals
unearned revenue
a liability created when a business collects cash from customers in advance of earning the revenue. the obligation is to provide a product or a service in the future