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159 Glossary Last-in, first-out BS A method of accounting for inventory. 8 Leasehold BS Incr Decr 11 improvements The cost of improvements made to property that the company leases. Liabilities BS Decr Amounts owed by the company. Incr 13 Liquidity BS 2 A term that means nearness to cash; the closer an asset is to becoming cash or a liability is to using cash, the more liquid that asset or liability is. Loans payable BS Decr Incr 15 Amounts that have been loaned to the company and that it still owes. Machinery BS Incr Decr The cost of machinery owned by the company. 11 Net income IS 2 The last line of the Income Statement; it represents the amount that the company earned during a specified period. No par value stock BS 16 Stock issued by the company that does not have an arbitrary value (par value) assigned to it. Notes payable BS Decr Incr 15 Amounts owed by the company that have been formalized by a legal document called a note. Notes receivable BS Incr Decr 10 Amounts owed to the company that have been formalized by a legal agreement called a note. 160 Glossary Office expense IS Incr Decr The amount of expense incurred for the general operation of an office. Office supplies IS Incr Decr The cost of the supplies used in running an office. Outstanding shares BS 16 The number of shares that are in the hands of the public. The difference between issued shares and outstanding shares is the shares held as treasury stock. Par value BS 16 An arbitrary value assigned by the company to each share of stock; it is used in the accounting for the sale of stock and in some jurisdictions for calculating taxes. Payment date 16 The date established for the payment of a declared dividend. Payroll expense IS Incr Decr 18 The amount paid to employees for services rendered; synonymous with salary expense and wage expense. Payroll journal 19 A journal used to record the payroll of a company. Payroll tax expense IS Incr Decr 18 The amount of tax associated with salaries that an employer pays to governments (federal, state, and local). Payroll taxes BS Decr Incr 15 payable The amount of payroll taxes owed to the various governments at the end of a period. Glossary 161 Periodic inventory BS 17 system An inventory system in which the balance in the Inventory account is adjusted for the units sold only at the end of the period. Permanent BS 18 accounts The accounts found on the Balance Sheet; these account balances are carried forward for the lifetime of the company. Perpetual inventory BS 17 system An inventory system in which the balance in the Inventory account is adjusted for the units sold each time a sale is made. Petty cash BS Incr Decr 6 The amount of currency and coin that a company keeps on hand to pay for small purchases and expenses. Posting 3 The process of taking journal entries and recording them in the general ledger. Prepaid expenses BS Incr Decr 9 Expenses that have been paid for but have not yet been used up; examples are prepaid insurance and prepaid rent. Purchase discounts IS Decr Incr 17 A contra account that reduces purchases by the amount of the discounts taken for early payment. Purchase returns IS Decr Incr 17 A contra account that reduces purchases by the amount of items purchased that were subsequently returned. 162 Glossary Purchases IS Incr Decr 17 Items purchased by the company for the purpose of resale. Purchases journal 19 A journal used to record the transactions that result in a credit to accounts payable. Ratio analysis 21 A method of relating numbers from the various financial statements to one another in order to get meaningful information for comparison. Record date 16 The date used to decide which shareholders will receive the dividend. The owners of the shares at the end of this day are entitled to the dividend. Rent expense IS Incr Decr The amount of expense paid for the use of property. Retained earnings BS, RE Decr The residual earnings of the company. Incr 16 Revenue IS Decr Incr 18 Amounts earned by the company from the sale of merchandise or services; often used interchangeably with the term sales. Reversing entry IS 18 An entry that is made at the beginning of the current period so that the systems and procedures do not have to be altered to allow for previously accrued items. Salaries payable BS Decr Incr 18 Salaries that are owed but have not been paid at the end of a period. 163 Glossary Salary expense IS Incr Decr 18 The amount paid to employees for services rendered; synonymous with payroll expense and wage expense. Sales IS Decr Incr 18 Amounts earned by the company from the sale of merchandise or services; often used interchangeably with the term revenue. Sales discounts IS Incr Decr 17 A contra account that offsets revenue. It represents the amount of the discounts for early payment allowed on sales. Sales journal 19 A journal used to record the transactions that result in a credit to sales. Sales returns IS Incr Decr 17 A contra account that offsets revenue. It represents the amount of sales made that were later returned. Shareholders’ equity BS Decr Incr 16 The total amount of contributed capital and retained earnings; synonymous with stockholders’ equity. Specialized journals 19 Journals that are used to aid in segregating duties and making the accounting function efficient. Specific BS identification A method of accounting for inventory. 8 Stated value stock BS 16 Stock issued by the company that does not have a par value, but does have a stated value. For accounting purposes, stated value is functionally equivalent to par value. 164 Glossary Statement of Cash CF 20 Flows One of the basic financial statements; it lists the cash inflows and cash outflows of the company, grouped into the categories of operating activities, financing activities, and investing activities. The Statement of Cash Flows is prepared for a specified period of time. Statement of RE 2 Retained Earnings One of the basic financial statements; it takes the beginning balance of retained earnings and adds net income, then subtracts dividends. The Statement of Retained Earnings is prepared for a specified period of time. Stockholders’ BS Decr Incr 16 equity The total amount of contributed capital and retained earnings; synonymous with shareholders’ equity. Straight-line IS A method of depreciation. 11 Subsidiary ledger 7 An accounting record giving the detailed transactions in an account; the subtotals of the debits and credits are posted to the control account maintained in the general ledger. It helps to keep the general ledger free of clutter. T account 3 The format used for a general ledger page. The name of the account is put on the top line, and a vertical line is dropped from the top line (hence the ‘‘T’’). Debits are recorded on the left side, and credits are recorded on the right. 165 Glossary Temporary IS, RE 18 accounts The accounts found on the Income Statement and the Statement of Retained Earnings; these accounts are reduced to zero at the end of every accounting period. Treasury stock BS Incr Decr 16 Shares that were sold to the public but have since been repurchased by the company in the open market. Treasury stock is deducted from the equity section, and is therefore a contraequity account. Trial balance 3 A listing of all the accounts and their balances on a specified day. Unearned revenue BS Decr Incr 13 Money that has been paid by customers for work yet to be done or goods yet to be provided. Vehicles BS Incr Decr 11 The cost of transportation equipment owned by the company. Wage expense IS Incr Decr 18 The amount paid to employees for services rendered; synonymous with salary expense and payroll expense. Weighted average BS A method of accounting for inventory. 8 This page intentionally left blank Index accounting as language of business, 1 types of accounting, 1–2 accounting equation, 15–16 accounting process, 13–24 accounting equation, 15–16 adjusting entries, 24, 118–125 closing entries, 24, 125–128 errors in, 20–23 journal entries, 14–15, 25–29, 130–135 posting, 17–19, 22–23 trial balance, 19–23 accounts payable, 27, 42, 92–94 cash disbursement journal, 131–133 credit purchases and, 89, 92 in first-in, first-out (FIFO) inventory costing method, 58–59 purchases journal, 133 accounts receivable, 10–11, 27, 28, 41–51, 68 aging of accounts receivable, 47–49 bad debts, 45–51 control account, 42–45 subsidiary ledger, 42–45 uncollectible accounts, 46– 48, 50 accrual basis accounting, 91 accrued interest, 123–124 payroll accrual adjusting entries, 119–122 prepaid expenses, 26, 66–67, 125 reversing entries, 121–122 unearned revenue, 10, 26, 29, 90–91, 124–125 accrued expenses, 91 accumulated amortization, 86–87 accumulated depreciation, 77– 78, 82, 83, 84 acid-test ratio, 146 additional paid-in capital, 103 adjusting entries, 24, 118–125 in bank reconciliation, 36, 38–40 interest expense, 123–124 payroll accrual, 119–122 prepaid expenses, 125 reversing entries, 121–122 unearned revenue, 124–125 aging of accounts receivable, 47–49 allowance account, 47–51 167 168 Index allowance for doubtful accounts, 47 allowance method for bad debts, 46–51 amortization, 86–87 Articles of Incorporation, 101 articulation, 137–138 assets, 9–11, 30–88 in accounting equation, 15–16 accounts receivable, 41–51 capitalization of, 76, 85–86 cash, 32–40 defined, 25 fixed assets, 31, 72–84 intangible assets, 31, 85–88 inventory, 52–65 investments, 31 notes receivable, 68–71 other assets, 31 other receivables, 68–71 prepaid expenses, 26, 66–67, 125 return on assets, 147–148 types of, 30–31 asset sale, 82–84 asset turnover ratio, 146–147, 148 authorized shares, 101, 102 date of, 8–9 fixed asset section of, 77–78 function of, 8–9 merchandising company, 107–108 order of preparation, 11–12 sample, 10 service versus merchandising company, 107–108 stockholders’ equity section, 99–100 bank fees, 40 bank reconciliation, 34–40 adjustments in, 36, 38–40 deposits in, 35, 36, 37–38, 40 function of, 34–35 outstanding checks in, 35, 36, 37 preparing, 35–36 board of directors, 104–105 bonds payable, 91, 95–96, 123–124 bonds receivable, 68–71 book balance, 34–36 bookkeeping, 2 book value, 79–81 buildings, 31, 75 bylaws, 101 bad debt expense, 47–48, 49, 50 bad debts, 45–51 allowance method, 46–51 direct write-off method, 45–46 Balance Sheet, 8–12 in accounting equation, 15 accounts, 9–11 classified, 11 contents of, 25 calendar year-end, 96 capital in excess of par, 103 capitalization of fixed assets, 76 of intangible assets, 85–86 cash, 11, 26–27, 28, 32–40 bank reconciliation, 34–40 petty cash, 32–34 sample journal entry, 14–15, 17–19