1.0 FINANCIAL ACCOUNTING
Accelerated Depreciation Methods - ANSWER ✓Depreciation methods that recognize
more depreciation expense in the early years and less in the later years. Double-
declining balance is an example of an accelerated depreciation method.
Accounting Equation - ANSWER ✓Assets = Liabilities + Owners' Equity. This equation
is fundamental and must always be true in double entry accounting.
Accounting Period - ANSWER ✓The period of time for which the financial results are
reported; typically either a month or a quarter or a year.
Accounts Payable - ANSWER ✓Liability account used to show the obligation to pay
suppliers who have provided goods or services on credit terms.
Accounts Payable Turnover - ANSWER ✓Accounts Payable Turnover is a ratio that is
used to measure how efficiently a business is paying its vendors. It is calculated by
dividing the credit purchases for the period by the average accounts payable balance
for the period. In the absence of credit purchases information, we may use cost of
goods sold as a substitute. The ratio represents how many times the accounts payable
turned over during the period. For most ratios in this course, we use averages when
calculating ratios with balance sheet numbers, but this is not necessary and some may
choose to use beginning or ending balances.
Accounts Receivable - ANSWER ✓Asset account used to show the claim to receive
cash at some future date for goods or services that have been supplied to a customer
on credit terms.
Accounts Receivable Turnover - ANSWER ✓Accounts Receivable Turnover is a ratio
that is used to measure how efficiently a business is collecting receivables from its
customers. It is calculated by dividing the credit sales for the period by the average
accounts receivable balance for the period. In the absence of credit sales information,
we may use total sales as a substitute. The ratio represents how many times the
accounts receivable turned over during the period. For most ratios in this course, we
use averages when calculating ratios with balance sheet numbers, but this is not
necessary and some may choose to use beginning or ending balances.
Accrual - ANSWER ✓A revenue amount that is recorded after the revenue is earned but
before the payment is received or an expense amount that is recorded after it has been
incurred but before the payment has been made. In either case, for an accrual the
exchange of cash is expected at some future point after the initial revenue or expense is
recognized.
,Accrual Accounting Method - ANSWER ✓This is the accounting method taught in this
course, followed by most companies, and required under US GAAP and IFRS. The
method follows the revenue recognition principle, which says that revenue should be
recognized in the period in which it is earned and realizable, not necessarily when the
cash is received and the matching principle which says that expenses should be
recognized in the period in which the related revenue is recognized rather than when
the related cash is paid.
Accrued Expenses - ANSWER ✓Liability account used to record amounts at the end of
an accounting period to recognize expenses that were incurred in the period but for
which no invoice has yet been received nor payment has yet been made. Examples are
salaries/wages payable, accrued rent expense, accrued legal fees. When the accrual is
made, the debit is to the appropriate expense account (payroll expense, rent expense,
legal expense) and the credit is to the accrued expense account, which is a liability
because it represents an obligation which will need to be paid in the future. Remember
accrued expenses are NOT expenses.
Accrued Liability - ANSWER ✓Liability accounts that record expenses that have been
recognized on the income statement but have not yet been paid. Similar to accrued
expenses.
Accrued Payroll - ANSWER ✓An accrued expense recorded at the end of a financial
period for amounts of payroll that have been worked but not yet paid. It is a common
type of accrued expense. See also Salaries/Wages Payable.
Accrued Revenue - ANSWER ✓An asset account that records revenue that has been
earned and recognized on the income statement but not yet paid for by the customer. At
the time of the accrual, we debit the receivable account and credit the appropriate
accrued revenue account. When the cash transfer ultimately occurs, we debit the cash
account and credit the receivable account.
Accumulated Depreciation - ANSWER ✓A contra asset account that includes the
cumulative total of all depreciation expenses recorded to date for specific assets. The
credit balance in this account offsets the debit balance in the asset account which
shows the original value of the asset. When the original asset value is netted against
the accumulated depreciation for the asset you arrive at the net book value of the asset.
Accumulated other comprehensive income - ANSWER ✓An equity account that
consists of cumulative unrealized gains or losses on line items classified under other
comprehensive income. It includes items such as unrealized gains or losses on
investments available for sale, foreign currency gains or losses, and pension plan gains
or losses.
, Adjusting (Journal) Entries - ANSWER ✓Entries made to adjust the balances of asset
and liability accounts to reflect changes in their values due to the passage of time or
another implicit transaction.
Allowance for Doubtful Accounts - ANSWER ✓A contra asset account that nets against
Accounts Receivable. It is generally set up as an estimate of accounts that will
ultimately prove to be uncollectible. It is then reduced when accounts are written off. It
may be adjusted at period end to reflect any updated estimates. May also be referred to
as Reserve for Bad Debts.
Amortization - ANSWER ✓The method for recognizing the expense of long-lived
intangible assets such as patents, copyrights, and brands, over the life of the assets.
Amortization is usually calculated similar to straight-line depreciation. Some companies
use an accumulated amortization account, while other companies may directly reduce
the value of the associated asset.
Annuity - ANSWER ✓An investment where the purchaser receives the right to receive a
fixed amount each year for a lifetime or for a certain number of years.
Asset - ANSWER ✓A resource that is owned or controlled by a business and is
expected to provide some future economic benefit to the business. Examples include
cash, inventory, and equipment. The business expects that its assets will help to
produce cash inflow in the future.
Asset Turnover - ANSWER ✓Asset Turnover is calculated by dividing the total sales for
the period by the average total assets. This calculation is used as a measure of
efficiency in the DuPont Framework. For most ratios in this course, we use averages
when calculating ratios with balance sheet numbers, but this is not necessary and some
may choose to use beginning or ending balances.
Average Collection Period - ANSWER ✓Average Collection Period is a measure related
to accounts receivable turnover that shows the average number of days it took for a
business to collect payment from a customer. It can be calculated by dividing the
average accounts receivable by the credit sales per day. Alternatively, it can be
calculated by dividing 365 by the Accounts Receivable Turnover. For most ratios in this
course, we use averages when calculating ratios with balance sheet numbers, but this
is not necessary and some may choose to use beginning or ending balances.
Balance Sheet - ANSWER ✓Financial report that shows the financial position of a
company at a specific point in time; a snapshot of the resources that are owned or
controlled by company, and how those resources were financed. The balance sheet
shows the balance of all asset, liability, and equity accounts as of a given date.
Bonds - ANSWER ✓Long term debt instruments that are issued with a specific rate of
interest and maturity date. There are many types of bonds and they are issued by
governments, utilities, and public companies to raise funds.
Accelerated Depreciation Methods - ANSWER ✓Depreciation methods that recognize
more depreciation expense in the early years and less in the later years. Double-
declining balance is an example of an accelerated depreciation method.
Accounting Equation - ANSWER ✓Assets = Liabilities + Owners' Equity. This equation
is fundamental and must always be true in double entry accounting.
Accounting Period - ANSWER ✓The period of time for which the financial results are
reported; typically either a month or a quarter or a year.
Accounts Payable - ANSWER ✓Liability account used to show the obligation to pay
suppliers who have provided goods or services on credit terms.
Accounts Payable Turnover - ANSWER ✓Accounts Payable Turnover is a ratio that is
used to measure how efficiently a business is paying its vendors. It is calculated by
dividing the credit purchases for the period by the average accounts payable balance
for the period. In the absence of credit purchases information, we may use cost of
goods sold as a substitute. The ratio represents how many times the accounts payable
turned over during the period. For most ratios in this course, we use averages when
calculating ratios with balance sheet numbers, but this is not necessary and some may
choose to use beginning or ending balances.
Accounts Receivable - ANSWER ✓Asset account used to show the claim to receive
cash at some future date for goods or services that have been supplied to a customer
on credit terms.
Accounts Receivable Turnover - ANSWER ✓Accounts Receivable Turnover is a ratio
that is used to measure how efficiently a business is collecting receivables from its
customers. It is calculated by dividing the credit sales for the period by the average
accounts receivable balance for the period. In the absence of credit sales information,
we may use total sales as a substitute. The ratio represents how many times the
accounts receivable turned over during the period. For most ratios in this course, we
use averages when calculating ratios with balance sheet numbers, but this is not
necessary and some may choose to use beginning or ending balances.
Accrual - ANSWER ✓A revenue amount that is recorded after the revenue is earned but
before the payment is received or an expense amount that is recorded after it has been
incurred but before the payment has been made. In either case, for an accrual the
exchange of cash is expected at some future point after the initial revenue or expense is
recognized.
,Accrual Accounting Method - ANSWER ✓This is the accounting method taught in this
course, followed by most companies, and required under US GAAP and IFRS. The
method follows the revenue recognition principle, which says that revenue should be
recognized in the period in which it is earned and realizable, not necessarily when the
cash is received and the matching principle which says that expenses should be
recognized in the period in which the related revenue is recognized rather than when
the related cash is paid.
Accrued Expenses - ANSWER ✓Liability account used to record amounts at the end of
an accounting period to recognize expenses that were incurred in the period but for
which no invoice has yet been received nor payment has yet been made. Examples are
salaries/wages payable, accrued rent expense, accrued legal fees. When the accrual is
made, the debit is to the appropriate expense account (payroll expense, rent expense,
legal expense) and the credit is to the accrued expense account, which is a liability
because it represents an obligation which will need to be paid in the future. Remember
accrued expenses are NOT expenses.
Accrued Liability - ANSWER ✓Liability accounts that record expenses that have been
recognized on the income statement but have not yet been paid. Similar to accrued
expenses.
Accrued Payroll - ANSWER ✓An accrued expense recorded at the end of a financial
period for amounts of payroll that have been worked but not yet paid. It is a common
type of accrued expense. See also Salaries/Wages Payable.
Accrued Revenue - ANSWER ✓An asset account that records revenue that has been
earned and recognized on the income statement but not yet paid for by the customer. At
the time of the accrual, we debit the receivable account and credit the appropriate
accrued revenue account. When the cash transfer ultimately occurs, we debit the cash
account and credit the receivable account.
Accumulated Depreciation - ANSWER ✓A contra asset account that includes the
cumulative total of all depreciation expenses recorded to date for specific assets. The
credit balance in this account offsets the debit balance in the asset account which
shows the original value of the asset. When the original asset value is netted against
the accumulated depreciation for the asset you arrive at the net book value of the asset.
Accumulated other comprehensive income - ANSWER ✓An equity account that
consists of cumulative unrealized gains or losses on line items classified under other
comprehensive income. It includes items such as unrealized gains or losses on
investments available for sale, foreign currency gains or losses, and pension plan gains
or losses.
, Adjusting (Journal) Entries - ANSWER ✓Entries made to adjust the balances of asset
and liability accounts to reflect changes in their values due to the passage of time or
another implicit transaction.
Allowance for Doubtful Accounts - ANSWER ✓A contra asset account that nets against
Accounts Receivable. It is generally set up as an estimate of accounts that will
ultimately prove to be uncollectible. It is then reduced when accounts are written off. It
may be adjusted at period end to reflect any updated estimates. May also be referred to
as Reserve for Bad Debts.
Amortization - ANSWER ✓The method for recognizing the expense of long-lived
intangible assets such as patents, copyrights, and brands, over the life of the assets.
Amortization is usually calculated similar to straight-line depreciation. Some companies
use an accumulated amortization account, while other companies may directly reduce
the value of the associated asset.
Annuity - ANSWER ✓An investment where the purchaser receives the right to receive a
fixed amount each year for a lifetime or for a certain number of years.
Asset - ANSWER ✓A resource that is owned or controlled by a business and is
expected to provide some future economic benefit to the business. Examples include
cash, inventory, and equipment. The business expects that its assets will help to
produce cash inflow in the future.
Asset Turnover - ANSWER ✓Asset Turnover is calculated by dividing the total sales for
the period by the average total assets. This calculation is used as a measure of
efficiency in the DuPont Framework. For most ratios in this course, we use averages
when calculating ratios with balance sheet numbers, but this is not necessary and some
may choose to use beginning or ending balances.
Average Collection Period - ANSWER ✓Average Collection Period is a measure related
to accounts receivable turnover that shows the average number of days it took for a
business to collect payment from a customer. It can be calculated by dividing the
average accounts receivable by the credit sales per day. Alternatively, it can be
calculated by dividing 365 by the Accounts Receivable Turnover. For most ratios in this
course, we use averages when calculating ratios with balance sheet numbers, but this
is not necessary and some may choose to use beginning or ending balances.
Balance Sheet - ANSWER ✓Financial report that shows the financial position of a
company at a specific point in time; a snapshot of the resources that are owned or
controlled by company, and how those resources were financed. The balance sheet
shows the balance of all asset, liability, and equity accounts as of a given date.
Bonds - ANSWER ✓Long term debt instruments that are issued with a specific rate of
interest and maturity date. There are many types of bonds and they are issued by
governments, utilities, and public companies to raise funds.
