Key Terms

abnormal balance: account balance that is contrary to the expected normal balance of that account

account: record showing increases and decreases to assets, liabilities, and equity found in the accounting equation

accounting cycle: step-by-step process to record business activities and events to keep financial records up to date

book of original entry: journal is often referred to as this because it is the place the information originally enters into the system

chart of accounts: account numbering system that lists all the accounts a business uses in its day-to-day transactions

compound entry: more than one account is listed under the debit and/or credit column of a journal entry

conceptual framework: interrelated objectives and fundamentals of accounting principles for financial reporting

conservatism: concept that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount

contra account: account that has a normal balance opposite of normal balance for the broad category to which the account belongs

contributed capital: owner’s investment (cash and other assets) in the business which typically comes in the form of common stock

cost principle: everything the company owns or controls (assets) must be recorded at its value at the date of acquisition

credit: records financial information on the right side of an account

debit: records financial information on the left side of each account

double-entry accounting system: requires the sum of the debits to equal the sum of the credits for each transaction

ending account balance: difference between debits and credits for an account

expanded accounting equation: breaks down the equity portion of the accounting equation into more detail to see the impact to equity from changes to revenues and expenses, and to owner investments and payouts

expense recognition principle: (also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated

full disclosure principle: business must report any business activities that could affect what is reported on the financial statements

general ledger: comprehensive listing of all of a company’s accounts with their individual balances

going concern assumption: absent any evidence to the contrary, assumption that a business will continue to operate in the indefinite future

journal: record of all transactions

journalizing: entering information into a journal; second step in the accounting cycle

monetary measurement: system of using a monetary unit by which to value the transaction, such as the US dollar

normal balance: expected balance each account type maintains, which is the side that increases

original source: traceable record of information that contributes to the creation of a business transaction

period: one operating cycle of a business, which could be a month, quarter, or year

posting: takes all transactions from the journal during a period and moves the information to a general ledger (ledger)

prepaid expenses: items paid for in advance of their use

revenue recognition principle: principle stating that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided

separate entity concept: business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally

simple entry: only one debit account and one credit account are listed under the debit and credit columns of a journal entry

stockholders‛ equity: owner (stockholders‛) investments in the business and earnings

T-account: graphic representation of a general ledger account in which each account is visually split into left and right sides

time period assumption: companies can present useful information in shorter time periods such as years, quarters, or months

transaction: business activity or event that has an effect on financial information presented on financial statements

trial balance: list of all accounts in the general ledger that have nonzero balances

unadjusted trial balance: trial balance that includes accounts before they have been adjusted

unearned revenue: advance payment for a product or service that has yet to be provided by the company; the transaction is a liability until the product or service is provided

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