ABA key terms

A method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It aims to match economic activity to the period it belongs to.

A cost that has been incurred during a period but not yet paid or recorded in the accounts. An adjusting entry records the liability and the related expense before statements are prepared.

A journal entry made at the end of an accounting period to update account balances for accruals, deferrals, and other items so the financial statements reflect the correct amounts.

A payment made in advance for goods or services not yet consumed, recorded as an asset. As the benefit is used, the amount is expensed through an adjusting entry.

Cash received from a customer before the related work is performed. It is reported as a liability until the obligation is fulfilled, at which point revenue is recognized.

The principle governing when and how much revenue is recorded. Under current rules, revenue is recognized as performance obligations are satisfied and control of goods or services transfers.

The idea that expenses should be reported in the same period as the revenues they helped generate. It underpins accrual accounting and period-end adjustments.

A listing of all general ledger accounts and their balances at a point in time, used to check that total debits equal total credits before statements are prepared.

The master record containing all accounts of a business, with each account showing its running balance. It is the source from which trial balances and financial statements are drawn.

An organized listing of every account a company uses, each with a number and description. It provides the structure for recording transactions in the general ledger.

The original record of a transaction showing the accounts to be debited and credited along with amounts and an explanation. Entries are later posted to the general ledger.

A system in which every transaction affects at least two accounts, with total debits always equaling total credits. It keeps the accounting equation in balance.

The relationship stating that assets equal liabilities plus equity. Every recorded transaction changes this equation while keeping both sides equal.

A statement showing a company's assets, liabilities, and equity at a specific date. It reveals what the entity owns, owes, and the owners' residual interest.

A report of revenues, expenses, gains, and losses over a period, ending with net income or loss. It explains how the period's activity changed equity.

A statement classifying cash receipts and payments into operating, investing, and financing activities. It reconciles beginning and ending cash and shows liquidity sources and uses.

The cash flow category covering cash generated or used by core business operations, such as collections from customers and payments to suppliers and employees.

Resources expected to be converted to cash, sold, or consumed within one year or the normal operating cycle. They include cash, receivables, inventory, and prepaid items.

Obligations due to be settled within one year or the normal operating cycle. Examples include accounts payable, accrued expenses, and the currently due portion of long-term debt.

A liquidity measure computed as current assets divided by current liabilities. A result above one generally indicates the entity can cover short-term obligations with short-term resources.

The excess of current assets over current liabilities. It indicates the short-term funds available to run day-to-day operations.

Goods held for sale or materials used in production, reported as a current asset. Its measurement method and cost flow assumption directly affect reported profit.

A cost flow assumption in which the earliest inventory costs are treated as sold first. In rising prices it tends to produce higher ending inventory and lower cost of goods sold.

A rule requiring inventory to be reported at the lower of its recorded cost or the amount it is expected to realize on sale. It prevents overstating assets when values decline.

The systematic allocation of a long-lived asset's cost to expense over its useful life. It reflects consumption of economic benefit, not a change in market value.

A method spreading the depreciable cost of an asset evenly over its estimated useful life. Annual expense equals cost minus salvage value divided by years of service.

A contra-asset account accumulating all depreciation recorded on an asset since acquisition. It is subtracted from the asset's cost to report net book value.

An intangible asset arising when a buyer pays more than the fair value of identifiable net assets acquired. It is tested for impairment rather than amortized under current rules.

A nonphysical resource with future economic benefit, such as patents, trademarks, or customer lists. Finite-lived intangibles are amortized; indefinite-lived ones are tested for impairment.

A reduction in an asset's carrying amount when its recoverable value falls below book value. The write-down is recognized as a loss in the period identified.

A tax obligation arising when taxable income is lower than accounting income in the current period, creating taxes payable in future periods. It reflects temporary timing differences.

A tax benefit arising when taxes already paid or accrued exceed the current tax expense, expected to reduce future taxes. It is recognized only if realization is more likely than not.

A difference between an item's accounting basis and its tax basis that reverses over time. It creates deferred tax assets or liabilities rather than permanent book-tax differences.

Total income tax expense divided by pre-tax accounting income. It differs from the statutory rate because of permanent differences, credits, and changes in valuation allowances.

Sales revenue minus all variable costs. It measures the amount each unit or sale contributes toward covering fixed costs and then generating profit.

The sales volume at which total revenues equal total costs, producing zero profit. In units it equals fixed costs divided by contribution margin per unit.

A cost that changes in total in proportion to activity volume while remaining roughly constant per unit. Direct materials and sales commissions are common examples.

A cost that stays the same in total across a relevant range of activity, so it declines per unit as volume rises. Rent and salaried supervision are typical examples.

A predetermined cost per unit set for materials, labor, and overhead, used to plan and to compare against actual results. Differences from actual are analyzed as variances.

The practice of comparing actual results with budgeted or standard amounts and investigating the causes of differences. It helps managers focus attention on significant deviations.

A budget adjusted to the actual volume achieved, so revenue and variable costs reflect real activity. Comparing it to actual results isolates spending efficiency from volume effects.