JCE Commerce & Accounting 26 key terms

Accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It matches efforts to accomplishments and underlies generally accepted reporting.

Guideline requiring that expenses be reported in the same period as the revenues they helped generate. It supports accrual accounting and prevents distorted profit figures across periods.

A payment made for goods or services not yet consumed, recorded as an asset until the benefit is used. Insurance premiums and rent paid in advance are common examples.

Cash received from a customer before the related goods or services are delivered, reported as a liability. It becomes revenue as the obligation is satisfied.

Systematic allocation of the cost of a long-lived tangible asset over the periods it benefits. It is a cost-allocation process, not a measure of market value decline.

The carrying amount of an asset shown on the balance sheet, computed as historical cost less accumulated depreciation or amortization and any 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 current period.

Current assets minus current liabilities, indicating short-term liquidity available to fund operations. A positive figure suggests the entity can meet obligations falling due within one year.

Current assets divided by current liabilities. It measures the ability to settle short-term obligations and is a rough indicator of liquidity and margin of safety.

Cash, marketable securities, and receivables divided by current liabilities. By excluding inventory, it tests whether an entity can meet immediate obligations without selling stock.

Financial statement classifying cash movements into operating, investing, and financing activities. It reconciles profit to cash generated and reveals liquidity and solvency trends.

Sales revenue minus all variable costs. It represents the amount available to cover fixed costs and then generate profit, and it drives break-even and target-profit analysis.

The volume of sales at which total revenue equals total cost, producing neither profit nor loss. It can be expressed in units or in sales currency.

The excess of budgeted or actual sales over break-even sales, often stated as a percentage. It shows how far sales can fall before losses begin.

A future cost that differs between alternatives under consideration. Sunk costs and costs identical across options are excluded from decision analysis.

A cost already incurred that cannot be recovered by any future decision. It should be ignored when evaluating alternatives because it does not change with the choice made.

The benefit forgone by choosing one alternative over the next best option. It is relevant to decisions even when no cash outflow is recorded in the accounts.

A system that assigns predetermined costs to products and compares them with actual results. Differences, called variances, are analyzed to control costs and improve efficiency.

The process of comparing actual performance with budgeted or standard figures and breaking differences into components. It helps managers identify causes of overspending or shortfalls.

A budget adjusted to the actual level of activity achieved, rather than fixed at one planned volume. It enables fair comparison of costs at the output actually produced.

A legal arrangement in which one party, the agent, acts on behalf of another, the principal, and can bind the principal to third parties within the scope of authority granted.

Authority a third party reasonably believes an agent possesses because of the principal's conduct or communications, even if actual authority was never granted. It can bind the principal.

A legal obligation to act in another party's best interest with loyalty, good faith, and care. Agents, directors, and trustees owe such duties to those they represent.

A legal rule requiring certain contracts, such as those for land or those not performable within one year, to be evidenced in writing and signed to be enforceable.

Something of legally sufficient value exchanged between contracting parties, such as money, goods, or a promise. Without it, an agreement is generally unenforceable as a contract.

The two essential steps forming a contract: a definite proposal by one party and an unqualified agreement to it by another. Together they create mutual assent.

A measure of how much quantity demanded responds to a change in price, calculated as percentage change in quantity divided by percentage change in price. Demand is elastic when the ratio exceeds one.

The price and quantity at which quantity supplied equals quantity demanded. At this point there is neither shortage nor surplus and no pressure for price to change.

The ability of a party to produce a good at a lower opportunity cost than another party. Specialization on this basis expands total output from the same resources.

The number of subordinates reporting directly to a single manager. Narrow spans create tall hierarchies with close supervision; wide spans create flatter structures requiring delegation.

The assignment of authority and responsibility by a manager to a subordinate while accountability for results remains with the manager. Effective delegation frees supervisors for higher-level work.

Concentration of decision-making authority at upper levels of an organization. It promotes consistency and control but may slow responses to local conditions.

The policies and procedures designed to safeguard assets, ensure reliable reporting, and promote compliance with laws. Segregation of duties and authorization limits are core elements.

An internal control practice separating authorization, custody of assets, and recordkeeping among different people. It reduces the risk that one person can both commit and conceal an error or fraud.

The documented sequence of transactions and system events that allows an independent reviewer to trace an item from source documents to financial statements and back.

The sum of an investment's expected future cash flows discounted to present value at a required rate, minus the initial outlay. A positive result suggests the project adds value.

The discount rate at which a project's net present value equals zero. Comparing it with a hurdle rate indicates whether the investment is acceptable.

The length of time required for cumulative cash inflows to recover an investment's initial cost. It is simple to compute but ignores the time value of money and cash flows after recovery.

A statistical technique estimating the relationship between a dependent variable and one or more independent variables. In cost accounting it helps separate fixed and variable cost components.