CLEP Financial Accounting key terms

The fundamental relationship stating that a company's total assets equal the sum of its total liabilities and total owners' equity. It underlies the balance sheet and every recorded transaction.

Economic resources a business owns or controls that are expected to provide future benefit. Examples include cash, accounts receivable, inventory, equipment, and buildings. They appear on the balance sheet.

Obligations a business owes to outside parties, arising from past transactions and payable in money, goods, or services. Examples include accounts payable, notes payable, and taxes payable.

The residual interest in a company's assets after deducting liabilities; it represents the owners' claim on the business. Also called stockholders' equity for a corporation.

The cumulative net income of a corporation that has not been distributed to shareholders as dividends. It is increased by net income and decreased by net losses and dividends.

Distributions of a corporation's earnings to its shareholders, usually in cash. They reduce retained earnings and total stockholders' equity but are not an expense on the income statement.

A system in which every transaction is recorded with equal debits and credits, keeping the accounting equation in balance. It provides a built-in error check.

An entry on the left side of a ledger account. Debits increase asset and expense accounts and decrease liability, equity, and revenue accounts.

An entry on the right side of a ledger account. Credits increase liability, equity, and revenue accounts and decrease asset and expense accounts.

The initial record of a business transaction, showing the date, accounts affected, amounts debited and credited, and a brief explanation. It is posted to the ledger.

The master collection of all accounts used by a business, showing each account's increases, decreases, and balance. It is the source for preparing financial statements.

A list of all ledger accounts and their balances at a point in time, used to verify that total debits equal total credits before preparing financial statements.

A method that records revenues when earned and expenses when incurred, regardless of when cash is received or paid. It is required by generally accepted accounting principles.

A method that records revenues when cash is received and expenses when cash is paid. It is simpler than accrual accounting but often distorts financial performance.

The accounting rule that revenue is recorded in the period it is earned, typically when goods are delivered or services are performed, not necessarily when cash is collected.

The accounting rule that expenses should be recorded in the same period as the revenues they help generate, so that profitability is measured accurately.

Journal entries made at the end of an accounting period to update account balances for accruals and deferrals, ensuring revenues and expenses are recorded in the proper period.

Expenses that have been incurred but not yet paid or recorded, such as unpaid wages or interest. They require an adjusting entry to record the expense and a related liability.

Payments made in advance for goods or services to be consumed in the future, such as prepaid rent or insurance. They are recorded as assets and later expensed.

The systematic allocation of the cost of a long-lived tangible asset over its useful life. It is an expense on the income statement and reduces the asset's book value.

A contra-asset account that shows the total depreciation recorded on a long-lived asset since it was acquired. It is subtracted from the asset's cost to determine book value.

The net amount at which an asset or liability is reported on the balance sheet. For a long-lived asset, it is cost minus accumulated depreciation.

A financial statement that reports a company's revenues, expenses, and net income or loss over a period of time. It measures profitability.

The excess of revenues over expenses for an accounting period. It increases retained earnings and is a key measure of a company's profitability.

Net sales minus cost of goods sold. It represents the profit earned before deducting operating expenses and shows how well a company manages its production or purchase costs.

The direct cost of the merchandise a company sold during a period, including purchase costs and freight. It is subtracted from sales to compute gross profit.

Costs incurred in running a business that are not directly tied to producing goods, such as selling, general, and administrative expenses. They are subtracted from gross profit to find operating income.

Goods held for sale in the ordinary course of business, or materials and supplies used in production. It is a current asset on the balance sheet and affects cost of goods sold.

First-in, first-out inventory costing method that assumes the oldest inventory items are sold first. It often reports higher ending inventory and lower cost of goods sold during rising prices.

Last-in, first-out inventory costing method that assumes the newest inventory items are sold first. It often reports higher cost of goods sold and lower ending inventory during rising prices.

A financial statement that reports a company's assets, liabilities, and owners' equity at a specific point in time. It shows what the company owns, owes, and is worth.

Assets expected to be converted to cash, sold, or consumed within one year or the operating cycle, whichever is longer. Examples include cash, receivables, and inventory.

Obligations expected to be paid or settled within one year or the operating cycle, whichever is longer. Examples include accounts payable, short-term notes, and accrued expenses.

A financial statement that reports cash inflows and outflows during a period, classified into operating, investing, and financing activities. It explains the change in cash.

Cash flows from a company's core business operations, such as cash received from customers and cash paid to suppliers and employees. They are reported in the statement of cash flows.

Cash flows related to acquiring or disposing of long-term assets and investments, such as buying equipment or selling land. They are reported in the statement of cash flows.

Cash flows related to obtaining or repaying capital, such as issuing stock, borrowing money, or paying dividends. They are reported in the statement of cash flows.

A financial statement that shows changes in retained earnings during a period, starting with the beginning balance, adding net income, and subtracting dividends.

The policies and procedures a company uses to safeguard assets, ensure accurate financial reporting, and promote operational efficiency. It helps prevent fraud and errors.

An independent examination of a company's financial statements and records to determine whether they fairly present its financial position and comply with accounting standards.

Generally Accepted Accounting Principles: the common set of accounting rules, standards, and procedures that companies follow when preparing financial statements.