Useful Accounting words meaning part 2

F

Financial statements - Balance sheet, income statement, cash flow statement, and statements of shareholders’ equity.

Financial transaction - An exchange between a business and one or more external parties to a business. It has a monetary impact on the financial statements of a business.

Fundamental accounting concepts - They are concepts governing the accounting system and include going concern, consistency, accruals, matching principle, and conservatism.

Fundamental accounting equation - Assets =

Liabilities + Stockholders’ Equity.

G

Going concerned - The assumption that the business will continue to operate for the foreseeable future.

I

Income statement - It is a financial statement that reports revenues, expenses, gains, and losses during a period.

Inventory - They are goods of a firm to be sold to customers to generate revenues.

Inventory impairment - It occurs when the net realizable value of an inventory is less than the cost. Inventory impairment requires a decrease in the value of the inventory account on the balance sheet, a corresponding expense on the income statement.

L

LIFO - It assumes that the last units purchased or manufactured are the first units sold. This method matches recent costs with revenues; earlier purchases remain in inventory.

Lower of the cost or the market - Valuation method used to value inventory on the balance sheet. It departs from the cost principle; it serves to recognize a loss when replacement cost or net realizable value of an inventory drops below cost.

M

Matching - Revenues earned by a business are matched with the expenses incurred in earning those revenues.

N

Net realizable value of receivables - Face value of receivables fewer cash discounts, sales returns, and bad debts.

P

Percentage of sales method - Provision for bad debts is equal to a certain percentage of credit sales. The percentage comes from either past experience or the bad debt rate of other firms in the same industry.

Prepaid expenses - It is an asset account that records the prepayment of future expenses.

Provision for doubtful accounts - It is the amount of estimated accounts receivables that firms do not expect to collect from customers.

R

Recording financial transactions - It involves the following steps:

Identify the accounts affected (at least two).

Classify each account as an asset, liability, or shareholders’ equity.

Determine the direction of the effect on each account.

Make sure that the fundamental accounting equation remains in balance.

Revenue recognition - The accounting principle governing when revenues need to be recognized in financial statements.

S

Sales returns - It is a provision account to record the estimated amount of sales returns by customers.

Shareholders - Ultimate owners of firms.

U

Unearned revenue - It is a liability account recording the firm’s promise to perform services or deliver goods in the future and is generated when customers pay in advance.