Key Terms Glossary

Account

A record of the accumulated results of accounting events affecting particular asset, liability, or owners’ equity items

accounts payable

A liability representing the company’s obligation to external suppliers of goods or services

accounts receivable

An asset representing the company’s right to receive money from customers

accounting

The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make better decisions

accounting cycle

Formal process by which companies record accounting information, transfer it to specific accounts, and assemble it for the preparation of financial statements

accounting equation

Assets = Liabilities + Owners’ equity

accounting event

An economic event that is specific to the entity, is measurable, and changes the entity’s rights and/or obligations

accounting system

A system used to identify, analyze, measure, record, summarize, and communicate relevant economic information to interested parties

actual manufacturing overhead

The amount of overhead incurred during the period, recorded as debits to Manufacturing Overhead for each cost pool when the cost is incurred

annual report

The report provided to stockholders and other external users that contains general information about the company as well as the financial as statements for the fiscal period

asset

A right to use resources that are expected to have future economic benefits for the entity

balance sheet

(statement of financial position)

The financial statement designed to show the assets, liabilities, and owners’ equity of the entity at the end of the period covered by the income statement

benefit

Something that provides business resources or reduces consumption

bond

A certificate that represents the debt of a company

budget

A plan for the future expressed in financial terms

budgeting

The process of expressing the company’s goals and objectives in quantitative terms

capital

An owners’ equity account in a sole proprietorship or partnership

cash budget

A budget that shows the expected cash receipts and disbursements from activities for the coming period

chart of accounts

A list of all a company’s general ledger accounts by name and number

conversion cycle

The sequence of manufacturing events that combines raw materials with labor and other manufacturing resources to produce products

cost

Something that requires the use of business resources

cost of goods sold

An expense that represents the company’s cost of the products sold to customers

cost driver

The means of measuring activity that reflects consumption of resources; that which causes costs to change

credit (Cr)

Any dollar amount entered on the right-hand side of an account

current asset

An asset expected to be converted to cash or consumed within a year

current liability

A liability expected to be discharged within a year

current ratio

The ratio of total current assets to total current liabilities, which measures the ability of the company to meet its current obligations

debit (Dr)

Any dollar amount entered on the left-hand side of an account

direct labor cost

The cost of the employees whose jobs directly relate to the manufacture of products

economic event

A situation that occurs which, when acted on, affects an entity’s wealth

equity

Obligations of the business to transfer resources of the company to other parties at some time in the future

expenditure

Cash payment made to acquire goods and services, reduce liabilities, or reward owners for their interest in the firm

expense

The amount incurred in an attempt to generate revenue

expense event

Either a decrease in assets or an increase in liabilities and a decrease in owner’s equity resulting from the operations of the business

FIFO

First-in, first-out: a cost flow assumption that presumes inventory purchases (costs) are charged to cost of goods sold in chronological order

financial accounts information

The information provided by the financial accounting subsystem

financial statements

A collective term used to describe the information communicated to external users by the financial accounting subsystem

finished goods inventory

An asset that represents a company’s right to use finished products

fixed cost

A cost that is constant in total as the amount of cost driver changes but changes per unit as the cost driver changes throughout the relevant range

flexible budget

A budget prepared to reflect the actual production level of the period

general journal

A chronological record of the accounting events which shows both the debit and credit side of each accounting event

general ledger

The record of all a company’s accounts

horizonal analysis

Comparison of each item on a financial statement with that same item on statements from previous periods

historical cost

The cash or cash equivalent value that either changed hands, or became obligated when an accounting event occurred

income statement

The financial statement designed to show the revenues, expenses, and the resulting net income for a period of time

indirect labor cost

The cost of production employees who do not actually produce the products but provide other needed services

internal auditor

A private accountant responsible for assessing the company’s internal control system

inventory

An asset that the company intends to sell to customers

job order costing system

A product costing system that accumulates production costs based on individual jobs or batches

LIFO

Last-in, first-out: a cost flow assumption that presumes inventory purchases (costs) are charged to cost of goods sold in reverse chronological order

limited liability

The condition which indicates that investors are not personally liable for the debts of the business

limited partnership

A partnership composed of one or more general partners and one or more limited partners

liquidity

The time required to convert an asset into cash or use it in operations

long-term asset

An asset expected to be used for more than a year

long-term liability

A liability expected to be discharged after a year

loss

A decrease in assets or increase in liabilities and a decrease in owners’ equity resulting from events that are incidental to the ongoing operations of the firm, with the exception of distributions to owners

mandated budgeting

A budgeting system that relies on predetermined standards set by upper levels of management that are passed down to lower levels of an organization

marketing function

The function responsible for determining the wants and needs of consumers and devising a system for distributing the goods and services they demand

merchandise inventory

The goods a company acquires with the intent of selling

mixed cost

A cost that varies in the same direction as a cost driver but not indirect proportion, and has both a fixed and a variable component (also known as a semivariable cost)

net income (accounting income)

The difference between revenue and expense in a certain time period

net price method

A method of recording the acquisition of inventory that assumes the cost of merchandise inventory is the purchase price less any available cash discount

nominal account

A temporary account relating to a given period of time

owner’s equity

The obligation of a business to transfer residual resources to owners in the event that the business ceases operations

participative budgeting

A budgeting system that allows individuals who are affected by the budget to have input into the budgeting process

product cost

A cost incurred in connection with the production of products for resale in a manufacturing company

product mix

In a multiple-product company, the total of all products sold

ratio analysis

The relationship between two or more accounts on the same statement or accounts from two different statements related by the transactions they represent

raw materials inventory

An asset representing the company’s right to use raw materials

replacement cost

The cost of producing or otherwise acquiring a similar item

revenue

The amount earned by a company for providing goods and services to customers

sales budget

a budget that shows the expected sales for the period in both physicals (quantity) and financial (dollar) terms

statement of cash flows

The financial statement designed to show a business’s cash inflows and outflows as well as the net change in the cash balance for the same time period as the income statement

statements of owners’ equity

The financial statement designed to show the changes that occurred in owners’ equity for the period of time covered by the income statement

trial balance

An internal document showing a company’s account or balances to verify the equality of debits and credits

variable cost

A cost that varies in total in proportion to the change in cost driver level but remains constant per unit of cost driver throughout the relevant range

vertical analysis

Analysis of the relative size of items to a base item within one