ACG 2021 Block 2 Definitions

Chapter 4 General Definitions Internal Controls – a company’s plan to 1.) Safeguard the company’s , and 2.) Improve the accuracy and reliability of information.

Framework for Internal controls – a framework to be used when designing internal controls systems including the control environment, risk assessment, control activities (preventative and detective), monitoring, and information and communication.

Separation of duties – authorizing transactions, recording transactions, and maintaining control of related assets should be separated among different employees.

Bank reconciliation – matches the balance of cash in the bank account with the balance of cash in the company’s own records.

Deposits outstanding (deposits in transit) – cash receipts of the company that have not been added to the bank’s records of the company’s balance.

Checks outstanding – checks the company has written that have not been subtracted from the bank’s record of the company’s balance.

NSF checks – customers’ checks written on “nonsufficient funds,” otherwise known as “bad” checks.

Chapter 5 General Definitions Direct write-off method – recording bad debt at the time we know the account is uncollectible.

Allowance method – recording an adjustment at the end of each period to allow for the possibility of future uncollectible accounts.

Percentage of Aging calculation – using a higher percentage for ‘old’ accounts than for ‘new’ accounts when estimating uncollectible accounts.

Percentage of receivables calculation - estimate for uncollectible accounts based on the percentage of accounts receivable expected not to be collected.

Contra account – an account with a balance that is opposite, or contra, to that of its related revenue account.

Net accounts receivable – the difference between total accounts receivable and the allowance of uncollectible accounts.

Net – the company’s total revenues less any discounts, returns, and allowances.

Uncollectible accounts – customers’ accounts that no longer are considered collectible.

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Chapter 6 General Definitions First-in, first-out method (FIFO) – inventory costing method that assumes the first units purchased (the first-in) are the first ones sold (the first-out).

Last-in, first-out method (LIFO) – inventory costing method that assumes the last units purchased (the last-in) are the first ones sold (the first out).

Multi-step income statement – an income statement that reports multiple levels of income (or profitability).

Gross profit – the difference between sales revenue and cost of goods sold.

Chapter 7 General Definitions Accelerated depreciation method – allocates a higher depreciation in the earlier years of the ’s life and lower depreciation in later years.

Basket asset purchase – purchase of more than one asset at the same time for one purchase price.

Book value – equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

Capitalize – record an expenditure as an asset.

Intangible asset – long-term assets that lack physical substance, and whose existence is often based on a legal contract.

Residual value – the amount the company expects to receive from selling the assets at the end of its service life.

Straight line depreciation – allocated an equal amount of depreciation to each year of the assets service life.

Double declining balance depreciation – a accelerated method that allocates a higher depreciation in the earlier years of the asset’s life and lower depreciation in later years

New Accounts Definitions – need to know definition, normal balance, and financial statement associated with the account

Balance Sheet Cash – liquid assets owned by the company. Normal balance debit.

Accounts Receivable – amounts the company expects to collect from customers based on the delivery of service or products. Normal balance debit.

Allowance for uncollectible accounts – contra asset account representing the amount of accounts receivable that we do not expect to collect. Contra asset – normal balance credit.

Inventory – items a company intends for sale to customers. Normal balance debit. 2

Notes receivable – formal credit arrangements evidenced by written debt instrument. Normal balance debit.

Accumulated depreciation – a contra asset account representing the total depreciation taken to date. Contra asset – normal balance credit.

Land improvements – improvements to land such as paving and landscaping that, unlike land itself, are subject to depreciation. Normal balance debit.

Patent – an exclusive right to manufacture a product or to use a process. Normal balance debit.

Trademark – a word, slogan, or symbol that distinctively identifies a company, product, or service. Normal balance debit.

Copyright – an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Normal balance debit.

Goodwill – the value of a company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less fair value of the net assets acquired. Normal balance debit.

Income Statement Sales allowance – seller reduction of customers’ balance owed or provision of a partial refund because of some deficiency in the company’s product or service. Contra revenue – normal balance debit.

Sales discount – reduction in the amount to be paid by a credit customer if payment on account is made within a specified period of time. Contra revenue – normal balance debit.

Sales return – customer returns a product. Contra revenue – normal balance debit.

Cost of goods sold – cost of inventory that was sold during the period. Normal balance debit.

Bad Debt Expense – the amount of the adjustment to allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period. Normal balance debit.

Amortization – allocation of the cost of an intangible asset over its service life. Normal balance debit.

Depreciation expense – the allocation of the cost of a tangible asset over its service life. Normal balance debit.

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