ACG 2021 Block 2 Definitions Chapter 4 General Definitions Internal Controls – a company’s plan to 1.) Safeguard the company’s assets, and 2.) Improve the accuracy and reliability of accounting 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 expense 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 revenue 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 revenues – the company’s total revenues less any discounts, returns, and allowances. Uncollectible accounts – customers’ accounts that no longer are considered collectible. 1 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 asset’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. 3 .