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.
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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 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.
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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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