Chapter 1 Key Terms Flashcards
Accounting
Information and measurement system that identifies, records, and communicates relevant information about a company’s business activities.
Accounting Equation
Equality involving a company’s assets, liabilities, and equity;
Assets = Liabilities + Equity;
Also called balance sheet equation.
Assets
Resources a business owns or controls that are expected to provide current and future benefits to the business.
Audit
Analysis and report of an organization’s accounting system, its records, and its reports using various tests.
Auditors (2 Types)
Individuals hired to review financial reports and information systems.
Internal auditors of a company are employed to assess and evaluate its system of internal controls, including the resulting reports.
External auditors are independent of a company and are hired to assess and evaluate the “fairness” of financial statements (or to perform other contracted financial services).
Balance Sheet
Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.
Equation:
Assets= Liabilities + Owner’s Equity
Expanded Formula:
Assets= Liabilities + (Common Stock - Dividends + Revenue - Expenses)
Bookkeeping
Part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping.
Business Entity Assumption
Principle that requires a business to be accounted for separately from its owner(s) and from any other entity:
- Sole Proprietorship
- Partnership
- Corporation
- Limited Liability Company (LLC)
Common Stock
Corporation’s basic ownership share; also generically called capital stock.
Conceptual Framework
The basic concepts that underlie the preparation and presentation of financial statements for external users; can serve as a guide in developing future standards and resolving accounting issues that are not addressed directly in current standards using the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses.
Corporation
Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders.
Cost Constraint
The notion that the benefit of a disclosure exceeds the cost of that disclosure.
Cost Principle
Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions.
Cost-benefit Constraint
The notion that the benefit of a disclosure exceeds the cost of that disclosure.
Data Analytics
A process of analyzing data to identify meaningful relations and trends; in accounting, data analytics helps individuals make informed business decisions.
Data Visualization
A graphical presentation of data to help people understand its significance and draw reliable inferences.
Equity
Owner’s claim on the assets of a business; equals the residual interest in an entity’s assets after deducting liabilities; also called net assets or owner’s equity.
Ethics
Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.
Events
Happenings that both affect an organization’s financial position and can be reliably measured.
Expanded Accounting Equation
Expanded version of: Assets = Liabilities + Equity.
For a noncorporation:
[Equity = Owner’s capital − Owner’s withdrawals + Revenues − Expenses.]
For a corporation:
[Equity = Contributed capital + Retained earnings + Revenues − Expenses − Dividends.]
Expense Recognition Principle
Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.
Expenses
Outflows or using up of assets as part of operations of a business to generate sales.
External Transactions
Exchanges of economic value between one entity and another entity.
External Users
Persons using accounting information who are not directly involved in running the organization.
