Key Business and Accounting Terms: Corporations, Assets, and Financial Statements

Corporation

A business organized under state or federal statutes as a separate legal entity.

Sole Proprietorship

A business owned by one individual.

Partnership

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit.

Limited Liability Company (LLC)

A business form consisting of one or more persons or entities filing an operating agreement with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes.

Asset

The resources owned by a business.

Liability

The rights of creditors that represent debts of the business; obligations by a business entity to transfer assets to third parties.

Equity

The rights of the owners of a business.

Revenue

Increases in owner's equity as a result of providing services or selling goods to customers.

Expense

Amounts used to generate revenue; assets used up or services consumed in the process of generating revenues.

Accounting Equation

Assets = Liabilities + Equity

Chart of Accounts

A list of accounts in the ledger.

The Accounting Process

Unadjusted Trial Balance

A trial balance prepared at the end of an accounting period before adjusting entries are made.

Adjusted Trial Balance

Journal

The initial record in which the effects of a transaction are recorded.

Posting

The process of transferring the debits and credits from the journal entries to the accounts.

Normal Balance of an Account

The side of an account (debit or credit) in which the balance normally appears based on the type of account and whether it is increased by debits or credits.

Debit

Amount entered on the left side of an account.

Credit

Amount entered on the right side of an account.

Types of Adjusting Entries

Prepaid Expense, Unearned Revenues, Accrued Revenues. Accrued Expenses, and Depreciation

Unearned Revenues

The liability created by receiving a cash payment in advance of providing a service.

Prepaid Expenses

Assets created by making advanced payments for expense items, such as insurance premiums or supplies, that will be used in the business in the future.

Depreciation

The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life.

Dividends

Distributions of earnings to stockholders; an account representing the distribution of a corporation's earnings to stockholders.

Historical Cost Principle

A concept of accounting that states that an asset should be recorded and maintained in the accounting records at its initial transaction price.

Separate Entity Concept

The business is treated as separate from its owner(s), meaning business finances are recorded and reported independently from personal finances.

Book Value

The value of an asset recorded on the company's books, calculated as the asset's cost minus accumulated depreciation.