Chapter 1: Accounting Principles and Financial Statements

Vocabulary flashcards reviewing core concepts, definitions, and business structures from Chapter 1.

Accounting

An information system that measures, processes, and communicates financial information about a business or other economic entity to decision makers.

Economic Entity

A unit that exists independently, such as a business, hospital, or governmental body.

Accounting Information System Model

A system where raw data from business activities serves as input, undergoes measurement, processing, and communication, and generates useful information for decision makers as output.

Financial Accounting

The branch of accounting that generates financial statements for external decision makers to evaluate whether a business has achieved its financial goals.

Managerial Accounting

The branch of accounting that provides information about operating, investing, and financing activities to internal decision makers such as managers and employees.

Bookkeeping

The mechanical and repetitive process of recording financial transactions and keeping financial records, typically handled by computers.

Management Information Systems (MIS)

The interconnected subsystems, including accounting, that provide the overall information needed to run a business.

Four Basic Questions of Accounting Measurement

The fundamental questions accountants must address: 1) What is measured? 2) When should the measurement be made? 3) What value should be placed on what is measured? 4) How should what is measured be classified?

Business Transactions

Economic events that affect a business's financial position, consisting either of direct exchanges of value (purchases, sales, loans) or nonexchange events (losses from fire, wear and tear, accumulation of interest).

Money Measure

The accounting concept that all business transactions are recorded in terms of money, which serves as the common unit of measure capable of producing comparable financial data.

Exchange Rate

The value of one currency expressed in terms of another currency used when conducting international transactions.

Separate Entity

The accounting concept that a business organization is distinct from its creditors, customers, and owners, requiring its own distinct set of financial records.

Sole Proprietorship

A business owned by one person who receives all profits or losses and is liable for all business obligations; it represents the largest number of businesses in the U.S. but is typically the smallest in size.

Partnership

A business owned by two or more people who share profits and losses according to a prearranged formula, where any partner can obligate the business and partners have personal liability for business debts.

Corporation

A business unit chartered by the state that is legally separate from its owners (stockholders), offering limited liability and an unlimited life span.

Stockholders

The owners of a corporation whose ownership is represented by shares of stock and who elect a board of directors to oversee operations.

Limited Liability

The legal protection enjoyed by corporate stockholders where their risk of financial loss is strictly limited to the amount paid for their shares.

U.S. Business Forms Distribution Graph

A chart illustrating that sole proprietorships represent the largest total number of U.S. businesses, but corporations generate the vast majority of total revenue.