The Accounting Equation and Principles Review

Vocabulary flashcards summarizing core accounting terminology, fundamental principles, accounting assumptions, business structures, ethical steps, and the basic accounting equation.

Accounting

The process of identifying, recording, and communicating economic events of a business to the people who need that information.

Bookkeeping

The recording of economic events, which is only one part of accounting.

External Users

Users who give money for the business and only want financial information about it, such as investors and creditors.

Internal Users

Managers who plan, organize, and run the business.

Relevance

A measurement principle meaning that the information is capable of making a difference in a decision.

Faithful Representation

A measurement principle meaning that numbers and descriptions matched what really happened.

Historical Cost Principle

A principle stating that companies record assets at their original cost and continue to report them at that cost the whole time the asset is held.

Fair Value Principle

A principle stating that assets and liabilities should be reported at fair value, meaning the price that would be received to sell an asset or settle a liability.

GAAP (Generally Accepted Accounting Principles)

The common set of standards that indicate how to report economic events.

FASB (Financial Accounting Standards Board)

The main standard-setting body that creates accounting standards.

SEC

An entity that oversees financial markets and accounting standard setters, relying on FASB to develop standards for companies to follow.

Monetary Unit Assumption

An assumption that only transaction data that can be expressed in money terms should be included in the accounting records.

Economic Entity Assumption

An assumption that business activities must be kept separate from the personal activities of its owner.

Proprietorship

A business owned by one person with no distinction between the business and its owner.

Partnership

A business owned by 2 or more individuals with unlimited liability, requiring a carefully strict separation between personal and professional transactions.

Corporation

A separate legal entity where stockholders enjoy limited liability and ownership can be easily transferred.

Ethics in Accounting - Step 1

Recognize an ethical situation and the ethical issues involved.

Ethics in Accounting - Step 2

Identify and analyze the main elements in the situation, including who is affected (stakeholders) and what obligations are involved.

Ethics in Accounting - Step 3

Identify the alternatives and weigh the impact of them, then pick the most honest choice.

Assets

Resources a business owns.

Liabilities

What the business owes to outsiders (debts).

Owner's Equity

Owner's claim on assets of the business, after liabilities are subtracted.

The Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$