Chapter 1: Accounting Principles and the Financial Statements

Vocabulary flashcards covering fundamental accounting principles, financial statements, the accounting equation, and core elements from Chapter 1.

Accounting

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

Economic Entity

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

Financial Accounting

The branch of accounting used by external decision makers to evaluate how well a business has achieved its goals via financial statements.

Managerial Accounting

The branch of accounting that provides internal decision makers with information regarding operating, investing, and financing activities to review past performance and plan future expectations.

Income Statement

A financial statement that summarizes revenues earned and expenses incurred by a business over an accounting period to report on profitability.

Balance Sheet

A financial report, also known as the statement of financial position, that shows the financial position of a business on a single specific date.

Statement of Owner's Equity

A financial report that shows the changes in owner's capital over an accounting period resulting from owner investments, net income or loss, and owner withdrawals.

Statement of Cash Flows

A financial statement organized by operating, investing, and financing activities that focuses on liquidity by balancing cash inflows and cash outflows.

Cash Flows

The inflows and outflows of cash into and out of a business.

Liquidity

The ability of a business to balance the inflows and outflows of cash to operate and satisfy debts when they are due.

Accounting Equation

The fundamental mathematical relationship expressed as $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

Assets

Economic resources expected to benefit a company's future operations, encompassing monetary items, nonmonetary physical items, and nonphysical items like patents, trademarks, and copyrights.

Liabilities

Present obligations of a business to pay cash, transfer assets, or render services to other entities in the future.

Accounts Payable

Amounts owed to suppliers for goods or services bought on credit.

Owner's Equity

The owner's residual claims to the business assets, equal to net assets, defined by the formula $\text{Owner's Equity} = \text{Assets} - \text{Liabilities}$.

Generally Accepted Accounting Principles (GAAP)

A set of guidelines encompassing the conventions, rules, and procedures necessary to define accepted financial accounting practice at a given time.