Key Accounting Organizations, Principles, and Financial Statements

FASB

Organization that creates and monitors Generally Accepted Accounting Principles (GAAP).

SEC

Organization that administers laws associated with the sale of stocks.

IRS

Organization that enforces U.S. tax laws.

Corporation

A business organization that is a separate legal entity created under state law.

Partnership

An unincorporated business organization owned by two or more individuals.

Limited Partnership

A partnership that offers limited liability to some of its partners.

Accounting

The process of identifying, measuring, and communicating economic information; known as the language of business.

Sole Proprietorship

A business organization owned by one individual; most common form in the U.S.

Limited Liability Company (LLC)

A business entity combining partnership tax benefits with corporate limited liability.

S Corporation

A special corporation taxed like a partnership with legal restrictions.

Full Disclosure

Requires businesses to report all important information in financial statements and footnotes.

Consistency

Requires the same accounting methods be used over time.

Matching

Requires expenses be recorded in the same period as the revenues they help generate.

GAAP

The rules and guidelines of accounting.

Revenue Recognition

Determines when and how much revenue is recorded.

Objective Evidence

Requires transactions to be supported by proof.

Unit of Measurement

Requires businesses to use the U.S. dollar in accounting records.

Business Entity

States that business records are kept separate from the owner's personal records.

Going Concern

Assumes the business will continue operating indefinitely.

Conservatism

Requires net income and assets not be overstated.

Materiality

Relates to the importance or significance of accounting information.

Cost

States that assets are recorded at the price paid.

Accrual Basis

Recognizes revenues and expenses when they occur, not when cash is exchanged.

Cash Basis

Records transactions only when cash is received or paid.

Statement of Cash Flows

Shows sources and uses of cash.

Balance Sheet

Reports assets, liabilities, and owners' equity.

Income Statement

Reports revenues and expenses.

Expenses

Costs incurred to generate sales.

Revenues

Income earned from selling goods or services.

Accounting Equation

Assets = Liabilities + Owners' Equity.

Assets

Items owned by a business.

Liabilities

Amounts owed by a business.

Owners' Equity

The owner's value or claim in the business.

Trial Balance

Prepared after posting to verify total debits equal total credits.

Owners Drawing

Account used for owner cash withdrawals.

Owners Capital

Account used for owner investments in the business.

Debit

Left side of an account.

Credit

Right side of an account.

Chart of Accounts

A list of all accounts a business may use.

T Account

A summary tool that divides an account into left and right sides.

General Ledger

The complete collection of all accounts used by a business.

Account

A record of increases and decreases in a specific asset, liability, or equity item.

Business Transaction

An exchange of goods or services for cash or a promise to pay.

Journalize

Recording transactions in the journal (first step in the accounting cycle).

Post

Transferring amounts from the journal to the general ledger.

Normal

The balance an account is expected to have.