Module 5 and 6- Business Transaction Vocabulary

Account

A record summarizing all the information pertaining to a single item in the accounting equation.

Account Balance

The dollar amount in an account

Account Title

The name given to an account

Accounting

The practice of planning, recording, analyzing, and interpreting financial information

Accounting Equation

A formula showing the relationship between Assets, Liabilities and Owner’s Equity (Assets = Liabilities + Owners Equity)

Accounting Records

Organized summaries of a business's financial activities

Accounting System

A planned process for providing financial information that will be useful to management

Asset

Anything of value that is owned

Balance Sheet

A financial statement that reports assets, liabilities, and owners equity on a specific date

Capital

The account used to summarize the owner’s equity in a Sole Proprietorship or Partnership business

Equities

Financial rights to the assets of a business or money owed to the owner

Liability

An amount owed by a business

Owners Equity

The amount remaining after the value of all liabilities is subtracted from the value of all assets

Sole Proprietorship

A business owned by one person

Service Business

A business that performs an activity for a fee

Start Up Costs

Non-recurring costs associated with setting up a business, such as accountant’s fees, legal fees, registration charges, as well as advertising, promotion, employee training, and the cost of equipment or furniture

Transaction

A business activity that changes assets, liabilities, or owners equity

Business Entity Concept

Requires that an accounting system ONLY reflects events that pertain to a particular entity (business owner MUST keep their personal and business transactions separate)

Going Concern Concept

The concept that assumes that the business entity will continue into the future

Monetary Unit Concept

The concept that asserts money is the common measurement unit of economic activity

Periodicity Concept

Concept that requires the success or failure of the business be determined at regular intervals

Revenue

Money coming into the business in exchange for goods and services produced by the business which increases Owners Equity

Expense

Money going out of a business to support business operations and the production of the product or service, which decreases Owner's Equity

Accounts Receivable

Amount owed to the business by the customers after selling to them on credit

Withdraw/ Drawing

Assets, usually cash, taken out of the business for the owner’s personal use

Measurement (Cost) Principle

A business buys a commercial oven originally valued at $5,000 for a sale price of $3,500. The amount recorded in the accounting records must be $3,500.

Revenue Recognition Principle

A landscaping service completes a job on October 12, but the customer pays on November 2. The revenue should be recorded on October 12.

Expense Recognition / Matching Principle

A retail shop pays $300 in commission to salespeople in December for sales made during December. This expense must be recorded in December's financial statements.

Full Disclosure Principle

A company pending a major lawsuit that could result in substantial financial loss must report this information in the financial statement footnotes.

Going Concern Assumption

An accountant values factory equipment based on its original cost minus accumulated depreciation rather than its immediate liquidation value because of this assumption.

Monetary Unit Assumption

An international corporation with offices in three countries reports all financial totals on its main statements using US Dollars ($).

Time Period / Periodicity Assumption

A business divides its ongoing operational life into monthly, quarterly, and annual segments to issue regular income statements.

Business Entity Concept

A sole proprietor who buys personal groceries using their personal checking account instead of company funds is following this concept.

Materiality Constraint

Purchasing a $15 stapler and expensing it immediately as an office supply rather than depreciating it over a 5-year useful life is justified by this constraint.

Cost-Benefit Constraint

Deciding not to hire an external firm to perform a $2,000 inventory audit to find $30 worth of missing paper clips is an example of this constraint.