Introduction to Accounting and Business (Video) - Key Terms

Service

A type of business that provides intangible services rather than physical goods.

Retail

A business that sells goods directly to end customers for personal use.

Manufacturing

A business that produces goods from raw materials and components for sale.

Operating activities

Activities related to the day-to-day operations of a business.

Investing activities

Activities that involve acquiring or disposing of long-term assets and investments.

Financing activities

Activities that raise capital and repay lenders or owners.

Role of Accountants

Provide information to users, assess information needs, design information to fit users’ needs, record economic data, and prepare accounting reports.

Goal of Accounting

Record, report, and interpret economic data for decision makers.

Owner

The person who has an ownership interest in a business.

Investors/Stockholders

People or entities that own shares and are interested in the profitability and value of the investment.

Bankers

Lenders who provide financing and assess creditworthiness of the business.

Governmental agencies

Regulatory bodies that use financial information for oversight and compliance.

Managers

Internal decision makers who use accounting information to plan, organize, and control operations.

Employees

Individuals who work for the business and may be affected by its financial performance.

Customers

People who purchase goods or services and rely on the business’s stability and reliability.

Competitors

Other firms in the same market that are analyzed for performance comparisons.

Financial accounting

Field focused on recording, summarizing, and reporting financial information for external users.

Auditing

Independent examination of financial statements and related disclosures.

Management accounting

Information used internally to aid planning, controlling, and decision making.

Cost accounting

Analysis of production costs to help control and price goods or services.

Tax accounting

Planning and compliance with tax laws and regulations.

Accounting systems

Methods and processes for collecting, processing, and reporting accounting information.

International accounting

Accounting across borders, including IFRS and cross-border standards.

FASB

Financial Accounting Standards Board; sets U.S. GAAP standards.

GAAP

Generally Accepted Accounting Principles; the framework for financial reporting in the U.S.

SEC

Securities and Exchange Commission; U.S. regulator of securities markets and disclosures.

IFRS

International Financial Reporting Standards; global accounting standards.

Proprietorship (sole proprietorship)

A business owned by one person; simple structure and often unlimited liability.

Partnership

A business owned by two or more people who share profits, losses, and responsibilities.

Corporations

A separate legal entity owned by shareholders with limited liability and potential to raise capital by stock.

Monetary unit assumption

Financial reports are expressed in a single monetary unit or currency.

Time period assumption

Financial statements are prepared for a specific, regular time period (e.g., a year).

Business entity assumption

Economic activity is reported for the business as a separate entity from its owners.

Going concern

Assumes the business will continue operating in the foreseeable future.

Measurement principle

Determines the amount that will be recorded and reported.

Historical cost

Report cost at the purchase price or cost

Report cost at the purchase price or cost

Revenue is recorded when earned (when goods or services are delivered) not necessarily when cash is received

Expense recognition

Requires expenses to be recorded in the same period as the related revenue.

Accounting Equation

Assets = Liabilities + Owners Equity or (Stockholders’ Equity)

Accounting Equation

Assets – Liabilities = Owner’s Equity (Stockholders’ Equity)

Assets

•Resources owned and used by a business

Liabilities

Debt that a business owes to creditors, representing financial obligations.

Owner’s Equity

What is left or the residual value when the assets are use to pay off all the business debts

Asset accounts

All accounts have a debit and credit side.  The debit is on the left and the credit is on the right.  Assets increase on the debit side and decrease on the credit side.

Liabilities

•All accounts have a debit and credit side.  The debit is on the left and the credit is on the right. All liabilities increase on the credit side and decrease on the debit side.

Owner’s Equity

All accounts have a debit and credit side.  The debit is on the left and the credit is on the right. Owner’s equity increases on the credit side and decreases on the debit side.

Owner Equity Accounts that increase Owner’s Equity and credit side

Capital Stock

Retained earnings

Revenue

Owner Equity Accounts that decrease Owner’s Equity and increase on the debit side

Expenses

Dividends

Four Financial Statements

Income statement, Statement of Stockholders’ Equity, Balance sheet, Statement of Cash Flow

Income Statement

Expenses and Revenues

Statement of Stockholders’ Equity

Capital Stock and Retained Earnings (Net Income – Dividends)

Balance Sheet

Assets, Liabilities, Stockholders’ Equity

Statement of Cash Flow

Use and receipt of cash

What are Ethics

Moral principles

Integrity

Conscience

Beliefs

Values

Honesty

Fairness

Role of Ethics in Accounting

 Objective to provide:

 Relevant information

 Timely information

 Decision makers

 Trustworthy information

 Managers

 Operations

What causes the downfall in

Ethics?

Failure of Individual character and Culture of greed and ethical indifference